e497
Filed Pursuant to Rule
497
Registration Statement No. 333-133755
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 22, 2006)
$1,000,000,000
This prospectus supplement supplements the prospectus dated
June 22, 2006, relating to our offer, from time to time, of
up to $1,000,000,000 in aggregate principal amount in one or
more classes or series of debt securities, including notes,
debentures, medium-term notes, commercial paper, retail notes or
similar obligations evidencing indebtedness in one or more
offerings, by providing certain information regarding our recent
developments and our second quarter 2006 financial results. As
of the date of this prospectus supplement, we have issued debt
securities totaling $400,000,000 of the $1,000,000,000 of debt
securities.
Please read this prospectus supplement, and the accompanying
prospectus, before investing, and keep it for future reference.
The prospectus supplement and the accompanying prospectus
contain important information about us that a prospective
investor should know before investing in our common stock. We
file annual, quarterly and current reports, proxy statements and
other information about us with the Securities and Exchange
Commission. This information is available free of charge by
contacting us at 1919 Pennsylvania Avenue, NW, Washington,
DC, 20006, or by telephone at
(202) 721-6100 or
on our website at www.alliedcapital.com. The SEC also maintains
a website at www.sec.gov that contains such information.
You should review the information, including the risk of
leverage, set forth under Risk Factors on
page 9 of the accompanying prospectus before
investing.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus supplement or the accompanying prospectus. Any
representation to the contrary is a criminal offense.
The date of this prospectus supplement is August 15, 2006
We have not authorized any dealer, salesman or other person
to give any information or to make any representation other than
those contained in this prospectus or any prospectus supplement,
if any, or any pricing supplement, if any, to this prospectus.
You must not rely upon any information or representation not
contained in this prospectus or any such supplements as if we
had authorized it. This prospectus and any such supplements do
not constitute an offer to sell or a solicitation of any offer
to buy any security other than the registered securities to
which they relate, nor do they constitute an offer to sell or a
solicitation of an offer to buy any securities in any
jurisdiction to any person to whom it is unlawful to make such
an offer or solicitation in such jurisdiction. The information
contained in this prospectus and any such supplements is
accurate as of the dates on their covers; however, the
prospectus and any supplements will be updated to reflect any
material changes.
TABLE OF CONTENTS
Prospectus Supplement
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Page |
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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S-1 |
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Interim Consolidated Financial Statements
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S-36 |
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Notice Regarding Independent Public Accountants Review
Report
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S-81 |
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Prospectus |
Prospectus Summary
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1 |
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Selected Condensed Consolidated Financial Data
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6 |
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Where You Can Find Additional Information
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8 |
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Risk Factors
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9 |
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Use of Proceeds
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19 |
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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21 |
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Senior Securities
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67 |
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Business
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71 |
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Portfolio Companies
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88 |
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Determination of Net Asset Value
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95 |
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Management
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98 |
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Portfolio Management
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104 |
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Compensation of Executive Officers and Directors
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107 |
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Control Persons and Principal Holders of Securities
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118 |
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Certain Relationships and Related Party Transactions
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121 |
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Tax Status
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122 |
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Certain Government Regulations
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123 |
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Stock Trading Plans and Ownership Guidelines
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127 |
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Dividend Reinvestment Plan
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128 |
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Description of Capital Stock
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129 |
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Description of Notes
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130 |
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Special Considerations Under Our Charter and Bylaws and Maryland
Law
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142 |
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Plan of Distribution
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148 |
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Legal Matters
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149 |
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Custodians, Transfer and Dividend Paying Agent and Registrar
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149 |
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Brokerage Allocation and Other Practices
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149 |
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Independent Registered Public Accounting Firm
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150 |
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Notice Regarding Arthur Andersen LLP
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150 |
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Index to Consolidated Financial Statements
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F-1 |
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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission using the
shelf registration process. Under the shelf
registration process, which constitutes a delayed offering in
reliance on Rule 415 under the Securities Act of 1933, as
amended, we may offer, from time to time, up to $1,000,000,000
in aggregate principal amount of debt securities on the terms to
be determined at the time of the offering. The debt securities
may be offered at prices and on terms described in one or more
supplements to this prospectus. This prospectus provides you
with a general description of the debt securities that we may
offer. Each time we use this prospectus to offer debt
securities, we will provide a prospectus supplement and, if
applicable, a pricing supplement that will contain specific
information about the terms of that offering. Please carefully
read this prospectus and any such supplements together with the
additional information described under Where You Can Find
Additional Information in the Prospectus
Summary and Risk Factors sections before you
make an investment decision.
A prospectus supplement and, if applicable, a pricing supplement
may also add, update or change information contained in this
prospectus.
(i)
INTERIM MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results
of operations of the Company should be read in conjunction with
the Companys Consolidated Financial Statements and the
Notes thereto included herein and in the Companys annual
report on
Form 10-K for the
year ended December 31, 2005. 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:
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changes in the economy and general economic conditions; |
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risks associated with possible disruption in our operations
due to terrorism; |
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future changes in laws or regulations and conditions in our
operating areas; and |
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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 the 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, which
included 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 real estate related 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 to
middle market U.S. companies 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
S-1
private companies though, from time to time, we may invest in
companies that are public but lack access to additional public
capital. Our investment objective is to achieve current income
and capital gains.
Our portfolio composition at June 30, 2006 and 2005, and at
December 31, 2005, was as follows:
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June 30, |
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December 31, |
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2006 |
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2005 |
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2005 |
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Private finance
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96 |
% |
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95 |
% |
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96 |
% |
Commercial real estate finance
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4 |
% |
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5 |
% |
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4 |
% |
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, operating
expenses and income taxes including excise tax. 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, interest rates on the types of loans we
make, 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 six
months ended June 30, 2006 and 2005, and at and for the
year ended December 31, 2005, were as follows:
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At and for the |
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At and for the |
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At and for the |
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Three Months Ended |
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Six Months Ended |
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Year Ended |
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June 30, |
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June 30, |
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December 31, |
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2006 |
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2005 |
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2006 |
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2005 |
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2005 |
($ in millions) |
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Portfolio at value
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$ |
3,593.5 |
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$ |
2,714.3 |
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$ |
3,593.5 |
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$ |
2,714.3 |
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$ |
3,606.4 |
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Investments
funded(1)
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$ |
453.4 |
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$ |
389.3 |
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$ |
1,251.2 |
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$ |
654.9 |
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$ |
1,675.8 |
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Change in accrued or reinvested interest and
dividends(2)
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$ |
(7.0 |
) |
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$ |
(14.1 |
) |
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$ |
(9.1 |
) |
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$ |
(3.6 |
) |
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$ |
6.6 |
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Principal collections related to investment repayments or sales
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$ |
429.2 |
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$ |
932.6 |
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$ |
769.6 |
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$ |
1,090.8 |
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$ |
1,503.4 |
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Yield on interest-bearing
investments(3)
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12.6 |
% |
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13.2 |
% |
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12.6 |
% |
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13.2 |
% |
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12.8 |
% |
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(1) |
Investments funded for the six months ended June 30, 2006,
included a $150 million subordinated debt investment in
Advantage Sales & Marketing, Inc. received in
conjunction with the sale of Advantage and a $30 million
subordinated debt investment in STS Operating, Inc.
received in conjunction with the sale of STS. See discussion
below. |
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(2) |
Includes changes in accrued or reinvested interest of
$0.6 million and $1.7 million for the three and six
months ended June 30, 2006, respectively, related to our
investments in money market securities. |
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(3) |
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. |
S-2
Private Finance
The private finance portfolio at value, investment activity, and
the yield on loans and debt securities at and for the three and
six months ended June 30, 2006 and 2005, and at and for the
year ended December 31, 2005, were as follows:
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At and for the |
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At and for the |
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At and for the |
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Three Months Ended |
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Six Months Ended |
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Year Ended |
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June 30, |
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June 30, |
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December 31, |
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2006 |
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2005 |
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2006 |
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2005 |
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2005 |
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Value |
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Yield(2) |
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Value |
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Yield(2) |
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Value |
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Yield(2) |
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Value |
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Yield(2) |
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Value |
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Yield(2) |
($ in millions) |
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Portfolio at value:
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Loans and debt securities:
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Senior loans
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$ |
275.9 |
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9.5 |
% |
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$ |
203.3 |
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10.0 |
% |
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$ |
275.9 |
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9.5 |
% |
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$ |
203.3 |
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10.0 |
% |
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$ |
239.8 |
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9.5 |
% |
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Unitranche debt
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515.0 |
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10.7 |
% |
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67.3 |
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13.3 |
% |
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515.0 |
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10.7 |
% |
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67.3 |
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13.3 |
% |
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294.2 |
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11.4 |
% |
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Subordinated debt
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1,700.3 |
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13.9 |
% |
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1,362.4 |
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14.2 |
% |
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1,700.3 |
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13.9 |
% |
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1,362.4 |
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14.2 |
% |
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1,560.9 |
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13.8 |
% |
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Total loans and debt securities
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$ |
2,491.2 |
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12.7 |
% |
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$ |
1,633.0 |
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13.7 |
% |
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$ |
2,491.2 |
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12.7 |
% |
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$ |
1,633.0 |
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13.7 |
% |
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$ |
2,094.9 |
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13.0 |
% |
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Equity securities
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|
969.2 |
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|
937.5 |
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969.2 |
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937.5 |
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1,384.4 |
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Total portfolio
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$ |
3,460.4 |
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$ |
2,570.5 |
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$ |
3,460.4 |
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$ |
2,570.5 |
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$ |
3,479.3 |
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Investments
funded(1)
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$ |
441.5 |
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$ |
298.0 |
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$ |
1,237.3 |
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$ |
466.3 |
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$ |
1,462.3 |
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Change in accrued or reinvested interest and dividends
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|
$ |
(7.1 |
) |
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$ |
6.5 |
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$ |
(11.3 |
) |
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$ |
14.4 |
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$ |
24.6 |
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Principal collections related to investment repayments or sales
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|
$ |
415.7 |
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$ |
178.8 |
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$ |
752.4 |
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$ |
330.0 |
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$ |
703.9 |
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(1) |
Investments funded for the six months ended June 30, 2006,
included a $150 million subordinated debt investment in
Advantage Sales & Marketing, Inc. received in
conjunction with the sale of Advantage and a $30 million
subordinated debt investment in STS Operating, Inc.
received in conjunction with the sale of STS. See discussion
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,
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 and equity
capital upon the closing of certain buyout transactions, which
may include investments in lower-yielding senior debt.
Subsequent to the closing, the portfolio company may refinance
all or a portion of the lower-yielding senior debt, which would
reduce our investment. Senior loans at June 30, 2006,
included approximately $30.1 million of senior loans that
are currently in the process of being refinanced. Repayments
include repayments of senior debt funded by us that was
subsequently refinanced or repaid by the portfolio companies.
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. To
address the current market, 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 are also focusing our debt investing on
smaller middle market companies where we can provide both senior
and subordinated debt or unitranche
S-3
debt, where our combined current yield may be lower than
traditional subordinated debt only. We believe that providing
both senior and subordinated debt or unitranche debt provides us
with greater protection in the capital structures of our
portfolio companies.
Investments Funded. Investments funded and the
weighted average yield on investments funded for the six months
ended June 30, 2006 and 2005, and for the year ended
December 31, 2005, consisted of the following:
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For the Six Months Ended June 30, 2006 |
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Debt Investments |
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Buyout Investments |
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Total |
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Weighted |
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Weighted |
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Weighted |
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Average |
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Average |
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Average |
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Amount |
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Yield(1) |
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Amount |
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Yield(1) |
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Amount |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
loans(4)
|
|
$ |
149.4 |
|
|
|
9.3 |
% |
|
$ |
121.6 |
|
|
|
8.8 |
% |
|
$ |
271.0 |
|
|
|
9.1 |
% |
|
Unitranche
debt(2)
|
|
|
255.9 |
|
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
255.9 |
|
|
|
10.6 |
% |
|
Subordinated
debt(3)
|
|
|
374.8 |
|
|
|
13.0 |
% |
|
|
189.1 |
|
|
|
13.7 |
% |
|
|
563.9 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
|
780.1 |
|
|
|
11.5 |
% |
|
|
310.7 |
|
|
|
11.8 |
% |
|
|
1,090.8 |
|
|
|
11.5 |
% |
Equity
|
|
|
54.6 |
|
|
|
|
|
|
|
91.9 |
|
|
|
|
|
|
|
146.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
834.7 |
|
|
|
|
|
|
$ |
402.6 |
|
|
|
|
|
|
$ |
1,237.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2005 |
|
|
|
|
|
Debt Investments |
|
Buyout Investments |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
19.5 |
|
|
|
12.1 |
% |
|
$ |
77.7 |
|
|
|
5.9 |
% |
|
$ |
97.2 |
|
|
|
7.1 |
% |
|
Unitranche
debt(2)
|
|
|
59.2 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
59.2 |
|
|
|
10.8 |
% |
|
Subordinated debt
|
|
|
140.0 |
|
|
|
12.9 |
% |
|
|
110.6 |
|
|
|
13.2 |
% |
|
|
250.6 |
|
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
|
218.7 |
|
|
|
12.3 |
% |
|
|
188.3 |
|
|
|
10.2 |
% |
|
|
407.0 |
|
|
|
11.3 |
% |
Equity
|
|
|
15.5 |
|
|
|
|
|
|
|
43.8 |
|
|
|
|
|
|
|
59.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
234.2 |
|
|
|
|
|
|
$ |
232.1 |
|
|
|
|
|
|
$ |
466.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average yield on interest-bearing investments is
computed as the (a) annual stated interest on accruing
interest-bearing investments, divided by (b) total
interest-bearing investments funded. |
|
(2) |
Unitranche debt is a single debt investment that is a blend of
senior and subordinated debt terms. The yield on a unitranche
investment reflects the blended yield of senior and subordinated
debt combined. |
|
(3) |
Debt investments for the six months ended June 30, 2006,
included a $150 million, 12.0% subordinated debt investment
in Advantage Sales & Marketing, Inc. received in conjunction
with the sale of Advantage and a $30 million, 15.0%
subordinated debt investment in STS Operating, Inc.
received in conjunction with the sale of STS. See discussion
below. |
|
(4) |
Senior loans funded for the six months ended June 30, 2006,
included $163.6 million that was repaid during the six
months ended June 30, 2006. |
S-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005 |
|
|
|
|
|
Debt Investments |
|
Buyout Investments |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
loans(3)
|
|
$ |
76.8 |
|
|
|
10.0 |
% |
|
$ |
250.2 |
|
|
|
6.4 |
% |
|
$ |
327.0 |
|
|
|
7.2 |
% |
|
Unitranche
debt(2)
|
|
|
259.5 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
259.5 |
|
|
|
10.5 |
% |
|
Subordinated debt
|
|
|
296.9 |
|
|
|
12.3 |
% |
|
|
330.9 |
|
|
|
12.5 |
% |
|
|
627.8 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
|
633.2 |
|
|
|
11.3 |
% |
|
|
581.1 |
|
|
|
9.9 |
% |
|
|
1,214.3 |
|
|
|
10.6 |
% |
Equity
|
|
|
82.5 |
|
|
|
|
|
|
|
165.5 |
|
|
|
|
|
|
|
248.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
715.7 |
|
|
|
|
|
|
$ |
746.6 |
|
|
|
|
|
|
$ |
1,462.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average yield on interest-bearing investments is
computed as the (a) annual stated interest on accruing
interest-bearing investments, divided by (b) total
interest-bearing investments funded. |
|
(2) |
Unitranche debt is a single debt investment that is a blend of
senior and subordinated debt terms. The yield on a unitranche
investment reflects the blended yield of senior and subordinated
debt combined. |
|
(3) |
Buyout senior loans funded included $174.9 million that was
repaid during the year. |
In July 2006, we funded private finance investments totaling
$274.8 million.
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.
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 is strong, which has resulted in
an increase in private finance investment opportunities, as well
as increased repayments. We continue to have an active pipeline
of new investments under consideration. We believe that merger
and acquisition activity for middle market companies will remain
strong for the remainder of 2006.
Through our wholly owned subsidiary, AC Finance LLC (AC
Finance), we generally originate, underwrite and arrange senior
loans. Senior loans originated and underwritten by AC Finance
may or may not be funded by us at closing. When these senior
loans are closed, we may fund all or a portion of the
underwritten commitment pending sale of the loan to other
investors, which may include loan sales to Callidus Capital
Corporation (Callidus) or funds managed by Callidus, a portfolio
company controlled by us. After completion of the sale process,
we may or may not retain a position in these senior loans. AC
Finance generally earns a fee on the senior loans originated and
underwritten whether or not we fund the underwritten commitment.
Portfolio Yield. The weighted average yield on
private finance loans and debt securities was 12.7% at
June 30, 2006, as compared to 13.7% and 13.0% at
June 30, 2005, and December 31, 2005, respectively.
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 funded, the yield on
loans and debt securities repaid, the amount of loans and debt
securities for which interest is not
S-5
accruing and the amount of lower-yielding senior or unitranche
debt in the portfolio at the end of the period. The yield on the
private finance portfolio has declined partly due to our
strategy to pursue more buyout and recapitalization
transactions, which may include investing in lower-yielding
senior debt, and unitranche investments.
Outstanding Investment Commitments. At
June 30, 2006, we had outstanding private finance
investment commitments totaling $352.7 million, including
the following:
|
|
|
|
|
$88.3 million in the form of revolving senior debt
facilities to nineteen companies. |
|
|
|
$50.7 million in the form of equity to fifteen private
equity and venture capital funds. |
|
|
|
$24.2 million in the form of debt to Promo Works, LLC. |
|
|
|
$23.9 million in the form of debt to S.B. Restaurant
Company. |
|
|
|
$9.0 million in the form of debt to Integrity Interactive
Corp. |
|
|
|
$7.6 million in the form of debt to Carlisle Wide Plank
Floors, Inc. |
|
|
|
$6.5 million in co-investment commitments to Pine Creek
Equity Partners, LLC. |
|
|
|
We have various commitments to Callidus Capital Corporation
(Callidus), which owns 80% (subject to dilution) of Callidus
Capital Management, LLC, an asset management company that
structures and manages collateralized debt obligations (CDOs),
collateralized loan obligations (CLOs), and other related
investments. Our commitment to Callidus consisted of the
following at June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Committed |
|
Amount |
|
Available |
|
|
Amount |
|
Drawn |
|
to be Drawn |
($ in millions) |
|
|
|
|
|
|
Subordinated debt to support warehouse facilities &
warehousing
activities(1)
|
|
$ |
36.0 |
|
|
$ |
|
|
|
$ |
36.0 |
|
Revolving line of credit for working capital
|
|
|
4.0 |
|
|
|
1.6 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
40.0 |
|
|
$ |
1.6 |
|
|
$ |
38.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Callidus has a secured warehouse credit facility with a third
party for up to $240 million. The facility is used
primarily to finance the acquisition of loans pending
securitization through a CDO or CLO. In conjunction with this
warehouse credit facility, we have agreed to designate our
$36 million subordinated debt commitment for Callidus to
draw upon to provide first loss capital as needed to support the
warehouse facility. |
|
|
|
In addition, at June 30, 2006, we had a commitment to
Callidus to purchase preferred equity in future CLO transactions
of $77.0 million. |
In addition to these outstanding investment commitments at
June 30, 2006, 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 $194.7 million. See Financial
Condition, Liquidity and Capital Resources.
Our largest investment at value at June 30, 2006, was in
Business Loan Express, LLC (BLX) and our largest investments at
value at December 31, 2005, were in Advantage
Sales & Marketing, Inc. (Advantage) and BLX.
S-6
Business Loan Express,
LLC. At June 30, 2006,
our investment in BLX totaled $293.2 million at cost and
$317.2 million at value, or 7.9% of our total assets, which
includes unrealized appreciation of $24.0 million. We
acquired BLX in 2000.
Total interest and related portfolio income earned from the
Companys investment in BLX for the six months ended
June 30, 2006 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Interest income
|
|
$ |
7.8 |
|
|
$ |
6.9 |
|
Dividend income
|
|
|
|
|
|
|
5.0 |
|
Fees and other income
|
|
|
4.3 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
12.1 |
|
|
$ |
16.6 |
|
|
|
|
|
|
|
|
|
|
Interest income from BLX for the six months ended
June 30, 2006 and 2005, included interest income of
$3.7 million and $3.3 million, respectively, which was
paid in kind. The interest paid in kind was paid to us through
the issuance of additional Class A equity interests.
Accrued interest and dividends receivable at June 30, 2006,
included accrued interest due from BLX totaling
$2.5 million, of which $2.1 million was paid in cash
in July 2006.
Net change in unrealized appreciation or depreciation included a
net decrease in unrealized appreciation on our investment in BLX
of $33.6 million for the six months ended
June 30, 2006, and a net increase in unrealized
appreciation on our investment in BLX of $1.3 million for
the six months ended June 30, 2005. See Results
of Operations for a discussion of the net change in
unrealized appreciation or depreciation related to this
investment.
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 and
small investment real estate loans. 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 may declare dividends on its Class B
interests. If declared, BLX would determine the amount of such
dividend considering its estimated annual taxable income
allocable to such interests.
At December 31, 2005, BLX had a three-year
$275.0 million revolving credit facility provided by third
party lenders that was scheduled to mature in January 2007. As
the controlling equity owner in BLX, we had 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 December 31, 2005, the principal amount
of loans outstanding on the revolving credit facility was
$228.2 million and letters of credit issued under the
facility were $41.7 million. The total obligation
guaranteed by us at December 31, 2005, was
$135.4 million.
S-7
On March 17, 2006, BLX closed on a new three-year
$500.0 million revolving credit facility that matures in
March 2009, which replaced the existing facility. The revolving
credit facility may be expanded through new or additional
commitments up to $600.0 million at BLXs option. This
new facility provides for a sub-facility for the issuance of
letters of credit for up to an amount equal to 25% of the
committed facility. We have provided an unconditional guaranty
to these 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 this facility. At June 30, 2006, the
principal amount outstanding on the revolving credit facility
was $238.7 million and letters of credit issued under the
facility were $56.7 million. The total obligation
guaranteed by us at June 30, 2006, was $149.2 million.
This guaranty can be called by the lenders only in the event of
a default under the BLX credit facility, which includes certain
defaults under our revolving credit facility. BLX has determined
it was in compliance with the terms of this facility at
June 30, 2006.
At June 30, 2006, we had also provided four standby letters
of credit totaling $32.0 million in connection with four
term securitization transactions completed by BLX. In
consideration for providing the revolving credit facility
guaranty and the standby letters of credit, BLX paid us fees of
$3.1 million and $3.2 million for the six months ended
June 30, 2006 and 2005, respectively, which were included
in fees and other income above.
Advantage Sales & Marketing,
Inc. At December 31,
2005, our investment in Advantage totaled $257.7 million at
cost and $660.4 million at value, or 16.4% of our total
assets, which included unrealized appreciation of
$402.7 million. We completed the purchase of a majority
ownership in Advantage in June 2004.
On March 29, 2006, we sold our majority equity interest in
Advantage. We were repaid our $184 million in subordinated
debt outstanding and realized a gain on our equity investment
sold of $433.7 million, subject to post-closing
adjustments. As consideration for the common stock sold in the
transaction, we received a $150 million subordinated note,
with the balance of the consideration paid in cash.
Approximately $34 million of our cash proceeds from the
sale of the common stock were placed in escrow, subject to
certain holdback provisions. In addition, there is potential for
us to receive additional consideration through an earn-out
payment that would be based on Advantages 2006 audited
results. Our realized gain of $433.7 million, subject to
post-closing
adjustments, excludes any earn-out amounts. For tax purposes,
the receipt of the $150 million subordinated note as part
of our consideration for the common stock sold will allow us,
through installment treatment, to defer the recognition of
taxable income for a portion of our realized gain until the note
is collected. In connection with the transaction, we retained an
equity investment in the business valued at $15 million at
closing as a minority shareholder.
Total interest and related portfolio income earned from our
investment in Advantage while we held a majority equity interest
was $14.1 million for the six months ended
June 30, 2006, which included a prepayment premium of
$5.0 million, and $18.5 million for the six months
ended June 30, 2005. In addition, we earned structuring
fees of $2.3 million on our new $150 million
subordinated debt investment in Advantage upon the closing of
the sale transaction.
After the sale transaction, our investment in Advantage at
June 30, 2006, which was composed of subordinated debt and
a minority equity interest, totaled $152.1 million at cost
and $165.1 million at value, which included unrealized
appreciation of $13.0 million. Subsequent to the completion
of the sale transaction, our interest income from our
subordinated debt investment in Advantage for the
three months ended June 30, 2006, was
$4.6 million.
S-8
Advantage is a sales and marketing agency providing outsourced
sales, merchandising, and marketing services to the consumer
packaged goods industry. Advantage has offices across the United
States and is headquartered in Irvine, CA.
Commercial Real Estate Finance
The commercial real estate finance portfolio at value,
investment activity, and the yield on interest-bearing
investments at and for the three and six months ended
June 30, 2006 and 2005, and at and for the year ended
December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
At and for the |
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
At and for |
|
|
|
|
|
|
the Year Ended |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
$ |
96.5 |
|
|
|
8.1% |
|
|
$ |
116.1 |
|
|
|
6.7% |
|
|
$ |
96.5 |
|
|
|
8.1% |
|
|
$ |
116.1 |
|
|
|
6.7% |
|
|
$ |
102.6 |
|
|
|
7.6% |
|
|
Real estate owned
|
|
|
14.6 |
|
|
|
|
|
|
|
16.6 |
|
|
|
|
|
|
|
14.6 |
|
|
|
|
|
|
|
16.6 |
|
|
|
|
|
|
|
13.9 |
|
|
|
|
|
|
Equity interests
|
|
|
22.0 |
|
|
|
|
|
|
|
11.1 |
|
|
|
|
|
|
|
22.0 |
|
|
|
|
|
|
|
11.1 |
|
|
|
|
|
|
|
10.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio
|
|
$ |
133.1 |
|
|
|
|
|
|
$ |
143.8 |
|
|
|
|
|
|
$ |
133.1 |
|
|
|
|
|
|
$ |
143.8 |
|
|
|
|
|
|
$ |
127.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments funded
|
|
$ |
11.9 |
|
|
|
|
|
|
$ |
91.3 |
|
|
|
|
|
|
$ |
13.9 |
|
|
|
|
|
|
$ |
188.6 |
|
|
|
|
|
|
$ |
213.5 |
|
|
|
|
|
Change in accrued or reinvested interest
|
|
$ |
(0.5 |
) |
|
|
|
|
|
$ |
(20.6 |
) |
|
|
|
|
|
$ |
0.5 |
|
|
|
|
|
|
$ |
(18.0 |
) |
|
|
|
|
|
$ |
(18.0 |
) |
|
|
|
|
Principal collections related to investment repayments or
sales(2)
|
|
$ |
13.5 |
|
|
|
|
|
|
$ |
753.8 |
|
|
|
|
|
|
$ |
17.2 |
|
|
|
|
|
|
$ |
760.8 |
|
|
|
|
|
|
$ |
799.5 |
|
|
|
|
|
|
|
(1) |
The weighted average yield on the commercial mortgage loans 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. |
|
(2) |
Principal collections related to investment repayments or sales
for the year ended December 31, 2005, included
$718.1 million related to the sale of our CMBS and CDO
portfolio in May 2005. |
Our commercial real estate investments funded for the six months
ended June 30, 2006 and 2005, and for the year ended
December 31, 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face |
|
|
|
Amount |
|
|
Amount |
|
Discount |
|
Funded |
($ in millions) |
|
|
|
|
|
|
For the Six Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
$ |
7.4 |
|
|
$ |
|
|
|
$ |
7.4 |
|
Equity interests
|
|
|
6.5 |
|
|
|
|
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
13.9 |
|
|
$ |
|
|
|
$ |
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds (4 new
issuances)(1)
|
|
$ |
211.5 |
|
|
$ |
(90.5 |
) |
|
$ |
121.0 |
|
Commercial mortgage loans
|
|
|
67.1 |
|
|
|
(0.9 |
) |
|
|
66.2 |
|
Equity interests
|
|
|
1.4 |
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
280.0 |
|
|
$ |
(91.4 |
) |
|
$ |
188.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds (4 new
issuances)(1)
|
|
$ |
211.5 |
|
|
$ |
(90.5 |
) |
|
$ |
121.0 |
|
Commercial mortgage loans
|
|
|
88.5 |
|
|
|
(0.8 |
) |
|
|
87.7 |
|
Equity interests
|
|
|
4.8 |
|
|
|
|
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
304.8 |
|
|
$ |
(91.3 |
) |
|
$ |
213.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The CMBS bonds invested in during 2005 were sold on May 3,
2005. |
S-9
At June 30, 2006, we had outstanding funding commitments
related to commercial mortgage loans and equity interests of
$9.4 million and commitments in the form of standby letters
of credit and guarantees related to equity interests of
$6.9 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 was included in
the net realized gain on the sale.
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. 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, or through May 2008, 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.
Hedging Activities
We have invested in commercial mortgage loans, 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 these commercial mortgage loans.
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 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 mortgage loans 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 mortgage loans
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
$17.2 million and $17.7 million at June 30, 2006,
and December 31, 2005, 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 $17.2 million and
$17.7 million at June 30, 2006, and December 31,
2005, respectively. The amount
S-10
of the hedge will vary from period to period depending upon the
amount of commercial mortgage loans that we own and have hedged
as of the balance sheet date.
OTHER ASSETS
Other assets is composed primarily of fixed assets, assets held
in deferred compensation trusts, deferred financing and offering
costs, and accounts receivable, which includes amounts received
in connection with the sale of portfolio companies, including
amounts held in escrow, and other receivables from portfolio
companies. At June 30, 2006, and December 31, 2005,
other assets totaled $124.4 million and $87.9 million,
respectively. The increase since year end was primarily the
result of amounts received in connection with the sales of
Advantage and STS Operating, Inc., that are being held in
escrow. See Portfolio and Investment
Activity Private Finance above.
PORTFOLIO ASSET QUALITY
Portfolio by Grade. We employ a grading system for
our entire portfolio. Grade 1 is used for those investments
from which a capital gain is expected. Grade 2 is used for
investments performing in accordance with plan. Grade 3 is
used for investments that require closer monitoring; however, no
loss of investment return or principal is expected. Grade 4
is used for investments that are in workout and for which some
loss of current investment return is expected, but no loss of
principal is expected. Grade 5 is used for investments that
are in workout and for which some loss of principal is expected.
At June 30, 2006, and December 31, 2005, our portfolio was
graded as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Portfolio |
|
Percentage of |
|
Portfolio |
|
Percentage of |
Grade |
|
at Value |
|
Total Portfolio |
|
at Value |
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
1
|
|
$ |
1,241.2 |
|
|
|
34.5 |
% |
|
$ |
1,643.0 |
|
|
|
45.6 |
% |
2
|
|
|
2,177.8 |
|
|
|
60.6 |
|
|
|
1,730.8 |
|
|
|
48.0 |
|
3
|
|
|
93.1 |
|
|
|
2.6 |
|
|
|
149.1 |
|
|
|
4.1 |
|
4
|
|
|
27.4 |
|
|
|
0.8 |
|
|
|
26.5 |
|
|
|
0.7 |
|
5
|
|
|
54.0 |
|
|
|
1.5 |
|
|
|
57.0 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,593.5 |
|
|
|
100.0 |
% |
|
$ |
3,606.4 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of the portfolio in each grading category may vary
substantially from period to period resulting primarily from
changes in the composition of the portfolio as a result of new
investment, repayment, and exit activity, changes in the grade
of investments to reflect our expectation of performance, and
changes in investment values.
Total Grade 3, 4 and 5 portfolio assets were
$174.5 million and $232.6 million, respectively, or
were 4.9% and 6.4%, respectively, of the total portfolio at
value at June 30, 2006, and December 31, 2005.
Grade 4 and 5 assets include loans, debt securities, and
equity securities. We expect that a number of portfolio
companies will be in the Grades 4 or 5 categories from time
to time. Part of the private equity business is working with
troubled portfolio companies to improve their businesses and
protect our investment. The number of portfolio companies and
related investment amount included in Grade 4 and 5 may
fluctuate from period to period. We continue to follow our
historical practice of working with such companies in order to
recover the maximum amount of our investment.
S-11
Loans and Debt Securities on Non-Accrual Status.
At June 30, 2006, and December 31, 2005, loans
and debt securities at value not accruing interest for the total
investment portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Loans and debt securities in workout status (classified as
Grade 4
or 5)(1) |
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
17.7 |
|
|
$ |
15.6 |
|
|
|
Companies 5% to 25% owned
|
|
|
3.3 |
|
|
|
|
|
|
|
Companies less than 5% owned
|
|
|
24.6 |
|
|
|
11.4 |
|
|
Commercial real estate finance
|
|
|
2.9 |
|
|
|
12.9 |
|
Loans and debt securities not in workout status
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
40.8 |
|
|
|
58.0 |
|
|
|
Companies 5% to 25% owned
|
|
|
6.6 |
|
|
|
0.5 |
|
|
|
Companies less than 5% owned
|
|
|
3.9 |
|
|
|
49.5 |
|
|
Commercial real estate finance
|
|
|
12.8 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
112.6 |
|
|
$ |
155.8 |
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total portfolio
|
|
|
3.1% |
|
|
|
4.3% |
|
|
|
(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 June 30, 2006, and December 31,
2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
($ in millions) |
|
|
|
|
Private finance
|
|
$ |
47.2 |
|
|
$ |
74.6 |
|
Commercial mortgage loans
|
|
|
3.7 |
|
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
50.9 |
|
|
$ |
80.7 |
|
|
|
|
|
|
|
|
|
|
|
Percentage of total portfolio
|
|
|
1.4% |
|
|
|
2.2% |
|
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
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
$50.9 million and $60.7 million at June 30, 2006,
and December 31, 2005, respectively.
PORTFOLIO RETURNS
Since our merger on December 31, 1997, through
June 30, 2006, our combined aggregate cash flow Internal
Rate of Return (IRR) has been approximately 22% for private
finance and
S-12
CMBS/CDO investments exited during this period. The IRR is
calculated using the aggregate portfolio cash flow for all
investments exited over this period. For investments exited
during this period, we invested capital totaling
$3.7 billion. The weighted average holding period of these
investments was 35 months. Investments are considered to be
exited when the original investment objective has been achieved
through the receipt of cash and/or non-cash consideration upon
the repayment of our debt investment or sale of an equity
investment, or through the determination that no further
consideration was collectible and, thus, a loss may have been
realized. The aggregate cash flow IRR for private finance
investments was approximately 21% and for CMBS/CDO investments
was approximately 24% for the same period. The weighted average
holding period of the private finance and CMBS/CDO investments
was 47 months and 22 months, respectively, for the
same period. These IRR results represent historical results.
Historical results are not necessarily indicative of future
results.
S-13
RESULTS OF OPERATIONS
Comparison of Three and Six Months Ended June 30, 2006
and 2005
The following table summarizes the Companys operating
results for the three and six months ended June 30, 2006
and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
For the Six Months |
|
|
|
|
|
|
Ended June 30, |
|
|
|
|
|
Ended June 30, |
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Change |
|
Change |
|
2006 |
|
2005 |
|
Change |
|
Change |
($ in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
(unaudited) |
|
|
|
|
Interest and Related Portfolio Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
$ |
95,433 |
|
|
$ |
71,330 |
|
|
$ |
24,103 |
|
|
|
34 |
% |
|
$ |
184,314 |
|
|
$ |
156,275 |
|
|
$ |
28,039 |
|
|
|
18 |
% |
|
Loan prepayment premiums
|
|
|
1,745 |
|
|
|
853 |
|
|
|
892 |
|
|
|
105 |
% |
|
|
7,031 |
|
|
|
2,530 |
|
|
|
4,501 |
|
|
|
178 |
% |
|
Fees and other income
|
|
|
13,278 |
|
|
|
14,024 |
|
|
|
(746 |
) |
|
|
(5 |
)% |
|
|
30,122 |
|
|
|
22,321 |
|
|
|
7,801 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
110,456 |
|
|
|
86,207 |
|
|
|
24,249 |
|
|
|
28 |
% |
|
|
221,467 |
|
|
|
181,126 |
|
|
|
40,341 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
21,607 |
|
|
|
19,154 |
|
|
|
2,453 |
|
|
|
13 |
% |
|
|
45,907 |
|
|
|
39,379 |
|
|
|
6,528 |
|
|
|
17 |
% |
|
Employee
|
|
|
20,398 |
|
|
|
22,877 |
|
|
|
(2,479 |
) |
|
|
(11 |
)% |
|
|
41,826 |
|
|
|
38,333 |
|
|
|
3,493 |
|
|
|
9 |
% |
|
Stock options
|
|
|
4,597 |
|
|
|
|
|
|
|
4,597 |
|
|
|
100 |
% |
|
|
8,203 |
|
|
|
|
|
|
|
8,203 |
|
|
|
100 |
% |
|
Administrative
|
|
|
9,861 |
|
|
|
23,048 |
|
|
|
(13,187 |
) |
|
|
(57 |
)% |
|
|
21,380 |
|
|
|
43,802 |
|
|
|
(22,422 |
) |
|
|
(51 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
56,463 |
|
|
|
65,079 |
|
|
|
(8,616 |
) |
|
|
(13 |
)% |
|
|
117,316 |
|
|
|
121,514 |
|
|
|
(4,198 |
) |
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
53,993 |
|
|
|
21,128 |
|
|
|
32,865 |
|
|
|
156 |
% |
|
|
104,151 |
|
|
|
59,612 |
|
|
|
44,539 |
|
|
|
75 |
% |
Income tax expense, including excise tax
|
|
|
3,798 |
|
|
|
5,861 |
|
|
|
(2,063 |
) |
|
|
(35 |
)% |
|
|
12,656 |
|
|
|
5,593 |
|
|
|
7,063 |
|
|
|
126 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
50,195 |
|
|
|
15,267 |
|
|
|
34,928 |
|
|
|
229 |
% |
|
|
91,495 |
|
|
|
54,019 |
|
|
|
37,476 |
|
|
|
69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
100,240 |
|
|
|
207,496 |
|
|
|
(107,256 |
) |
|
|
* |
|
|
|
533,075 |
|
|
|
217,781 |
|
|
|
315,294 |
|
|
|
* |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(116,706 |
) |
|
|
89,122 |
|
|
|
(205,828 |
) |
|
|
* |
|
|
|
(491,254 |
) |
|
|
159,706 |
|
|
|
(650,960 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains
|
|
|
(16,466 |
) |
|
|
296,618 |
|
|
|
(313,084 |
) |
|
|
* |
|
|
|
41,821 |
|
|
|
377,487 |
|
|
|
(335,666 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
33,729 |
|
|
$ |
311,885 |
|
|
$ |
(278,156 |
) |
|
|
(89 |
)% |
|
$ |
133,316 |
|
|
$ |
431,506 |
|
|
$ |
(2 98,190 |
) |
|
|
(69 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.24 |
|
|
$ |
2.29 |
|
|
$ |
(2.05 |
) |
|
|
(90 |
)% |
|
$ |
0.94 |
|
|
$ |
3.17 |
|
|
$ |
(2. 23 |
) |
|
|
(70 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
143,213 |
|
|
|
136,381 |
|
|
|
6,832 |
|
|
|
5 |
% |
|
|
142,466 |
|
|
|
135,982 |
|
|
|
6,484 |
|
|
|
5 |
% |
|
|
* |
Net realized gains (losses) and net change in unrealized
appreciation or depreciation can fluctuate significantly from
period to period. As a result, quarterly comparisons may not be
meaningful. |
S-14
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.
Interest and Dividends. Interest and dividend income for
the three and six months ended June 30, 2006 and 2005, was
composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private finance loans and debt securities
|
|
$ |
88.6 |
|
|
$ |
53.1 |
|
|
$ |
171.2 |
|
|
$ |
109.9 |
|
|
CMBS and CDO portfolio
|
|
|
|
|
|
|
7.3 |
|
|
|
|
|
|
|
29.4 |
|
|
Commercial mortgage loans
|
|
|
2.1 |
|
|
|
2.0 |
|
|
|
4.8 |
|
|
|
3.5 |
|
|
Cash and cash equivalents, U.S. Treasury bills and other
|
|
|
2.9 |
|
|
|
3.6 |
|
|
|
5.9 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
|
|
|
93.6 |
|
|
|
66.0 |
|
|
|
181.9 |
|
|
|
146.9 |
|
Dividends
|
|
|
1.8 |
|
|
|
5.3 |
|
|
|
2.4 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
$ |
95.4 |
|
|
$ |
71.3 |
|
|
$ |
184.3 |
|
|
$ |
156.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our interest income from our private finance loans and debt
securities has increased period over period as a result of the
growth in this portfolio as shown below. In addition, during the
six months ended June 30, 2006, we resumed accruing
interest on loans to two private finance portfolio companies.
Such additional interest income totaled $2.4 million and
$6.2 million for the three and six months ended
June 30, 2006, respectively. In addition, one of these
portfolio companies paid off during the second quarter and the
accrued interest was collected.
There was no interest income from the CMBS and CDO portfolio in
2006 as we sold this portfolio on May 3, 2005. The CMBS and
CDO portfolio sold had a cost basis of $718.1 million and a
weighted average yield on the cost basis of the portfolio of
approximately 13.8%. We generally reinvested the principal
proceeds from the CMBS and CDO portfolio into our private
finance portfolio.
The level of portfolio-related interest income, which includes
interest paid in cash and in kind, is directly related to the
balance of the interest-bearing investment portfolio outstanding
during the period multiplied by the weighted average yield. The
interest-bearing investments in the portfolio at value and the
yield on the interest-bearing investments in the portfolio at
June 30, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
Private finance loans and debt securities
|
|
$ |
2,491.2 |
|
|
|
12.7 |
% |
|
$ |
1,633.0 |
|
|
|
13.7 |
% |
CMBS and CDO
portfolio(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
|
96.5 |
|
|
|
8.1 |
% |
|
|
116.1 |
|
|
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,587.7 |
|
|
|
12.6 |
% |
|
$ |
1,749.1 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. The weighted
average yield is computed as of the balance sheet date. |
|
(2) |
The CMBS and CDO portfolio was sold on May 3, 2005. See
discussion above. |
S-15
The private finance portfolio yield at June 30, 2006, of
12.7% as compared to the private finance portfolio yield of
13.7% at June 30, 2005, reflects the mix of debt
investments in the private finance portfolio. 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.
See the discussion of the private finance portfolio yield above
under the caption Portfolio and Investment
Activity 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 for the three and six months ended June 30,
2006, did not include any dividends from BLX. Dividend income
for the three and six months ended June 30, 2005, included
$3.0 million and $5.0 million, respectively, of
dividends from BLX on the Class B equity interests held by us,
which were paid in cash. See the discussion of BLX above under
the caption Portfolio and Investment
Activity Private Finance.
Loan Prepayment Premiums. Loan prepayment premiums were
$1.7 million and $0.9 million for the three months
ended June 30, 2006 and 2005, respectively, and
$7.0 million and $2.5 million for the six months ended
June 30, 2006 and 2005, respectively. Loan prepayment
premiums for the six months ended June 30, 2006, included
$5.0 million related to the repayment of our subordinated
debt in connection with the sale of our majority equity interest
in Advantage on March 29, 2006. See Portfolio
and Investment Activity above for further discussion.
While the scheduled maturities of private finance and commercial
real estate loans generally range from five to ten years, it is
not unusual for our borrowers to refinance or pay off their
debts to us ahead of schedule. Therefore, we generally structure
our loans to require a prepayment premium for the first three to
five years of the loan. Accordingly, the amount of prepayment
premiums will vary depending on the level of repayments and the
age of the loans at the time of repayment.
Fees and Other Income. Fees and other income primarily
include fees related to financial structuring, diligence,
transaction services, management and consulting services to
portfolio companies, commitments, guarantees, and other
services. As a business development company, we are required to
make significant managerial assistance available to the
companies in our investment portfolio. Managerial assistance
includes, but is not limited to, management and consulting
services related to corporate finance, marketing, human
resources, personnel and board member recruiting, business
operations, corporate governance, risk management and other
general business matters.
Fees and other income for the three and six months ended
June 30, 2006 and 2005, included fees relating to the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Structuring and diligence
|
|
$ |
8.0 |
|
|
$ |
7.5 |
|
|
$ |
19.0 |
|
|
$ |
8.9 |
|
Management, consulting and other services provided to portfolio
companies
|
|
|
2.3 |
|
|
|
3.6 |
|
|
|
6.4 |
|
|
|
6.8 |
|
Commitment, guaranty, transaction and other fees from portfolio
companies
|
|
|
2.9 |
|
|
|
2.0 |
|
|
|
4.6 |
|
|
|
4.8 |
|
Other income
|
|
|
0.1 |
|
|
|
0.9 |
|
|
|
0.1 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
$ |
13.3 |
|
|
$ |
14.0 |
|
|
$ |
30.1 |
|
|
$ |
22.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-16
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.
Structuring and diligence fees for the six months ended
June 30, 2006, included structuring fees from Advantage
Sales and Marketing, Cook Inlet Alternative Risk, CR Brands, Hot
Stuff Foods, MHF Logistical Solutions, the Step 2 Company,
and 3SI Security Systems totaling $13.0 million.
Structuring and diligence fees may vary substantially from
period to period based on the level of new investment
originations and the market rates for these types of fees.
Private finance investments funded were $1.2 billion for
the six months ended June 30, 2006, as compared to
$466.3 million for the six months ended June 30, 2005.
Management fees for the six months ended June 30, 2006,
included $1.8 million in management fees from Advantage
prior to its sale on March 29, 2006. See
Portfolio and Investment Activity above for
further discussion.
Fees and other income related to the CMBS and CDO portfolio for
the six months ended June 30, 2005, were $4.1 million.
As noted above, we sold our CMBS and CDO portfolio on
May 3, 2005.
BLX and Advantage. BLX was our largest investment at
value at June 30, 2006, and represented 7.9% of our total
assets. Advantage and BLX were our largest investments at
June 30, 2005, and together represented 22.2% of our total
assets.
Total interest and related portfolio income from these
investments for the three and six months ended June 30,
2006 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
BLX
|
|
$ |
6.0 |
|
|
$ |
8.8 |
|
|
$ |
12.1 |
|
|
$ |
16.6 |
|
Advantage(1)
|
|
$ |
|
|
|
$ |
9.4 |
|
|
$ |
14.1 |
|
|
$ |
18.5 |
|
|
|
(1) |
Includes income from the period we held a majority equity
interest only. See Portfolio and Investment
Activity above for further discussion. |
Operating Expenses. Operating expenses include
interest, employee, stock options, and administrative expenses.
Interest Expense. The fluctuations in interest expense
during the three and six months ended June 30, 2006 and
2005, 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
S-17
weighted average cost of debt, including fees and debt financing
costs, at and for the three and six months ended June 30,
2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
At and for the |
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Total outstanding debt
|
|
$ |
1,208.9 |
|
|
$ |
986.5 |
|
|
$ |
1,208.9 |
|
|
$ |
986.5 |
|
Average outstanding debt
|
|
$ |
1,301.1 |
|
|
$ |
1,071.0 |
|
|
$ |
1,395.8 |
|
|
$ |
1,097.9 |
|
Weighted average
cost(1)
|
|
|
6.6 |
% |
|
|
6.8 |
% |
|
|
6.6 |
% |
|
|
6.8 |
% |
|
|
(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, other facility fees and debt
financing costs 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
$0.5 million for the three months ended June 30, 2006
and 2005, respectively, and $0.4 million and
$1.1 million for the six months ended June 30, 2006
and 2005, respectively.
Employee Expense. Employee expenses for the three and six
months ended June 30, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$ |
17.6 |
|
|
$ |
11.7 |
|
|
$ |
35.0 |
|
|
$ |
23.5 |
|
Transition compensation, net
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
|
|
5.5 |
|
Individual performance award (IPA)
|
|
|
2.1 |
|
|
|
1.9 |
|
|
|
3.8 |
|
|
|
3.8 |
|
IPA mark to market expense (benefit)
|
|
|
(1.5 |
) |
|
|
1.8 |
|
|
|
(0.6 |
) |
|
|
1.9 |
|
Individual performance bonus (IPB)
|
|
|
2.2 |
|
|
|
2.0 |
|
|
|
3.6 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee expense
|
|
$ |
20.4 |
|
|
$ |
22.9 |
|
|
$ |
41.8 |
|
|
$ |
38.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at end of period
|
|
|
166 |
|
|
|
152 |
|
|
|
166 |
|
|
|
152 |
|
The change in salaries and employee benefits reflects the effect
of wage increases and the change in mix of employees given their
area of responsibility and relevant experience level. Salaries
and employee benefits expense has generally increased due to
changes in the composition of our employee resources and
compensation increases. Salaries and employee benefits include
an accrual for employee bonuses, which are generally paid
annually after the completion of the fiscal year. The quarterly
accrual is based upon an estimate of annual bonuses and is
subject to change. The amount of the current year bonuses will
be finalized by the Compensation Committee and the Board of
Directors at the end of the year. Salaries and employee benefits
include accrued bonuses of $9.0 million and
$3.4 million for the three months ended June 30, 2006
and 2005, respectively, and $16.9 million and
$7.1 million for the six months ended June 30, 2006
and 2005, respectively.
Transition compensation costs were $6.4 million for the six
months ended June 30, 2005, including $3.7 million of
costs under retention agreements and $2.7 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 expenses were reduced
by $0.9 million for salary reimbursements from CWCapital
under the transition services agreement resulting in net expense
related to the sale of the CMBS and CDO portfolio of
$5.5 million. See the caption
S-18
Portfolio and Investment Activity
Commercial Real Estate Finance for additional information.
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 generally in four
equal installments, 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 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 determined that for 2005 and 2006 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 of each respective year) as long as the
recipient remains employed by us.
The Compensation Committee and the Board of Directors have
determined the IPA and the IPB for 2006. We currently estimate
the IPA and IPB to be approximately $8.1 million each;
however, the Compensation Committee may adjust the IPA or IPB as
needed, or make new awards as new officers are hired. 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.
In connection with our 2006 Annual Meeting of Stockholders, the
stockholders approved the issuance of up to 2.5 million
shares of our common stock in exchange for the cancellation of
vested
in-the-money
stock options granted to certain officers and directors under
our Amended Stock Option Plan. Under the initiative, which has
been reviewed and approved by our Board of Directors, all
optionees who hold vested stock options with exercise prices
below the market value of the stock (or
in-the-money
options), would be offered the opportunity to receive an Option
Cancellation Payment (OCP) equal to the in-the-money
value of the stock options cancelled, which would be paid
one-half in cash and one-half in shares of our common stock, in
exchange for their voluntary cancellation of their vested stock
options. As part of this initiative, the Board of Directors has
adopted a target ownership structure that establishes minimum
ownership levels for our senior officers and continues to
further align the interests of our officers with those of our
stockholders.
Unlike the accounting treatment typically associated with a
stock option exercise, the OCP would be recorded as an expense
for financial reporting purposes, and the expense may be
significant. Based on the 13 million vested options
outstanding and the market price of $30.50 of our stock on
March 10, 2006, the date used for disclosure in our 2006
proxy, the expense related to the OCP would be approximately
$106 million if all option holders choose to cancel all
vested in-the-money
options in exchange for the OCP. As of June 30, 2006, there
were 17 million vested options outstanding, of which
13 million options were
in-the-money. Using the
market price of $28.77 of our stock on June 30, 2006, the
expense related to the OCP would be approximately
$86 million if all option holders chose to cancel all
vested in-the-money options in exchange for the OCP. For income
tax purposes, our tax expense resulting from the OCP would be
similar to the tax expense that would result from an exercise of
stock options in the market. Any tax deduction for us resulting
from the OCP or an exercise of stock options in the market would
be limited by Section 162(m) of the Code for persons
subject to Section 162(m).
S-19
Employee Stock Options Expense. In December 2004, the
FASB issued Statement No. 123 (Revised 2004),
Share-Based Payment (the Statement), which
requires companies to recognize the grant-date fair value of
stock options and other equity-based compensation issued to
employees in the income statement. The Statement was effective
January 1, 2006, and it applies to our stock option plan.
Our stock options are typically granted with ratable vesting
provisions, and we amortize the compensation cost over the
related service period. With respect to options granted prior to
January 1, 2006, we have used the modified
prospective method for adoption of the Statement. Under
this method, the unamortized cost of previously awarded options
that were unvested as of January 1, 2006, is recognized
over the remaining service period in the statement of operations
beginning in 2006. With respect to options granted on or after
January 1, 2006, compensation cost is recognized in the
statement of operations over the service period. The effect of
this adoption for the six months ended June 30, 2006, was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2006 |
|
|
|
|
|
($ in millions) |
|
|
|
|
Employee Stock Option Expense:
|
|
|
|
|
|
|
|
|
|
Previously awarded, unvested options as of January 1, 2006
|
|
$ |
3.3 |
|
|
$ |
6.7 |
|
|
Options granted on or after January 1, 2006
|
|
|
1.3 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option expense
|
|
$ |
4.6 |
|
|
$ |
8.2 |
|
|
|
|
|
|
|
|
|
|
In addition to the employee stock option expense, for the three
and six months ended June 30, 2006, administrative expense
included $0.2 million of expense related to options granted
to directors during the period. Options granted to non-officer
directors vest on the grant date and therefore, the full expense
is recorded on the grant date.
We estimate that the employee-related stock option expense under
the Statement that will be recorded in our statement of
operations will be approximately $16.1 million,
$10.1 million, and $3.2 million for the years ended
December 31, 2006, 2007, and 2008, respectively, which
includes approximately $2.6 million, $1.4 million, and
$0.7 million, respectively, related to options granted in
the first and second quarters of 2006. This estimate may change
if our assumptions related to future option forfeitures change.
This estimate does not include any expense related to future
stock option grants as the fair value of those stock options
will be determined at the time of grant.
Administrative Expense. Administrative expenses include
legal and accounting fees, valuation assistance fees, insurance
premiums, the cost of leases for our headquarters in
Washington, DC, and our regional offices, portfolio
origination and development expenses, stock record expenses,
directors fees, and various other expenses. Administrative
expenses for the three and six months ended June 30, 2006
and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ending |
|
Months Ending |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Administrative expenses
|
|
$ |
9.4 |
|
|
$ |
9.6 |
|
|
$ |
18.0 |
|
|
$ |
18.1 |
|
Investigation related costs
|
|
|
0.5 |
|
|
|
13.5 |
|
|
|
3.4 |
|
|
|
25.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
$ |
9.9 |
|
|
$ |
23.1 |
|
|
$ |
21.4 |
|
|
$ |
43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investigation related costs include costs associated with
requests for information in connection with two government
investigations. These expenses remain difficult to predict. See
Legal Proceedings in the accompanying prospectus.
S-20
Income Tax Expense, Including Excise
Tax. Income tax expense for
the three and six months ended June 30, 2006 and 2005, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Income tax expense, net
|
|
$ |
0.6 |
|
|
$ |
1.9 |
|
|
$ |
1.1 |
|
|
$ |
1.6 |
|
Excise tax expense
|
|
|
3.2 |
|
|
|
4.0 |
|
|
|
11.6 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense, including excise tax
|
|
$ |
3.8 |
|
|
$ |
5.9 |
|
|
$ |
12.7 |
|
|
$ |
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our wholly owned subsidiary, A.C. Corporation, 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,
our estimated annual taxable income for 2006 currently exceeds
our estimated dividend distributions to shareholders from such
taxable income in 2006, and such estimated excess taxable income
will be distributed in 2007. Therefore, we will be required to
pay a 4% excise tax on the excess of 98% of our taxable income
over the amount of actual distributions from such taxable
income. Accordingly, we have accrued an estimated excise tax of
$3.2 million and $11.6 million for the three and six months
ended June 30, 2006, respectively, based upon our estimated
excess taxable income earned for the period. We currently expect
that the excise tax accrual in the first half of the year, which
included accruals for the estimated taxable income earned from
the gains realized on the sale of our equity investments in
Advantage and STS Operating, Inc., will be materially higher
than that accrued in the second half of the year. See
Financial Condition, Liquidity and Capital Resources.
Realized Gains and Losses. Net realized gains
primarily result from the sale of equity securities associated
with certain private finance investments, the sale of CMBS bonds
and CDO bonds and preferred shares, and the realization of
unamortized discount resulting from the sale and early repayment
of private finance loans and commercial mortgage loans, offset
by losses on investments. Net realized gains for the three and
six months ended June 30, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Realized gains
|
|
$ |
101.0 |
|
|
$ |
244.7 |
|
|
$ |
537.5 |
|
|
$ |
259.4 |
|
Realized losses
|
|
|
(0.8 |
) |
|
|
(37.2 |
) |
|
|
(4.4 |
) |
|
|
(41.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
$ |
100.2 |
|
|
$ |
207.5 |
|
|
$ |
533.1 |
|
|
$ |
217.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months ended June 30,
S-21
2006 and 2005, we reversed previously recorded unrealized
appreciation or depreciation when gains or losses were realized
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
($ in millions) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
|
$ |
(95.6 |
) |
|
$ |
(16.6 |
) |
|
$ |
(489.2 |
) |
|
$ |
(26.5 |
) |
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
|
|
0.5 |
|
|
|
37.1 |
|
|
|
3.2 |
|
|
|
41.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reversal
|
|
$ |
(95.1 |
) |
|
$ |
20.5 |
|
|
$ |
(486.0 |
) |
|
$ |
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains for the three months ended June 30, 2006 and
2005, were as follows:
($ in millions)
|
|
|
|
|
|
2006 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
STS Operating, Inc.
|
|
$ |
94.8 |
|
United Site Services, Inc.
|
|
|
3.3 |
|
MHF Logistical Solutions, Inc.
|
|
|
1.2 |
|
Advantage Sales & Marketing, Inc.
|
|
|
0.6 |
|
Other
|
|
|
1.1 |
|
|
|
|
|
|
|
Total private finance
|
|
|
101.0 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
101.0 |
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Master Plan, Inc.
|
|
$ |
3.7 |
|
Ginsey Industries, Inc.
|
|
|
2.8 |
|
E-Talk Corporation
|
|
|
1.6 |
|
Professional Paint, Inc.
|
|
|
1.0 |
|
Other
|
|
|
1.0 |
|
|
|
|
|
|
|
Total private finance
|
|
|
10.1 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
CMBS/CDO asset
net(1)
|
|
|
227.7 |
|
Other
|
|
|
6.9 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
234.6 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
244.7 |
|
|
|
|
|
|
|
|
(1) |
Net of net realized losses from related hedges of
$0.7 million for the three months ended June 30, 2005. |
STS Operating, Inc. In the second quarter of 2006,
we completed the sale of STS Operating, Inc. (STS). We were
repaid our $6.8 million in subordinated debt outstanding
and we realized a gain on the sale of our common stock in STS of
$94.8 million, subject to post-closing adjustments. The
cost basis of our equity was $3.5 million. As part of the
consideration for the sale of our equity investment, we received
a $30 million subordinated note. Approximately
$11.2 million of our proceeds are subject to certain
holdback provisions and post-closing adjustments. For tax
purposes, the receipt of the $30 million subordinated note
as part of our consideration for the common stock sold will
allow us, through installment treatment, to defer the
recognition of taxable income for a portion of our realized gain
until the note is collected.
S-22
Realized losses for the three months ended June 30, 2006
and 2005, were as follows:
($ in millions)
|
|
|
|
|
|
|
2006 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Other
|
|
$ |
0.3 |
|
|
|
|
|
|
|
Total private finance
|
|
|
0.3 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
0.5 |
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
0.5 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
0.8 |
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Norstan Apparel Shops, Inc.
|
|
$ |
18.5 |
|
E-Talk Corporation
|
|
|
9.0 |
|
Garden Ridge Corporation
|
|
|
7.1 |
|
Other
|
|
|
0.3 |
|
|
|
|
|
|
|
Total private finance
|
|
|
34.9 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
2.3 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
2.3 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
37.2 |
|
|
|
|
|
|
Realized gains for the six months ended June 30, 2006 and 2005,
were as follows:
($ in millions)
|
|
|
|
|
|
2006 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Advantage Sales & Marketing, Inc.
|
|
$ |
433.7 |
|
STS Operating, Inc.
|
|
|
94.8 |
|
United Site Services, Inc.
|
|
|
3.3 |
|
Nobel Learning Communities, Inc.
|
|
|
1.5 |
|
MHF Logisitical Solutions, Inc.
|
|
|
1.2 |
|
The Debt Exchange, Inc.
|
|
|
1.1 |
|
Other
|
|
|
1.3 |
|
|
|
|
|
|
|
Total private finance
|
|
|
536.9 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
0.6 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
0.6 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
537.5 |
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Polaris Pool System, Inc.
|
|
$ |
7.4 |
|
Master Plan, Inc.
|
|
|
3.7 |
|
U.S. Security Holdings, Inc.
|
|
|
3.3 |
|
Ginsey Industries, Inc.
|
|
|
2.8 |
|
E-Talk Corporation
|
|
|
1.6 |
|
Professional Paint, Inc.
|
|
|
1.0 |
|
Oriental Trading Company, Inc.
|
|
|
1.0 |
|
Other
|
|
|
3.5 |
|
|
|
|
|
|
|
Total private finance
|
|
|
24.3 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
CMBS/CDO assets,
net(1)
|
|
|
227.7 |
|
Other
|
|
|
7.4 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
235.1 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
259.4 |
|
|
|
|
|
|
|
|
(1) |
Net of net realized losses from related hedges of
$0.7 million for the six months ended June 30, 2005. |
S-23
Realized losses for the six months ended June 30, 2006 and
2005, were as follows:
($ in millions)
|
|
|
|
|
|
|
2006 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Aspen Pet Products, Inc.
|
|
$ |
1.6 |
|
Nobel Learning Communities, Inc.
|
|
|
1.4 |
|
Other
|
|
|
0.6 |
|
|
|
|
|
|
|
Total private finance
|
|
|
3.6 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
0.8 |
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
0.8 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
4.4 |
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Norstan Apparel Shops, Inc.
|
|
$ |
18.5 |
|
E-Talk Corporation
|
|
|
9.0 |
|
Garden Ridge Corporation
|
|
|
7.1 |
|
Alderwoods Group, Inc.
|
|
|
0.8 |
|
Other
|
|
|
0.7 |
|
|
|
|
|
|
|
Total private finance
|
|
|
36.1 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
5.5 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
5.5 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
41.6 |
|
|
|
|
|
|
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 June 30, 2006,
portfolio investments recorded at fair value were approximately
90% 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.
As a business development company, we have invested in illiquid
securities including debt and equity securities of companies.
The structure of each 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 may be subject to certain restrictions on resale
and generally have no
S-24
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 Private Finance. Our
process for determining the fair value of a private finance
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 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.
S-25
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.
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. 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 2006 and 2005, we received third-party valuation assistance
from Duff & Phelps, LLC (Duff & Phelps) and
Houlihan Lokey Howard and Zukin (Houlihan Lokey) for our private
finance portfolio as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Q1 |
|
Q2 |
|
Q1 |
|
Q2 |
|
|
|
|
|
|
|
|
|
Number of private finance portfolio companies reviewed
|
|
|
78 |
|
|
|
78 |
|
|
|
36 |
|
|
|
72 |
|
Percentage of private finance portfolio reviewed at value
|
|
|
87.0 |
% |
|
|
89.6 |
% |
|
|
74.5 |
% |
|
|
83.0 |
% |
Professional fees for third-party valuation assistance were $1.4
million for the year ended December 31, 2005, and are
estimated to be approximately $1.5 million for 2006.
Valuation Methodology CDO and CLO Bonds and
Preferred Shares/Income Notes (CDO/CLO Assets).
CDO/CLO Assets are carried at fair value, which is based on
a discounted cash flow model that utilizes prepayment and loss
assumptions based on historical experience and projected
performance, economic factors, the characteristics of the
underlying cash flow and comparable yields for similar bonds and
preferred shares/income notes, when available. We recognize
unrealized appreciation or depreciation on our CDO/CLO Assets as
comparable yields in the market change and/ or based on changes
in estimated cash flows resulting from changes in prepayment or
loss assumptions in the underlying collateral pool. As each bond
ages, the expected amount of losses and the expected timing of
recognition of such losses in the underlying collateral pool is
updated and the revised cash flows are used in determining the
fair value of the bonds. We determine the fair value of our
CDO/CLO Assets on an individual security-by-security basis. If
we were to sell a group of these CDO/CLO Assets in a pool in one
or more transactions, the total value received for that pool may
be different than the sum of the fair values of the individual
bonds or preferred shares/income notes.
S-26
Net Change in Unrealized Appreciation or Depreciation.
Net change in unrealized appreciation or depreciation for the
three and six months ended June 30, 2006 and 2005,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006(1) |
|
2005(1) |
|
2006(1) |
|
2005(1) |
($ in millions) |
|
|
|
|
|
|
|
|
Net unrealized appreciation or depreciation
|
|
$ |
(21.6 |
) |
|
$ |
68.6 |
|
|
$ |
(5.3 |
) |
|
$ |
144.3 |
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
|
|
(95.6 |
) |
|
|
(16.6 |
) |
|
|
(489.2 |
) |
|
|
(26.5 |
) |
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
|
|
0.5 |
|
|
|
37.1 |
|
|
|
3.2 |
|
|
|
41.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation or depreciation
|
|
$ |
(116.7 |
) |
|
$ |
89.1 |
|
|
$ |
(491.3 |
) |
|
$ |
159.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 30, 2006, our largest investment was in BLX. The
following is a summary of the methodology that we used to
determine the fair value of this investment.
Business Loan Express, LLC. To determine the value
of our investment in BLX at June 30, 2006, 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 June 30, 2006, and December 31, 2005.
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 June 30, 2006, was made up of CIT Group, Inc., Financial
Federal Corporation, GATX Corporation, and Marlin Business
Services Corporation, which is consistent with the comparable
group at March 31, 2006, and December 31, 2005.
Our investment in BLX at June 30, 2006, was valued at
$317.2 million. This fair value was within the range of
values determined by the four valuation analyses. Unrealized
appreciation on our investment was $24.0 million at
June 30, 2006. We decreased unrealized appreciation for the
three and six months ended June 30, 2006, by
$10.9 million and $33.6 million, respectively. The
decrease resulted from a reduction in enterprise value at
June 30, 2006, of approximately 6% as compared to the
enterprise value at December 31, 2005. BLX has experienced
higher loan prepayments in recent months, which BLX management
believes is due to a robust economy and increased competition
from banks. BLX management has scaled back their traditional
loan originations to remain selective in this competitive
lending environment, and is also developing new loan products.
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 143.2 million and 136.4 million
for the three months ended June 30, 2006 and 2005,
respectively, and were 142.5 million and 136.0 million
for the six months ended June 30, 2006 and 2005,
respectively.
S-27
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 or other amounts, including amounts held in escrow,
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 from such
taxable income 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 and obtain regulated investment company tax benefits, 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 regulated investment
company. However, there can be no assurance that we will
continue to qualify for such treatment in future years.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Dividends and Distributions
Dividends to common shareholders for the six months ended
June 30, 2006 and 2005, were $166.6 million and
$152.3 million, respectively, or $1.19 per common share for
the first half of 2006 and $1.14 per common share for the first
half of 2005. An extra cash dividend of $0.03 per common share
was declared during 2005 and was paid to shareholders on
January 27, 2006.
The Board of Directors has declared a dividend of $0.61 per
common share for the third quarter of 2006.
Dividends are generally determined based upon an estimate of
annual taxable income and the amount of taxable income carried
over from the prior year for distribution in the current year.
S-28
Taxable income 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 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 and the amount of
taxable income carried over from the prior year for distribution
in the current year. 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 from such taxable income for the year, we may
carry over the excess taxable income into the next year and such
excess taxable 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
is generally 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 estimate that the taxable income carried
over from 2005 for distribution to shareholders in 2006 is
$163.8 million. However, our taxable income for 2005 is an
estimate and will not be finally determined until we file our
2005 tax return in September 2006, and therefore, the amount of
excess taxable income carried over from 2005 into 2006 may be
different from this estimate.
We currently expect that our estimated annual taxable income for
2006 will be in excess of our estimated dividend distributions
to shareholders in 2006 from such taxable income, and,
therefore, we expect to carry over excess taxable income for
distribution to shareholders in 2007. We expect that we will
generally be required to pay a 4% excise tax on the excess of
98% of our taxable income for 2006 over the amount of actual
distributions from such taxable income in 2006. Accordingly, for
the six months ended June 30, 2006, we have accrued an
excise tax of $11.6 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 2006 may
be adjusted as appropriate in the remainder of 2006 to reflect
changes in our estimate of the carry over amount and additional
excise tax may be accrued during the remainder of 2006 as
additional excess taxable income is earned, if any. Our ability
to earn the estimated annual taxable income for 2006 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 expenses incurred. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Risk
Factors.
In addition to excess taxable income available to be carried
over from the current tax year for distribution in the following
tax year, we currently estimate that we have deferred taxable
income related to installment sale gains of approximately
$33 million as of December 31 2005, and approximately
$170 million for the six months ended June 30, 2006, for a
total of approximately $203 million as of June 30, 2006 . These
gains have been recognized for financial reporting purposes in
the respective years they were realized, but will be deferred
for tax purposes until the notes or other amounts received from
the sale of the related investments are collected in cash. These
installment
S-29
sale gains are estimates and will not be finally determined
until we file our tax returns for the respective years. See
Other Matters Regulated Investment Company
Status above.
Because we are a regulated investment company, we distribute our
taxable income and, therefore, from time to time we will raise
new debt or equity capital in order to fund our investments and
operations.
Liquidity and Capital Resources
At June 30, 2006, and December 31, 2005, our liquidity
portfolio (see below), cash and investments in money market and
other securities, total assets, total debt outstanding, total
shareholders equity, debt to equity ratio and asset
coverage for senior indebtedness were as follows:
|
|
|
|
|
|
|
|
|
($ in millions) |
|
2006 |
|
2005 |
|
|
|
|
|
Liquidity portfolio (including money market and other
securities: 2006-$75.3; 2005-$100.0)
|
|
$ |
201.2 |
|
|
$ |
200.3 |
|
Cash and investments in money market and other securities
(including money market and other securities: 2006-$22.5;
2005-$22.0)
|
|
$ |
25.6 |
|
|
$ |
53.3 |
|
Total assets
|
|
$ |
4,011.2 |
|
|
$ |
4,025.9 |
|
Total debt outstanding
|
|
$ |
1,208.9 |
|
|
$ |
1,284.8 |
|
Total shareholders equity
|
|
$ |
2,690.0 |
|
|
$ |
2,620.5 |
|
Debt to equity ratio
|
|
|
0.45 |
|
|
|
0.49 |
|
Asset coverage
ratio(1)
|
|
|
326 |
% |
|
|
309 |
% |
|
|
(1) |
As a business development company, we are generally required to
maintain a minimum ratio of 200% of total assets to total
borrowings. |
We have a liquidity portfolio that is composed of
U.S. Treasury bills, money market securities and a
certificate of deposit. At June 30, 2006, and
December 31, 2005, the value and yield of the securities in
the liquidity portfolio were as follows:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
($ in millions) |
|
Value |
|
Yield |
|
Value |
|
Yield |
|
|
|
|
|
|
|
|
|
U.S. Treasury
bills(1)
|
|
$ |
125.9 |
|
|
|
4.9% |
|
|
$ |
100.3 |
|
|
|
4.3% |
|
Money market securities
|
|
|
55.3 |
|
|
|
5.0% |
|
|
|
100.0 |
|
|
|
4.1% |
|
Certificate of
Deposit(1)
|
|
|
20.0 |
|
|
|
5.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
201.2 |
|
|
|
5.0% |
|
|
$ |
200.3 |
|
|
|
4.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Treasury bills and certificate of deposit mature in 2006. |
The liquidity portfolio was established to provide a pool of
liquid assets within our balance sheet. Our investment portfolio
is primarily composed of private, illiquid assets for which
there is no readily available market. Our portfolios
liquidity was reduced when we sold our portfolio of CMBS assets
in May 2005, particularly BB rated bonds, which were generally
more liquid than assets in our private finance portfolio. We
will assess the amount held in and the composition of the
liquidity portfolio throughout the year.
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 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.
S-30
During the six months ended June 30, 2006, we sold equity
of $83.0 million. We did not sell new equity in a public
offering during the six months ended June 30, 2005, or for
the year ended December 31, 2005. In addition, shareholders
equity increased by $15.9 million, $17.1 million and
$77.5 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 six months ended June 30, 2006 and 2005, and
the year ended December 31, 2005, respectively.
We employ an asset-liability management approach that focuses on
matching the estimated maturities of our 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
$882.5 million on June 30, 2006. 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.
On July 24, 2006, we sold 4.5 million shares of our
common stock for proceeds of $118.1 million, net of
underwriting discounts and estimated offering expenses. In
addition, on August 1, 2006, we sold 0.7 million
shares of our common stock for proceeds of $17.8 million,
net of underwriting discounts and estimated offering expenses,
pursuant to the underwriters over-allotment option related to
the sale of the 4.5 million shares.
On July 25, 2006, we completed a public issuance of
$400 million of five-year, unsecured notes with a fixed
interest rate of 6.625%. This debt matures on July 15,
2011. We have the option to redeem these notes in whole or in
part, together with a redemption premium, as stipulated in the
notes. We have certain financial and operating covenants that
will be required by this public debt issuance, including that we
will maintain a minimum ratio of 200% of total assets to total
borrowings, as required by the Investment Company Act of 1940,
as amended, while these notes are outstanding.
The net proceeds from the debt and equity issuances were used to
reduce borrowings under our revolving line of credit, with the
remainder being used to fund new portfolio investments and for
general corporate purposes. We currently have no borrowings
outstanding on our revolving line of credit.
As a result of the equity and debt issuances in the third
quarter of 2006, we expect that our leverage ratio will increase
by the end of the third quarter of 2006 from the 0.45:1.00 level
at June 30, 2006. We currently target a debt to equity
ratio ranging between 0.50:1.00 to 0.70:1.00 because we believe
that it is prudent to operate with a larger equity capital base
and less leverage.
S-31
At June 30, 2006, we had outstanding debt as follows:
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|
|
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|
|
|
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|
|
|
Annual |
|
Annual Return to |
|
|
Facility |
|
Amount |
|
Interest |
|
Cover Interest |
|
|
Amount |
|
Outstanding |
|
Cost(1) |
|
Payments(2) |
($ in millions) |
|
|
|
|
|
|
|
|
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable
|
|
$ |
1,190.6 |
|
|
$ |
1,190.6 |
|
|
|
6.2% |
|
|
|
1.9% |
|
|
SBA debentures
|
|
|
16.5 |
|
|
|
16.5 |
|
|
|
7.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and debentures
|
|
|
1,207.1 |
|
|
|
1,207.1 |
|
|
|
6.2% |
|
|
|
1.9% |
|
Revolving line of credit
|
|
|
922.5 |
|
|
|
1.8 |
|
|
|
6.4% |
(3) |
|
|
0.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
2,129.6 |
|
|
$ |
1,208.9 |
|
|
|
6.6% |
(4) |
|
|
2.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, other facility fees and the
amortization of debt financing costs 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) |
The annual portfolio return to cover interest payments is
calculated as the June 30, 2006, annualized cost of debt
per class of financing outstanding divided by total assets at
June 30, 2006. |
|
(3) |
The annual interest cost reflects the interest rate payable for
borrowings under the revolving line of credit. In addition to
the current interest rate payable, there were annual costs of
commitment fees, other facility fees and the amortization of
debt financing costs of $3.8 million at June 30, 2006. |
|
(4) |
The annual interest cost for total debt includes the annual cost
of commitment fees, other facility fees and the amortization of
debt financing costs on the revolving line of credit regardless
of the amount outstanding on the facility as of the balance
sheet date. |
Unsecured Notes Payable. We have issued unsecured
long-term notes to institutional investors, primarily insurance
companies. The notes have five- or seven-year maturities, with
maturity dates beginning in 2006 and generally have fixed rates
of interest. The notes generally require payment of interest
only semi-annually, and all principal is due upon maturity.
On May 1, 2006, we issued $50.0 million of long-term
debt with a fixed interest rate of 6.75%. This debt matures in
May 2013. The proceeds of this issuance were used to repay
$25 million of 7.49% unsecured long-term debt that matured
on May 1, 2006, with the remainder being used to fund new
portfolio investments and for general corporate purposes.
Small Business Administration Debentures. Through
our small business investment company subsidiary, we have
debentures payable to the Small Business Administration (SBA)
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 half of 2006 and 2005, we repaid
$12.0 million and $31.0 million, respectively, of this
outstanding debt. We intend to repay the SBA in the third
quarter of 2006 for the remaining outstanding borrowings of
$16.5 million. The prepayment penalty upon repayment will
be approximately $0.2 million. We currently do not have
plans to borrow additional amounts from the SBA.
Revolving Line of Credit. At December 31,
2005, we had an unsecured revolving line of credit with a
committed amount of $772.5 million that expires on
September 30, 2008. In May 2006, we expanded the
committed amount to 922.5 million. The revolving line of
credit is now fully committed. The revolving line of credit
generally bears interest at a rate equal to (i) LIBOR (for
the period we select) plus 1.05% 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.
At June 30, 2006, there was $1.8 million outstanding
on our unsecured revolving line of credit. The amount available
under the line at June 30, 2006, was $882.5 million,
net of amounts committed
S-32
for standby letters of credit of $38.3 million. Net
repayments under the revolving line of credit for the six months
ended June 30, 2006, were $90.0 million.
We have various financial and operating covenants required by
the revolving line of credit and notes payable and debentures
outstanding at June 30, 2006. These covenants require us to
maintain certain financial ratios, including debt to equity and
interest coverage, and a minimum net worth. These credit
facilities provide for customary events of default, including,
but not limited to, payment defaults, breach of representations
or covenants, cross-defaults, bankruptcy events, failure to pay
judgments, attachment of our assets, change of control and the
issuance of an order of dissolution. Certain of these events of
default are subject to notice and cure periods or materiality
thresholds. Our credit facilities also limit our ability to
declare dividends if we default under certain provisions. As of
June 30, 2006, we were in compliance with these covenants.
The following table shows our significant contractual
obligations for the repayment of debt and payment of other
contractual obligations as of June 30, 2006.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year |
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2010 |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured long-term notes payable
|
|
$ |
1,190.6 |
|
|
$ |
150.0 |
|
|
$ |
|
|
|
$ |
153.0 |
|
|
$ |
268.1 |
|
|
$ |
408.0 |
|
|
$ |
211.5 |
|
|
SBA debentures
|
|
|
16.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.5 |
|
Revolving line of
credit(1)
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
26.7 |
|
|
|
2.2 |
|
|
|
4.4 |
|
|
|
4.5 |
|
|
|
4.6 |
|
|
|
4.4 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
1,235.6 |
|
|
$ |
152.2 |
|
|
$ |
4.4 |
|
|
$ |
159.3 |
|
|
$ |
272.7 |
|
|
$ |
412.4 |
|
|
$ |
234.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
At June 30, 2006, $882.5 million remained unused and
available, net of amounts committed for standby letters of
credit of $38.3 million issued under the credit facility. |
Off-Balance Sheet Arrangements
The following table shows our contractual commitments that may
have the effect of creating, increasing, or accelerating our
liabilities as of June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Year |
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2010 |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$ |
163.3 |
|
|
$ |
2.5 |
|
|
$ |
0.7 |
|
|
$ |
3.0 |
|
|
$ |
151.6 |
|
|
$ |
|
|
|
$ |
5.5 |
|
Standby letters of
credit(1)
|
|
|
38.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$ |
201.6 |
|
|
$ |
2.6 |
|
|
$ |
0.7 |
|
|
$ |
41.2 |
|
|
$ |
151.6 |
|
|
$ |
|
|
|
$ |
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $362.1 million at June 30, 2006. 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.
S-33
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 and CDO and
CLO bonds and preferred shares/ income notes. Our investments
may be subject to certain 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 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. The value of loan and debt securities may
be greater than our cost basis if the amount that would be
repaid on the loan or debt security upon the sale of the
portfolio company is greater than our cost basis.
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 a method that
approximates 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.
S-34
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.
Collateralized Debt Obligations (CDO) and
Collateralized Loan Obligations (CLO). CDO
and CLO bonds and preferred shares/ income notes (CDO/CLO
Assets) are carried at fair value, which is based on a
discounted cash flow model that utilizes 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 bonds
and preferred shares/income notes, when available. We recognize
unrealized appreciation or depreciation on its CDO/CLO Assets as
comparable yields in the market change and/or based on changes
in estimated cash flows resulting from changes in prepayment or
loss assumptions in the underlying collateral pool. We determine
the fair value of its CDO/CLO Assets on an individual
security-by-security basis.
We recognize 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 are revised when there are changes in actual and
estimated prepayment speeds or actual and estimated credit
losses. Changes in estimated yield are recognized as an
adjustment to the estimated yield over the remaining life of the
CDO/ CLO Assets 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 primarily 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. Net change in
unrealized appreciation or depreciation also reflects the change
in the value of U.S. Treasury bills and deposits of
proceeds from sales of borrowed Treasury securities, and
depreciation on accrued interest and dividends receivable and
other assets where collection is doubtful.
Fee Income. Fee income includes fees for
guarantees, commitments, 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 and commitment fees are
generally recognized as income over the related period of the
guaranty or commitment, respectively. 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.
S-35
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
(in thousands, except per share amounts) |
|
(unaudited) |
|
|
ASSETS |
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned (cost: 2006-$1,282,768;
2005-$1,489,782)
|
|
$ |
1,188,131 |
|
|
$ |
1,887,651 |
|
|
|
Companies 5% to 25% owned (cost: 2006-$371,550; 2005-$168,373)
|
|
|
371,156 |
|
|
|
158,806 |
|
|
|
Companies less than 5% owned (cost: 2006-$1,933,932;
2005-$1,448,268)
|
|
|
1,901,139 |
|
|
|
1,432,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private finance (cost: 2006-$3,588,250; 2005-$3,106,423)
|
|
|
3,460,426 |
|
|
|
3,479,290 |
|
|
Commercial real estate finance (cost: 2006-$127,748;
2005-$131,695)
|
|
|
133,051 |
|
|
|
127,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio at value (cost: 2006-$3,715,998; 2005-$3,238,118)
|
|
|
3,593,477 |
|
|
|
3,606,355 |
|
U.S. Treasury bills
|
|
|
125,940 |
|
|
|
100,305 |
|
Investments in money market and other securities
|
|
|
97,810 |
|
|
|
121,967 |
|
Deposits of proceeds from sales of borrowed Treasury securities
|
|
|
17,156 |
|
|
|
17,666 |
|
Accrued interest and dividends receivable
|
|
|
49,270 |
|
|
|
60,366 |
|
Other assets
|
|
|
124,448 |
|
|
|
87,858 |
|
Cash
|
|
|
3,106 |
|
|
|
31,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
4,011,207 |
|
|
$ |
4,025,880 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures (maturing within one year:
2006-$150,000; 2005-$175,000)
|
|
$ |
1,207,137 |
|
|
$ |
1,193,040 |
|
|
Revolving line of credit
|
|
|
1,750 |
|
|
|
91,750 |
|
|
Obligations to replenish borrowed Treasury securities
|
|
|
17,156 |
|
|
|
17,666 |
|
|
Accounts payable and other liabilities
|
|
|
95,145 |
|
|
|
102,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,321,188 |
|
|
|
1,405,334 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 200,000 shares authorized;
140,312 and 136,697 shares issued and outstanding at
June 30, 2006, and December 31, 2005, respectively
|
|
|
14 |
|
|
|
14 |
|
|
Additional paid-in capital
|
|
|
2,284,117 |
|
|
|
2,177,283 |
|
|
Common stock held in deferred compensation trust
|
|
|
(24,003 |
) |
|
|
(19,460 |
) |
|
Notes receivable from sale of common stock
|
|
|
(3,370 |
) |
|
|
(3,868 |
) |
|
Net unrealized appreciation (depreciation)
|
|
|
(136,929 |
) |
|
|
354,325 |
|
|
Undistributed earnings
|
|
|
570,190 |
|
|
|
112,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,690,019 |
|
|
|
2,620,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
4,011,207 |
|
|
$ |
4,025,880 |
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$ |
19.17 |
|
|
$ |
19.17 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-36
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
(unaudited) |
Interest and Related Portfolio Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
23,419 |
|
|
$ |
30,199 |
|
|
$ |
53,565 |
|
|
$ |
58,450 |
|
|
|
Companies 5% to 25% owned
|
|
|
11,419 |
|
|
|
5,597 |
|
|
|
17,069 |
|
|
|
11,518 |
|
|
|
Companies less than 5% owned
|
|
|
60,595 |
|
|
|
35,534 |
|
|
|
113,680 |
|
|
|
86,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
|
95,433 |
|
|
|
71,330 |
|
|
|
184,314 |
|
|
|
156,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan prepayment premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
134 |
|
|
|
|
|
|
|
5,094 |
|
|
|
|
|
|
|
Companies 5% to 25% owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies less than 5% owned
|
|
|
1,611 |
|
|
|
853 |
|
|
|
1,937 |
|
|
|
2,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan prepayment premiums
|
|
|
1,745 |
|
|
|
853 |
|
|
|
7,031 |
|
|
|
2,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
5,515 |
|
|
|
7,877 |
|
|
|
12,642 |
|
|
|
12,758 |
|
|
|
Companies 5% to 25% owned
|
|
|
1,282 |
|
|
|
55 |
|
|
|
3,998 |
|
|
|
125 |
|
|
|
Companies less than 5% owned
|
|
|
6,481 |
|
|
|
6,092 |
|
|
|
13,482 |
|
|
|
9,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
|
13,278 |
|
|
|
14,024 |
|
|
|
30,122 |
|
|
|
22,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
110,456 |
|
|
|
86,207 |
|
|
|
221,467 |
|
|
|
181,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
21,607 |
|
|
|
19,154 |
|
|
|
45,907 |
|
|
|
39,379 |
|
|
Employee
|
|
|
20,398 |
|
|
|
22,877 |
|
|
|
41,826 |
|
|
|
38,333 |
|
|
Stock options
|
|
|
4,597 |
|
|
|
|
|
|
|
8,203 |
|
|
|
|
|
|
Administrative
|
|
|
9,861 |
|
|
|
23,048 |
|
|
|
21,380 |
|
|
|
43,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
56,463 |
|
|
|
65,079 |
|
|
|
117,316 |
|
|
|
121,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
53,993 |
|
|
|
21,128 |
|
|
|
104,151 |
|
|
|
59,612 |
|
Income tax expense, including excise tax
|
|
|
3,798 |
|
|
|
5,861 |
|
|
|
12,656 |
|
|
|
5,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
50,195 |
|
|
|
15,267 |
|
|
|
91,495 |
|
|
|
54,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
95,212 |
|
|
|
(17,884 |
) |
|
|
528,399 |
|
|
|
(17,485 |
) |
|
|
Companies 5% to 25% owned
|
|
|
(74 |
) |
|
|
4,711 |
|
|
|
(417 |
) |
|
|
4,708 |
|
|
|
Companies less than 5% owned
|
|
|
5,102 |
|
|
|
220,669 |
|
|
|
5,093 |
|
|
|
230,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains
|
|
|
100,240 |
|
|
|
207,496 |
|
|
|
533,075 |
|
|
|
217,781 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(116,706 |
) |
|
|
89,122 |
|
|
|
(491,254 |
) |
|
|
159,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses)
|
|
|
(16,466 |
) |
|
|
296,618 |
|
|
|
41,821 |
|
|
|
377,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
33,729 |
|
|
$ |
311,885 |
|
|
$ |
133,316 |
|
|
$ |
431,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.24 |
|
|
$ |
2.33 |
|
|
$ |
0.96 |
|
|
$ |
3.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.24 |
|
|
$ |
2.29 |
|
|
$ |
0.94 |
|
|
$ |
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
140,024 |
|
|
|
133,701 |
|
|
|
139,395 |
|
|
|
133,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
143,213 |
|
|
|
136,381 |
|
|
|
142,466 |
|
|
|
135,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-37
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
(unaudited) |
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
91,495 |
|
|
$ |
54,019 |
|
|
Net realized gains
|
|
|
533,075 |
|
|
|
217,781 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(491,254 |
) |
|
|
159,706 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
133,316 |
|
|
|
431,506 |
|
|
|
|
|
|
|
|
|
|
Shareholder distributions:
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
|
(166,632 |
) |
|
|
(152,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from shareholder
distributions
|
|
|
(166,632 |
) |
|
|
(152,329 |
) |
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
82,970 |
|
|
|
|
|
|
Issuance of common stock for portfolio investments
|
|
|
|
|
|
|
7,200 |
|
|
Issuance of common stock in lieu of cash distributions
|
|
|
7,199 |
|
|
|
4,163 |
|
|
Issuance of common stock upon the exercise of stock options
|
|
|
8,226 |
|
|
|
12,689 |
|
|
Stock option expense
|
|
|
8,439 |
|
|
|
|
|
|
Net decrease in notes receivable from sale of common stock
|
|
|
498 |
|
|
|
200 |
|
|
Purchase of common stock held in deferred compensation trust
|
|
|
(4,649 |
) |
|
|
(3,976 |
) |
|
Distribution of common stock held in deferred compensation trust
|
|
|
106 |
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
2,056 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from capital share
transactions
|
|
|
102,789 |
|
|
|
22,332 |
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
69,473 |
|
|
|
301,509 |
|
Net assets at beginning of period
|
|
|
2,620,546 |
|
|
|
1,979,778 |
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$ |
2,690,019 |
|
|
$ |
2,281,287 |
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$ |
19.17 |
|
|
$ |
17.01 |
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of period
|
|
|
140,312 |
|
|
|
134,131 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-38
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
June 30, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands) |
|
|
|
|
|
|
(unaudited) |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
133,316 |
|
|
$ |
431,506 |
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Portfolio investments
|
|
|
(1,071,243 |
) |
|
|
(647,248 |
) |
|
|
Principal collections related to investment repayments or sales
|
|
|
769,598 |
|
|
|
1,090,813 |
|
|
|
Change in accrued or reinvested interest and dividends
|
|
|
9,064 |
|
|
|
3,567 |
|
|
|
Amortization of discounts and fees
|
|
|
(3,094 |
) |
|
|
(3,334 |
) |
|
|
Redemption of (investments in) U.S. Treasury bills
|
|
|
(22,875 |
) |
|
|
|
|
|
|
Redemption of (investments in) money market securities
|
|
|
25,581 |
|
|
|
(74,200 |
) |
|
|
Stock option expense
|
|
|
8,439 |
|
|
|
|
|
|
|
Changes in other assets and liabilities
|
|
|
(1,410 |
) |
|
|
8,136 |
|
|
|
Depreciation and amortization
|
|
|
870 |
|
|
|
963 |
|
|
|
Realized gains from the receipt of notes and other securities as
consideration from sale of investments, net of collections
|
|
|
(217,086 |
) |
|
|
(916 |
) |
|
|
Realized losses
|
|
|
4,405 |
|
|
|
41,643 |
|
|
|
Net change in unrealized (appreciation) or depreciation
|
|
|
491,254 |
|
|
|
(159,706 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
126,819 |
|
|
|
691,224 |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
82,970 |
|
|
|
|
|
|
Sale of common stock upon the exercise of stock options
|
|
|
8,226 |
|
|
|
12,689 |
|
|
Collections of notes receivable from sale of common stock
|
|
|
498 |
|
|
|
200 |
|
|
Borrowings under notes payable and debentures
|
|
|
50,000 |
|
|
|
|
|
|
Repayments on notes payable and debentures
|
|
|
(37,000 |
) |
|
|
(76,700 |
) |
|
Net borrowings under (repayments on) revolving line of credit
|
|
|
(90,000 |
) |
|
|
(112,000 |
) |
|
Purchase of common stock held in deferred compensation trust
|
|
|
(4,649 |
) |
|
|
(3,976 |
) |
|
Other financing activities
|
|
|
(1,590 |
) |
|
|
(1,958 |
) |
|
Common stock dividends and distributions paid
|
|
|
(163,531 |
) |
|
|
(150,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(155,076 |
) |
|
|
(332,571 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(28,257 |
) |
|
|
358,653 |
|
Cash at beginning of period
|
|
|
31,363 |
|
|
|
57,160 |
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$ |
3,106 |
|
|
$ |
415,813 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
S-39
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Companies More Than 25% Owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acme Paging,
L.P.(4)
|
|
Senior Loan (6.0%, Due
12/07)(6) |
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
|
|
|
(Telecommunications)
|
|
Subordinated Debt (10.0%, Due
1/08)(6) |
|
|
881 |
|
|
|
881 |
|
|
|
|
|
|
|
|
Common Stock (23,513 shares) |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
Alaris Consulting, LLC
|
|
Senior Loan (16.5%, Due 12/05
12/07)(6) |
|
|
27,055 |
|
|
|
27,018 |
|
|
|
|
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
5,305 |
|
|
|
|
|
|
|
Guaranty ($1,100) |
|
|
|
|
|
|
|
|
|
|
|
|
|
American Healthcare Services, Inc.
|
|
Senior Loan (0.7%, Due 12/04
12/05)(6) |
|
|
4,997 |
|
|
|
4,599 |
|
|
|
4,329 |
|
|
and Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne,
Inc.(7)
|
|
Preferred Stock (12,500 shares) |
|
|
|
|
|
|
658 |
|
|
|
773 |
|
|
(Business Services)
|
|
Common Stock (27,500 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance,
Inc.(7)
|
|
Preferred Stock (1,568 shares) |
|
|
|
|
|
|
2,401 |
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (2,750 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty ($2,401) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Loan Express, LLC
|
|
Class A Equity Interests |
|
|
64,427 |
|
|
|
64,427 |
|
|
|
64,427 |
|
|
(Financial Services)
|
|
Class B Equity Interests |
|
|
|
|
|
|
119,436 |
|
|
|
130,890 |
|
|
|
Class C Equity Interests |
|
|
|
|
|
|
109,301 |
|
|
|
121,900 |
|
|
|
Guaranty ($149,162 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letters of Credit
($32,000 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Capital Corporation
|
|
Senior Loan (12.0%, Due 12/06) |
|
|
1,650 |
|
|
|
1,650 |
|
|
|
1,650 |
|
|
(Financial Services)
|
|
Subordinated Debt (18.0%, Due 10/08) |
|
|
5,276 |
|
|
|
5,276 |
|
|
|
5,276 |
|
|
|
Common Stock (10 shares) |
|
|
|
|
|
|
2,058 |
|
|
|
12,093 |
|
|
Cambridge Capital
Partners(5)
|
|
Senior Loan (8.0%, Due
5/09)(6) |
|
|
250 |
|
|
|
250 |
|
|
|
250 |
|
|
(Financial Services)
|
|
Equity Interests |
|
|
|
|
|
|
1,751 |
|
|
|
1,751 |
|
|
CR Brands, Inc.
|
|
Subordinated Debt (16.6%, Due 2/13) |
|
|
38,898 |
|
|
|
38,712 |
|
|
|
38,712 |
|
|
(Consumer Products)
|
|
Common Stock (37,200,551 shares) |
|
|
|
|
|
|
33,321 |
|
|
|
37,431 |
|
|
Diversified Group Administrators, Inc.
|
|
Preferred Stock (1,000,000 shares) |
|
|
|
|
|
|
700 |
|
|
|
728 |
|
|
(Business Services)
|
|
Preferred Stock (1,451,380 shares) |
|
|
|
|
|
|
841 |
|
|
|
841 |
|
|
|
|
Common Stock (1,451,380 shares) |
|
|
|
|
|
|
|
|
|
|
322 |
|
|
Financial Pacific Company
|
|
Subordinated Debt (17.4%, Due 2/12 8/12) |
|
|
70,878 |
|
|
|
70,630 |
|
|
|
70,630 |
|
|
(Financial Services)
|
|
Preferred Stock (10,964 shares) |
|
|
|
|
|
|
10,276 |
|
|
|
14,460 |
|
|
|
|
Common Stock (14,735 shares) |
|
|
|
|
|
|
14,819 |
|
|
|
44,418 |
|
|
ForeSite Towers, LLC
|
|
Equity Interests |
|
|
|
|
|
|
7,620 |
|
|
|
12,818 |
|
|
(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.
S-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Global Communications, LLC
|
|
Senior Loan (10.7%, Due 9/02
11/07)(6) |
|
$ |
15,957 |
|
|
$ |
15,957 |
|
|
$ |
15,957 |
|
|
(Business Services)
|
|
Subordinated Debt (17.0%, Due
12/03 9/05)(6) |
|
|
11,339 |
|
|
|
11,336 |
|
|
|
9,648 |
|
|
|
Preferred Equity Interest |
|
|
|
|
|
|
14,067 |
|
|
|
|
|
|
|
Options |
|
|
|
|
|
|
1,639 |
|
|
|
|
|
|
Gordian Group, Inc.
|
|
Senior Loan (10.0%, Due 6/06
12/08)(6) |
|
|
11,792 |
|
|
|
11,812 |
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (1,000 shares) |
|
|
|
|
|
|
6,762 |
|
|
|
|
|
|
Healthy Pet Corp.
|
|
Senior Loan (9.5%, Due 8/10) |
|
|
15,938 |
|
|
|
15,938 |
|
|
|
15,938 |
|
|
(Consumer Services)
|
|
Subordinated Debt (15.0%, Due 8/10) |
|
|
43,286 |
|
|
|
43,125 |
|
|
|
43,125 |
|
|
|
|
Common Stock (30,142 shares) |
|
|
|
|
|
|
30,142 |
|
|
|
28,152 |
|
|
HMT, Inc.
|
|
Preferred Stock (554,052 shares) |
|
|
|
|
|
|
2,637 |
|
|
|
2,637 |
|
|
(Energy Services)
|
|
Common Stock (300,000 shares) |
|
|
|
|
|
|
3,000 |
|
|
|
7,942 |
|
|
|
Warrants |
|
|
|
|
|
|
1,155 |
|
|
|
3,058 |
|
|
Impact Innovations Group, LLC
|
|
Equity Interests in Affiliate |
|
|
|
|
|
|
|
|
|
|
870 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insight Pharmaceuticals Corporation
|
|
Subordinated Debt (16.1%, Due 9/12) |
|
|
59,284 |
|
|
|
59,067 |
|
|
|
59,067 |
|
|
(Consumer Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
25,000 |
|
|
|
26,249 |
|
|
|
Common Stock (620,000 shares) |
|
|
|
|
|
|
6,325 |
|
|
|
218 |
|
|
Jakel, Inc.
|
|
Subordinated Debt (15.5%, Due
3/08)(6) |
|
|
14,442 |
|
|
|
14,442 |
|
|
|
2,533 |
|
|
(Industrial Products)
|
|
Preferred Stock (6,460 shares) |
|
|
|
|
|
|
6,460 |
|
|
|
|
|
|
|
|
Common Stock (158,061 shares) |
|
|
|
|
|
|
9,347 |
|
|
|
|
|
|
Legacy Partners Group, LLC
|
|
Senior Loan (14.0%, Due
5/09)(6) |
|
|
7,646 |
|
|
|
7,646 |
|
|
|
5,048 |
|
|
(Financial Services)
|
|
Subordinated Debt (18.0%, Due
5/09)(6) |
|
|
2,952 |
|
|
|
2,952 |
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
4,248 |
|
|
|
|
|
|
Litterer
Beteiligungs-GmbH(4)
|
|
Subordinated Debt (8.0%, Due 3/07) |
|
|
658 |
|
|
|
658 |
|
|
|
658 |
|
|
(Business Services)
|
|
Equity Interest |
|
|
|
|
|
|
1,809 |
|
|
|
1,615 |
|
|
Mercury Air Centers, Inc.
|
|
Subordinated Debt (16.0%, Due 4/09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Business Services)
|
|
11/12) |
|
|
48,369 |
|
|
|
48,198 |
|
|
|
48,198 |
|
|
|
|
Common Stock (57,970 shares) |
|
|
|
|
|
|
35,053 |
|
|
|
93,188 |
|
|
|
|
Standby Letters of Credit ($1,968) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MVL Group, Inc.
|
|
Senior Loan (12.0%, Due 10/07 7/09) |
|
|
26,498 |
|
|
|
26,324 |
|
|
|
26,324 |
|
|
(Business Services)
|
|
Subordinated Debt (14.5%, Due 6/09) |
|
|
34,354 |
|
|
|
33,921 |
|
|
|
33,921 |
|
|
|
Common Stock (648,661 shares) |
|
|
|
|
|
|
643 |
|
|
|
1,262 |
|
|
Powell Plant Farms, Inc.
|
|
Senior Loan (15.0%, Due 12/06) |
|
|
30,490 |
|
|
|
21,642 |
|
|
|
21,642 |
|
|
(Consumer Products)
|
|
Subordinated Debt (20.0%, Due
6/03)(6) |
|
|
19,291 |
|
|
|
19,223 |
|
|
|
|
|
|
|
|
Preferred Stock (1,483 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
S-41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Service Champ, Inc.
|
|
Subordinated Debt (15.5%, Due 4/12) |
|
$ |
27,384 |
|
|
$ |
27,260 |
|
|
$ |
27,260 |
|
|
(Business Services)
|
|
Common Stock (63,888 shares) |
|
|
|
|
|
|
13,662 |
|
|
|
16,322 |
|
|
Staffing Partners Holding
|
|
Subordinated Debt (13.5%,
Due 1/07)(6) |
|
|
5,987 |
|
|
|
5,987 |
|
|
|
1,160 |
|
|
Company, Inc. |
|
Preferred Stock (439,600 shares) |
|
|
|
|
|
|
4,968 |
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (69,773 shares) |
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
Guaranty ($1,300) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Startec Global Communications
|
|
Senior Loan (10.0%, Due 5/07 5/09) |
|
|
21,926 |
|
|
|
21,926 |
|
|
|
21,926 |
|
|
Corporation
|
|
Common Stock (19,180,000 shares) |
|
|
|
|
|
|
37,255 |
|
|
|
6,480 |
|
|
(Telecommunications)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triview Investments,
Inc.(8)
|
|
Senior Loan (9.4%, Due 6/07) |
|
|
14,325 |
|
|
|
14,301 |
|
|
|
14,301 |
|
|
(Broadcasting & Cable/ |
|
Subordinated Debt (15.0%, Due 7/12) |
|
|
37,877 |
|
|
|
37,687 |
|
|
|
37,687 |
|
|
Consumer Products) |
|
Subordinated Debt (16.8%, Due 7/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/12)(6) |
|
|
19,600 |
|
|
|
19,520 |
|
|
|
19,520 |
|
|
|
|
Common Stock (202 shares) |
|
|
|
|
|
|
93,907 |
|
|
|
32,526 |
|
|
|
Guaranty ($800) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letter of Credit ($200) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies more than 25% owned |
|
|
|
|
|
$ |
1,282,768 |
|
|
$ |
1,188,131 |
|
|
Companies 5% to 25% Owned |
|
|
|
|
|
Advantage Sales & Marketing, Inc.
|
|
Subordinated Debt (12.0%, Due 3/14) |
|
$ |
150,775 |
|
|
$ |
150,056 |
|
|
$ |
150,056 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
2,048 |
|
|
|
15,000 |
|
|
Air Medical Group Holdings LLC
|
|
Senior Loan (8.7%, Due 3/11 3/12) |
|
|
1,584 |
|
|
|
1,512 |
|
|
|
1,512 |
|
|
(Healthcare Services) |
|
Subordinated Debt (14.0%, Due 11/12) |
|
|
34,646 |
|
|
|
34,590 |
|
|
|
34,590 |
|
|
|
Equity Interests |
|
|
|
|
|
|
3,470 |
|
|
|
4,200 |
|
|
Amerex Group, LLC
|
|
Subordinated Debt (12.0%, Due 1/13) |
|
|
8,400 |
|
|
|
8,400 |
|
|
|
8,400 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
3,583 |
|
|
|
3,583 |
|
|
BB&T Capital Partners/Windsor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine Fund,
LLC(5)
|
|
Equity Interests |
|
|
|
|
|
|
5,867 |
|
|
|
5,867 |
|
|
(Private Equity Fund) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Subordinated Debt (14.5%, Due 8/12) |
|
|
23,939 |
|
|
|
23,850 |
|
|
|
23,850 |
|
|
(Industrial Products)
|
|
Common Stock (5,073 shares) |
|
|
|
|
|
|
5,813 |
|
|
|
2,400 |
|
|
BI Incorporated
|
|
Subordinated Debt (13.5%, Due 2/14) |
|
|
30,000 |
|
|
|
29,856 |
|
|
|
29,856 |
|
|
(Business Services)
|
|
Common Stock (40,000 shares) |
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
(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. holds investments in Longview Cable
& Data, LLC (Broadcasting & Cable) with a cost of
$66.5 million and value of $14.3 million and Triax
Holdings, LLC (Consumer Products) with a cost of
$98.9 million and a value of $89.7 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.
S-42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
MedBridge Healthcare, LLC
|
|
Senior Loan (4.0%, Due
8/09)(6) |
|
$ |
7,164 |
|
|
$ |
7,164 |
|
|
$ |
6,595 |
|
|
(Healthcare Services)
|
|
Subordinated Debt (10.0%, Due
8/14)(6) |
|
|
5,184 |
|
|
|
5,184 |
|
|
|
|
|
|
|
Convertible Subordinated Debt (2.0%,
Due
8/14)(6) |
|
|
2,970 |
|
|
|
984 |
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
1,306 |
|
|
|
|
|
|
Nexcel Synthetics, LLC
|
|
Subordinated Debt (14.5%, Due 6/09) |
|
|
10,805 |
|
|
|
10,781 |
|
|
|
10,781 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,742 |
|
|
|
1,730 |
|
|
Pres Air Trol LLC
|
|
Unitranche Debt (12.0%, Due
4/10)(6) |
|
|
5,911 |
|
|
|
5,593 |
|
|
|
3,312 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,361 |
|
|
|
|
|
|
Progressive International
|
|
Subordinated Debt (16.0%, Due 12/09) |
|
|
7,476 |
|
|
|
7,454 |
|
|
|
7,454 |
|
|
Corporation
|
|
Preferred Stock (500 shares) |
|
|
|
|
|
|
500 |
|
|
|
920 |
|
|
(Consumer Products)
|
|
Common Stock (197 shares) |
|
|
|
|
|
|
13 |
|
|
|
500 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Regency Healthcare Group, LLC
|
|
Senior Loan (11.1%, Due 6/12) |
|
|
1,000 |
|
|
|
980 |
|
|
|
980 |
|
|
(Healthcare Services)
|
|
Unitranche Debt (11.1%, Due 6/12) |
|
|
20,000 |
|
|
|
19,900 |
|
|
|
19,900 |
|
|
|
|
Equity Interests |
|
|
|
|
|
|
1,500 |
|
|
|
1,500 |
|
|
SGT India Private
Limited(4)
|
|
Common Stock (109,524 shares) |
|
|
|
|
|
|
3,608 |
|
|
|
3,608 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soteria Imaging Services, LLC
|
|
Subordinated Debt (11.7%, Due 11/10) |
|
|
16,500 |
|
|
|
15,505 |
|
|
|
15,505 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
2,163 |
|
|
|
2,400 |
|
|
Universal Environmental Services, LLC
|
|
Unitranche Debt (13.5%, Due 2/09) |
|
|
10,989 |
|
|
|
10,956 |
|
|
|
10,956 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
1,811 |
|
|
|
1,701 |
|
|
Total
companies 5% to 25% owned |
|
|
|
|
|
$ |
371,550 |
|
|
$ |
371,156 |
|
|
Companies Less Than 5% Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3SI Security Systems, Inc.
|
|
Senior Loan (10.9%, Due 2/12 2/13) |
|
$ |
1,650 |
|
|
$ |
1,640 |
|
|
$ |
1,640 |
|
|
(Consumer Products)
|
|
Subordinated Debt (14.4%, Due 8/13) |
|
|
26,377 |
|
|
|
26,252 |
|
|
|
26,252 |
|
|
Anthony, Inc.
|
|
Subordinated Debt (13.2%, Due 8/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Industrial Products)
|
|
9/12) |
|
|
14,743 |
|
|
|
14,688 |
|
|
|
14,688 |
|
|
Benchmark Medical, Inc.
|
|
Warrants |
|
|
|
|
|
|
18 |
|
|
|
|
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Border Foods, Inc.
|
|
Subordinated Debt (13.0%, Due
12/10)(6) |
|
|
13,428 |
|
|
|
12,721 |
|
|
|
|
|
|
(Consumer Products)
|
|
Preferred Stock (140,214 shares) |
|
|
|
|
|
|
2,893 |
|
|
|
|
|
|
|
Common Stock (1,810 shares) |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
910 |
|
|
|
|
|
|
Broadcast Electronics, Inc.
|
|
Senior Loan (8.9%, Due 7/12) |
|
|
4,988 |
|
|
|
4,953 |
|
|
|
4,953 |
|
|
(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. |
The accompanying notes are an integral part of these
consolidated financial statements.
S-43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
C&K Market, Inc.
|
|
Subordinated Debt (14.0%, Due 12/08) |
|
$ |
25,744 |
|
|
$ |
25,651 |
|
|
$ |
25,651 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CDO Fund I,
Ltd.(4)(9)
|
|
Class C Notes (12.9%, Due 12/13) |
|
|
18,800 |
|
|
|
18,962 |
|
|
|
18,962 |
|
|
(Senior Debt Fund)
|
|
Class D Notes (17.0%, Due 12/13) |
|
|
9,400 |
|
|
|
9,481 |
|
|
|
9,481 |
|
|
Callidus Debt Partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO Fund III, Ltd.
(4)(9)
|
|
Preferred Shares (23,600,000 shares) |
|
|
|
|
|
|
23,804 |
|
|
|
23,804 |
|
|
(Senior Debt Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO Fund IV,
Ltd.(4)(9)
|
|
Income Notes |
|
|
|
|
|
|
12,883 |
|
|
|
12,883 |
|
|
(Senior Debt Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus MAPS CLO Fund I
LLC(9)
|
|
Class E Notes (10.9%, Due 12/17) |
|
|
17,000 |
|
|
|
17,000 |
|
|
|
17,000 |
|
|
(Senior Debt Fund)
|
|
Income Notes |
|
|
|
|
|
|
50,584 |
|
|
|
50,584 |
|
|
Camden Partners Strategic Fund II,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,142 |
|
|
|
3,273 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carlisle Wide Plank Floors, Inc.
|
|
Unitranche Debt (10.5%, Due 6/11) |
|
|
14,000 |
|
|
|
13,889 |
|
|
|
13,889 |
|
|
(Consumer Products)
|
|
Preferred Stock (400,000 Shares) |
|
|
|
|
|
|
400 |
|
|
|
400 |
|
|
Catterton Partners V,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
3,065 |
|
|
|
3,150 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Centre Capital Investors IV,
LP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,753 |
|
|
|
1,655 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Credit Group, Inc.
|
|
Subordinated Debt (14.8%, Due 2/11) |
|
|
5,000 |
|
|
|
4,954 |
|
|
|
4,954 |
|
|
(Financial Services)
|
|
Preferred Stock (32,500 shares) |
|
|
|
|
|
|
3,900 |
|
|
|
3,900 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Education Centers, Inc.
|
|
Subordinated Debt (16.0%, Due 12/10) |
|
|
33,643 |
|
|
|
33,540 |
|
|
|
33,540 |
|
|
(Education Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component Hardware Group, Inc.
|
|
Preferred Stock (18,000 shares) |
|
|
|
|
|
|
2,605 |
|
|
|
3,000 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
3,001 |
|
|
Cook Inlet Alternative Risk, LLC
|
|
Unitranche Debt (10.5%, Due 4/12) |
|
|
74,800 |
|
|
|
74,412 |
|
|
|
74,412 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
Cooper Natural Resources, Inc.
|
|
Subordinated Debt (0%, Due 11/07) |
|
|
559 |
|
|
|
559 |
|
|
|
866 |
|
|
(Industrial Products)
|
|
Preferred Stock (6,316 shares) |
|
|
|
|
|
|
1,424 |
|
|
|
20 |
|
|
|
Warrants |
|
|
|
|
|
|
830 |
|
|
|
|
|
|
Coverall North America, Inc.
|
|
Subordinated Debt (14.6%, Due 2/11) |
|
|
27,664 |
|
|
|
27,621 |
|
|
|
27,621 |
|
|
(Business Services)
|
|
Preferred Stock (6,500 shares) |
|
|
|
|
|
|
6,500 |
|
|
|
7,073 |
|
|
|
Warrants |
|
|
|
|
|
|
2,950 |
|
|
|
3,890 |
|
|
Deluxe Entertainment Services Group, Inc.
|
|
Subordinated Debt (13.7%, Due 7/11) |
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
(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)
|
|
The fund is managed by Callidus Capital, a portfolio company of
Allied Capital. |
The accompanying notes are an integral part of these
consolidated financial statements.
S-44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Distant Lands Trading Co.
|
|
Senior Loan (9.2%, Due 1/11) |
|
$ |
500 |
|
|
$ |
477 |
|
|
$ |
477 |
|
|
(Consumer Products)
|
|
Unitranche Debt (10.3%, Due 1/11) |
|
|
25,000 |
|
|
|
24,888 |
|
|
|
24,888 |
|
|
|
|
Common Stock (1,500 shares) |
|
|
|
|
|
|
1,500 |
|
|
|
1,500 |
|
|
Drilltec Patents & Technologies
|
|
Subordinated Debt (18.0%, Due 8/06) |
|
|
4,119 |
|
|
|
4,119 |
|
|
|
4,119 |
|
|
Company, Inc.
|
|
Subordinated Debt (10.0%, Due
8/06)(6) |
|
|
10,994 |
|
|
|
10,918 |
|
|
|
16,018 |
|
|
(Energy Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DVS VideoStream, LLC
|
|
Unitranche Debt (11.0%, Due 2/12) |
|
|
19,529 |
|
|
|
19,413 |
|
|
|
19,413 |
|
|
(Business Services)
|
|
Convertible Subordinated Debt
(10.0%, Due 2/16) |
|
|
3,551 |
|
|
|
3,534 |
|
|
|
3,534 |
|
|
Dynamic India Fund
IV(4)(5)
|
|
Equity Interests |
|
|
|
|
|
|
3,850 |
|
|
|
3,850 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eCentury Capital Partners,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
5,649 |
|
|
|
194 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elexis Beta
GmbH(4)
|
|
Options |
|
|
|
|
|
|
426 |
|
|
|
50 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event Rentals, Inc.
(Consumer Services)
|
|
Senior Loan (10.8%, Due 11/11) |
|
|
23,739 |
|
|
|
23,631 |
|
|
|
23,631 |
|
|
Farleys & Sathers Candy Company, Inc.
|
|
Subordinated Debt (11.6%, Due 3/11) |
|
|
20,000 |
|
|
|
19,905 |
|
|
|
19,905 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frozen Specialties, Inc.
|
|
Warrants |
|
|
|
|
|
|
435 |
|
|
|
320 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Ridge Corporation
(Retail)
|
|
Subordinated Debt (7.0%, Due
5/12)(6) |
|
|
22,500 |
|
|
|
22,500 |
|
|
|
8,455 |
|
|
Geotrace Technologies, Inc.
|
|
Subordinated Debt (10.0%, Due 6/09) |
|
|
24,844 |
|
|
|
23,235 |
|
|
|
23,235 |
|
|
(Energy Services)
|
|
Warrants |
|
|
|
|
|
|
2,350 |
|
|
|
2,100 |
|
|
Ginsey Industries, Inc.
|
|
Subordinated Debt (12.5%, Due 3/07) |
|
|
3,225 |
|
|
|
3,225 |
|
|
|
3,225 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Broadcasting Systems II
|
|
Subordinated Debt (5.0%, Due 6/09) |
|
|
2,896 |
|
|
|
2,896 |
|
|
|
2,896 |
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grotech Partners, VI,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
8,279 |
|
|
|
5,695 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Havco Wood Products LLC
|
|
Senior Loan (11.3%, Due 8/11) |
|
|
2,000 |
|
|
|
1,978 |
|
|
|
1,978 |
|
|
(Industrial Products)
|
|
Unitranche Debt (10.7%, Due 8/11) |
|
|
24,054 |
|
|
|
22,950 |
|
|
|
22,950 |
|
|
|
|
Equity Interests |
|
|
|
|
|
|
1,049 |
|
|
|
1,800 |
|
|
Haven Eldercare of New England, LLC
(10)
|
|
Subordinated Debt (12.0%, Due
8/09)(6) |
|
|
3,573 |
|
|
|
3,573 |
|
|
|
3,573 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Haven Healthcare Management,
LLC(10)
|
|
Subordinated Debt (18.0%, Due
4/07)(6) |
|
|
76 |
|
|
|
160 |
|
|
|
125 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthASPex Services Inc.
|
|
Senior Loan (4.0%, Due 7/08) |
|
|
500 |
|
|
|
500 |
|
|
|
468 |
|
|
(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) |
|
|
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.
S-45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
The Hillman Companies,
Inc.(3)
|
|
Subordinated Debt (10.0%, Due 9/11) |
|
$ |
44,496 |
|
|
$ |
44,327 |
|
|
$ |
44,327 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homax Holdings, Inc.
|
|
Subordinated Debt (12.0%, Due 8/11) |
|
|
14,000 |
|
|
|
13,110 |
|
|
|
13,110 |
|
|
(Consumer Products)
|
|
Preferred Stock (89 shares) |
|
|
|
|
|
|
89 |
|
|
|
77 |
|
|
|
|
Common Stock (28 shares) |
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
Warrants |
|
|
|
|
|
|
1,106 |
|
|
|
1,261 |
|
|
Hot Stuff Foods, LLC
|
|
Senior Loan (8.7%, Due 2/11-2/12) |
|
|
47,080 |
|
|
|
47,080 |
|
|
|
47,080 |
|
|
(Consumer Products)
|
|
Subordinated Debt (13.9%, Due 8/12 2/13) |
|
|
72,967 |
|
|
|
72,688 |
|
|
|
72,688 |
|
|
|
|
Common Stock
(375,000 shares)(11) |
|
|
|
|
|
|
37,445 |
|
|
|
8,791 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrity Interactive Corporation
|
|
Unitranche Debt (10.5%, Due 2/12) |
|
|
30,000 |
|
|
|
29,795 |
|
|
|
29,795 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Fiber Corporation
|
|
Subordinated Debt (14.0%, Due 6/12) |
|
|
21,764 |
|
|
|
21,685 |
|
|
|
21,685 |
|
|
(Industrial Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
2,500 |
|
|
|
2,100 |
|
|
Kodiak Fund
LP(5)
|
|
Equity Interests |
|
|
|
|
|
|
4,975 |
|
|
|
4,975 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line-X, Inc.
|
|
Senior Loan (9.0%, Due 8/11) |
|
|
3,000 |
|
|
|
2,978 |
|
|
|
2,978 |
|
|
(Consumer Products)
|
|
Unitranche Debt (10.0% Due 8/11) |
|
|
50,225 |
|
|
|
50,001 |
|
|
|
50,001 |
|
|
|
|
Standby Letter of Credit ($1,500) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MedAssets, Inc.
|
|
Preferred Stock (227,865 shares) |
|
|
|
|
|
|
2,049 |
|
|
|
3,485 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
200 |
|
|
Meineke Car Care Centers, Inc.
|
|
Senior Loan (8.8%, Due 6/11) |
|
|
28,000 |
|
|
|
27,877 |
|
|
|
27,877 |
|
|
(Consumer Services)
|
|
Subordinated Debt (11.9%, Due 6/12 6/13) |
|
|
72,000 |
|
|
|
71,705 |
|
|
|
71,705 |
|
|
|
|
Common Stock (10,696,308
shares)(11) |
|
|
|
|
|
|
26,985 |
|
|
|
23,152 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
MHF Logistical Solutions, Inc.
|
|
Subordinated Debt (13.2%, Due 6/12 6/13) |
|
|
45,075 |
|
|
|
44,853 |
|
|
|
44,853 |
|
|
(Business Services)
|
|
Common Stock (21,425
shares)(11) |
|
|
|
|
|
|
21,425 |
|
|
|
21,425 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic Venture Fund IV,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
6,600 |
|
|
|
2,908 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mogas Energy, LLC
|
|
Subordinated Debt (9.5%, Due 3/12 4/12) |
|
|
16,570 |
|
|
|
15,259 |
|
|
|
15,259 |
|
|
(Energy Services)
|
|
Warrants |
|
|
|
|
|
|
1,774 |
|
|
|
2,900 |
|
|
Network Hardware Resale, Inc.
|
|
Unitranche Debt (10.5%, Due 12/11) |
|
|
38,060 |
|
|
|
38,283 |
|
|
|
38,283 |
|
|
(Business Services)
|
|
Convertible Subordinated Debt (9.8%, Due 12/15) |
|
|
12,000 |
|
|
|
12,072 |
|
|
|
12,072 |
|
|
N.E.W. Customer Service Companies, Inc.
|
|
Subordinated Debt (11.6%, Due 7/12) |
|
|
40,000 |
|
|
|
40,013 |
|
|
|
40,013 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norwesco, Inc.
|
|
Subordinated Debt (12.6%, Due 1/12 7/12) |
|
|
82,271 |
|
|
|
81,925 |
|
|
|
81,925 |
|
|
(Industrial Products)
|
|
Common Stock (559,603
shares)(11) |
|
|
|
|
|
|
38,313 |
|
|
|
55,992 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Novak Biddle Venture Partners III,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,595 |
|
|
|
1,700 |
|
|
(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. |
|
(11) |
|
|
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.
S-46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Oahu Waste Services, Inc.
|
|
Stock Appreciation Rights |
|
|
|
|
|
$ |
239 |
|
|
$ |
1,200 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Odyssey Investment Partners Fund III,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,832 |
|
|
|
1,688 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opinion Research
Corporation(3)
|
|
Warrants |
|
|
|
|
|
|
996 |
|
|
|
166 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Trading Company, Inc.
|
|
Common Stock (13,820 shares) |
|
|
|
|
|
|
|
|
|
|
6,995 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palm Coast Data, LLC
|
|
Senior Loan (8.5%, Due 8/10) |
|
$ |
15,569 |
|
|
|
15,501 |
|
|
|
15,501 |
|
|
(Business Services)
|
|
Subordinated Debt (15.5%, Due 8/12 8/15) |
|
|
30,126 |
|
|
|
29,997 |
|
|
|
29,997 |
|
|
|
|
Common Stock (21,743
shares)(11) |
|
|
|
|
|
|
21,743 |
|
|
|
19,003 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Passport Health
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications, Inc.
|
|
Subordinated Debt (14.0%, Due 4/12) |
|
|
10,000 |
|
|
|
9,952 |
|
|
|
9,952 |
|
|
(Healthcare Services)
|
|
Preferred Stock (651,381 shares) |
|
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
Performant Financial Corporation
|
|
Common Stock (478,816 shares) |
|
|
|
|
|
|
734 |
|
|
|
150 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Mach, Inc.
|
|
Subordinated Debt (13.8%, Due 6/12) |
|
|
14,471 |
|
|
|
14,396 |
|
|
|
14,396 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,500 |
|
|
|
2,650 |
|
|
Promo Works, LLC
|
|
Senior Loan (9.1%, Due 12/11) |
|
|
3,000 |
|
|
|
2,953 |
|
|
|
2,953 |
|
|
(Business Services)
|
|
Unitranche Debt (10.3%, Due 12/11) |
|
|
31,000 |
|
|
|
30,751 |
|
|
|
30,751 |
|
|
|
|
Guaranty ($1,500) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Red Hawk Industries, LLC
|
|
Unitranche Debt (11.0%, Due 4/11) |
|
|
56,342 |
|
|
|
56,088 |
|
|
|
56,088 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.B. Restaurant Company
|
|
Unitranche Debt (10.3%, Due 4/11) |
|
|
33,501 |
|
|
|
33,088 |
|
|
|
33,088 |
|
|
(Retail)
|
|
Preferred Stock (54,125 shares) |
|
|
|
|
|
|
135 |
|
|
|
135 |
|
|
|
Warrants |
|
|
|
|
|
|
619 |
|
|
|
1,200 |
|
|
|
Standby Letters of Credit ($2,611) |
|
|
|
|
|
|
|
|
|
|
|
|
|
SBBUT, LLC
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soff-Cut Holdings, Inc.
|
|
Preferred Stock (300 shares) |
|
|
|
|
|
|
300 |
|
|
|
300 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
114 |
|
|
SPP Mezzanine Fund,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,594 |
|
|
|
2,675 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STS Operating, Inc.
|
|
Subordinated Debt (15.0%, Due 1/13) |
|
|
30,000 |
|
|
|
29,854 |
|
|
|
29,854 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(11) |
|
|
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.
S-47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
The Step2 Company, LLC
|
|
Unitranche Debt (10.5%, Due 4/12) |
|
$ |
68,000 |
|
|
$ |
67,517 |
|
|
$ |
67,517 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
|
Tradesmen International, Inc.
|
|
Subordinated Debt (12.0%, Due 12/09) |
|
|
15,000 |
|
|
|
14,393 |
|
|
|
14,393 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
710 |
|
|
|
2,900 |
|
|
TransAmerican Auto Parts, LLC
|
|
Subordinated Debt (14.0%, Due 11/12) |
|
|
12,818 |
|
|
|
12,760 |
|
|
|
12,760 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,190 |
|
|
|
1,039 |
|
|
TransTechnology
Corporation(3)
|
|
Senior Loan (9.9%, Due 4/11) |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal Air Filter Company
|
|
Unitranche Debt (11.0%, Due 11/11) |
|
|
19,617 |
|
|
|
19,518 |
|
|
|
19,518 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal Tax Systems, Inc.
|
|
Subordinated Debt (14.5%, Due 10/13) |
|
|
19,310 |
|
|
|
19,243 |
|
|
|
19,243 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Updata Venture Partners II,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
5,077 |
|
|
|
4,898 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venturehouse-Cibernet Investors, LLC
|
|
Equity Interest |
|
|
|
|
|
|
42 |
|
|
|
42 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venturehouse Group,
LLC(5)
|
|
Equity Interest |
|
|
|
|
|
|
598 |
|
|
|
407 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VICORP Restaurants,
Inc.(3)
|
|
Warrants |
|
|
|
|
|
|
33 |
|
|
|
33 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walker Investment Fund II,
LLLP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,330 |
|
|
|
521 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wear Me Apparel Corporation
|
|
Subordinated Debt (15.0%, Due 12/10) |
|
|
40,000 |
|
|
|
39,190 |
|
|
|
39,190 |
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
1,219 |
|
|
|
2,900 |
|
|
Wilton Industries, Inc.
|
|
Subordinated Debt (16.0%, Due 6/08) |
|
|
4,800 |
|
|
|
4,800 |
|
|
|
4,800 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Woodstream Corporation
|
|
Subordinated Debt (13.4%, Due 11/12 5/13) |
|
|
52,753 |
|
|
|
52,617 |
|
|
|
52,617 |
|
|
(Consumer Products)
|
|
Common Stock (180 shares) |
|
|
|
|
|
|
673 |
|
|
|
3,352 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
2,348 |
|
|
York Insurance Services Group, Inc.
|
|
Subordinated Debt (14.5%, Due 10/13) |
|
|
19,000 |
|
|
|
18,907 |
|
|
|
18,907 |
|
|
(Business Services)
|
|
Common Stock (10,000 shares) |
|
|
|
|
|
|
1,000 |
|
|
|
1,000 |
|
|
Other companies
|
|
Other debt
investments(6) |
|
|
453 |
|
|
|
453 |
|
|
|
334 |
|
|
|
Other equity investments |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
Guaranty ($159) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies less than 5% owned |
|
|
|
|
|
$ |
1,933,932 |
|
|
$ |
1,901,139 |
|
|
Total
private finance (131 portfolio companies) |
|
|
|
|
|
$ |
3,588,250 |
|
|
$ |
3,460,426 |
|
|
|
|
|
|
|
|
(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.
S-48
|
|
|
|
|
|
|
|
|
Commercial Real Estate Finance
|
|
|
|
|
|
|
|
|
(in thousands, except number of loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
Interest |
|
Number of |
|
(unaudited) |
|
|
Rate Ranges |
|
Loans |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Commercial Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to 6.99% |
|
|
|
3 |
|
|
$ |
20,314 |
|
|
$ |
19,481 |
|
|
|
|
7.00%8.99% |
|
|
|
25 |
|
|
|
48,798 |
|
|
|
49,024 |
|
|
|
|
9.00%10.99% |
|
|
|
3 |
|
|
|
21,781 |
|
|
|
21,781 |
|
|
|
|
11.00%14.99% |
|
|
|
1 |
|
|
|
2,291 |
|
|
|
2,291 |
|
|
|
15.00% and above |
|
|
2 |
|
|
|
3,970 |
|
|
|
3,970 |
|
|
|
Total commercial mortgage
loans(12)
|
|
|
|
|
|
|
34 |
|
|
$ |
97,154 |
|
|
$ |
96,547 |
|
|
Real Estate Owned
|
|
|
|
|
|
|
|
|
|
$ |
13,090 |
|
|
$ |
14,553 |
|
|
Equity
Interests(2)
Companies more than 25% owned
(Guarantees $6,871) |
|
|
|
|
|
$ |
17,504 |
|
|
$ |
21,951 |
|
|
|
Total commercial real estate finance
|
|
|
|
|
|
|
|
|
|
$ |
127,748 |
|
|
$ |
133,051 |
|
|
Total portfolio
|
|
|
|
|
|
|
|
|
|
$ |
3,715,998 |
|
|
$ |
3,593,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield |
|
Cost |
|
Value |
|
|
|
|
|
|
|
Liquidity Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills (Due October 2006)
|
|
|
4.9% |
|
|
$ |
24,996 |
|
|
$ |
25,067 |
|
|
U.S. Treasury bills (Due December 2006)
|
|
|
4.9% |
|
|
|
100,004 |
|
|
|
100,873 |
|
|
SEI Daily Income Tr Prime Obligation
Fund(13)
|
|
|
5.0% |
|
|
|
55,292 |
|
|
|
55,292 |
|
|
Certificate of Deposit (Due September
2006)(13)
|
|
|
5.6% |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
|
Total liquidity portfolio
|
|
|
|
|
|
$ |
200,292 |
|
|
$ |
201,232 |
|
|
Other Investments in Money Market
Securities(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Columbia Treasury Reserves Money Market Fund
|
|
|
5.2% |
|
|
$ |
19,280 |
|
|
$ |
19,280 |
|
|
PNC Bank Corporate Money Market Deposit Account
|
|
|
4.8% |
|
|
$ |
524 |
|
|
$ |
524 |
|
|
Columbia Money Market Reserves
|
|
|
5.0% |
|
|
$ |
2,714 |
|
|
$ |
2,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
(12) Commercial
mortgage loans totaling $15.7 million at value were on
non-accrual status and therefore were considered non-income
producing. |
(13) Included
in investments in money market and other securities on the
accompanying Consolidated Balance Sheet. |
The accompanying notes are an integral part of these
consolidated financial statements.
S-49
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at and for the three and six months ended
June 30, 2006 and 2005 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 that are single member limited liability companies
established primarily to hold real estate properties. ACC also
has a subsidiary, A.C. Corporation (AC Corp),
that generally provides diligence and structuring services as
well as structuring, transaction, management, consulting and
other services to the Company and its portfolio companies.
AC Corp has a wholly-owned subsidiary, AC Finance LLC
(AC Finance), that generally originates,
underwrites and arranges senior loans.
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
the Company. All intercompany accounts and transactions have
been eliminated in consolidation. Certain reclassifications have
been made to the 2005 balances to conform with the 2006
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 June 30, 2006, the
results of operations for the three and six months ended
June 30, 2006 and 2005, and changes in net assets and cash
flows for the six months ended June 30, 2006 and 2005. The
results of operations for the three and six months ended
June 30, 2006, are not necessarily indicative of the
operating results to be expected for the full year.
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
S-50
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
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 and CDO and
CLO bonds and preferred shares/income notes. The Companys
investments may be subject to certain 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. The value of loan and debt
securities may be greater than the Companys cost basis if
the amount that would be repaid on the loan or debt security
upon the sale of the portfolio company is greater than the
Companys cost basis.
S-51
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 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 a method that approximates 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
S-52
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.
|
|
|
Collateralized Debt Obligations (CDO) and
Collateralized Loan Obligations (CLO) |
CDO and CLO bonds and preferred shares/ income notes (CDO/
CLO Assets) are carried at fair value, which is based on a
discounted cash flow model that utilizes 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 bonds
and preferred shares/income notes, when available. The Company
recognizes unrealized appreciation or depreciation on its CDO/
CLO Assets as comparable yields in the market change and/or
based on changes in estimated cash flows resulting from changes
in prepayment or loss assumptions in the underlying collateral
pool. The Company determines the fair value of its CDO/ CLO
Assets on an individual security-by-security basis.
The Company recognizes 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 are revised when there are changes in actual and
estimated prepayment speeds or actual and estimated credit
losses. Changes in estimated yield are recognized as an
adjustment to the estimated yield over the remaining life of the
CDO/ CLO Assets 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 primarily 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.
Net change in unrealized appreciation or depreciation also
reflects the change in the value of U.S. Treasury bills and
deposits of proceeds from sales of borrowed Treasury securities,
and depreciation on accrued interest and dividends receivable
and other assets where collection is doubtful.
Fee income includes fees for guarantees, commitments, 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 and commitment fees are generally recognized
as income over the related period of the guaranty or commitment,
respectively. 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.
S-53
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. See
Note 5.
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
using a method that approximates the effective interest method.
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.
|
|
|
Dividends to Shareholders |
Dividends to shareholders are recorded on the record date.
The Company has a stock-based employee compensation plan. See
Note 9. Effective January 1, 2006, the Company adopted
the provisions of Statement No. 123 (Revised 2004),
Share-Based Payment (the Statement). With
respect to options granted prior to January 1, 2006, the
Company has used the modified prospective method for
adoption of the Statement. Under this method, the unamortized
cost of previously awarded options that were unvested as of
January 1, 2006, is recognized over the remaining service
period in the statement of operations beginning in 2006. With
respect to options granted on or after January 1, 2006,
compensation cost is recognized over the related service period
in the statement of operations. The effect of this adoption for
the three and six months ended June 30, 2006, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2006 |
($ in millions, except per share amounts) |
|
|
|
|
Employee Stock Option Expense:
|
|
|
|
|
|
|
|
|
|
Previously awarded, unvested options as of January 1, 2006
|
|
$ |
3.3 |
|
|
$ |
6.7 |
|
|
Options granted on or after January 1, 2006
|
|
|
1.3 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total stock option expense
|
|
$ |
4.6 |
|
|
$ |
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Per basic share
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
|
Per diluted share
|
|
$ |
0.03 |
|
|
$ |
0.06 |
|
In addition to the employee stock option expense, for the three
and six months ended June 30, 2006, administrative expense
included $0.2 million of expense related to options granted
to directors during the period. Options granted to non-officer
directors vest on the grant date and therefore, the full expense
is recorded on the grant date.
S-54
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
Prior to January 1, 2006, the Company accounted for this
plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Prior to
January 1, 2006, no stock-based compensation cost was
reflected in net increase in net assets resulting from
operations, as all options granted under this plan had an
exercise price equal to the market value of the underlying
common stock on the date of grant. The following table
illustrates the effect on net increase in net assets resulting
from operations and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to
stock-based compensation for the three and six months ended
June 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2005 |
|
2005 |
($ in millions, except per share amounts) |
|
|
|
|
Net increase in net assets resulting from operations as reported
|
|
$ |
311.9 |
|
|
$ |
431.5 |
|
Less total stock-based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(4.1 |
) |
|
|
(7.0 |
) |
|
|
|
|
|
|
|
|
|
Pro forma net increase in net assets resulting from operations
available to common shareholders
|
|
$ |
307.8 |
|
|
$ |
424.5 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
2.33 |
|
|
$ |
3.23 |
|
|
Pro forma
|
|
$ |
2.30 |
|
|
$ |
3.18 |
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
2.29 |
|
|
$ |
3.17 |
|
|
Pro forma
|
|
$ |
2.26 |
|
|
$ |
3.12 |
|
The stock option expense for 2006 and the pro forma expense for
2005 shown in the tables above were based on the underlying
value of the options granted by the Company. The fair value of
each option grant was estimated on the date of grant using the
Black-Scholes option pricing model and expensed over the vesting
period. The following assumptions were used to calculate the
fair value of options granted during the three and six months
ended June 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
5.0 |
% |
|
|
4.1 |
% |
|
|
4.8 |
% |
|
|
4.1 |
% |
Expected life (in years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility
|
|
|
29.6 |
% |
|
|
35.5 |
% |
|
|
29.6 |
% |
|
|
35.5 |
% |
Dividend yield
|
|
|
9.0 |
% |
|
|
9.0 |
% |
|
|
9.0 |
% |
|
|
9.0 |
% |
Weighted average fair value per option
|
|
$ |
3.65 |
|
|
$ |
3.87 |
|
|
$ |
3.54 |
|
|
$ |
3.87 |
|
The risk free rate was based on the U.S. Treasury bond yield
curve at the date of grant. The expected life of the options
granted represents the period of time that such options are
expected to be outstanding. To determine the expected life of
the options, the Company used historical data to
S-55
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
estimate option exercise time frames and option forfeitures,
including considering employee terminations. Expected
volatilities were determined based on the historical volatility
of the Companys common stock. The dividend yield was
determined based on the Companys historical dividend yield.
The Company estimates that the employee-related stock option
expense under the Statement that will be recorded in the
Companys statement of operations will be approximately
$16.1 million, $10.1 million, and $3.2 million
for the years ended December 31, 2006, 2007, and 2008,
respectively, which includes approximately $2.6 million,
$1.4 million, and $0.7 million, respectively, related
to options granted in the first and second quarters of 2006.
This estimate may change if the Companys assumptions
related to future option forfeitures change. This estimate does
not include any expense related to future stock option grants as
the fair value of those stock options will be determined at the
time of grant. The aggregate total stock option expense
remaining as of June 30, 2006, is expected to be recognized over
an estimated weighted-average period of 1.38 years.
|
|
|
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 (REIT). ACC and any 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 income taxes for these entities. Income taxes for AC Corp
are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases as well as operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled.
If the Company does not distribute at least 98% of its annual
taxable income in the year earned, the Company will generally be
required to pay an excise tax equal to 4% of the amount by which
98% of the Companys annual taxable income exceeds the
distributions from such taxable income for the 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 from such taxable income,
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, if any.
S-56
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
|
|
|
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 $3.6 billion at both June 30,
2006, and December 31, 2005. At both June 30, 2006,
and December 31, 2005, 90% of the Companys total
assets represented portfolio investments whose fair values have
been determined by the Board of Directors in good faith in the
absence of readily available market values. Because of the
inherent uncertainty of valuation, the Board of Directors
determined values may differ significantly from the values that
would have been used had a ready market existed for the
investments, and the differences could be material.
Note 3. Portfolio
At June 30, 2006, and December 31, 2005, the private
finance portfolio consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Cost |
|
Value |
|
Yield(1) |
|
Cost |
|
Value |
|
Yield(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
322,041 |
|
|
$ |
275,874 |
|
|
|
9.5 |
% |
|
$ |
284,680 |
|
|
$ |
239,838 |
|
|
|
9.5 |
% |
|
Unitranche
debt(2)
|
|
|
517,287 |
|
|
|
515,006 |
|
|
|
10.7 |
% |
|
|
294,201 |
|
|
|
294,201 |
|
|
|
11.4 |
% |
|
Subordinated debt
|
|
|
1,769,369 |
|
|
|
1,700,324 |
|
|
|
13.9 |
% |
|
|
1,610,228 |
|
|
|
1,560,851 |
|
|
|
13.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt
securities(3)
|
|
|
2,608,697 |
|
|
|
2,491,204 |
|
|
|
12.7 |
% |
|
|
2,189,109 |
|
|
|
2,094,890 |
|
|
|
13.0 |
% |
Equity securities
|
|
|
979,553 |
|
|
|
969,222 |
|
|
|
|
|
|
|
917,314 |
|
|
|
1,384,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,588,250 |
|
|
$ |
3,460,426 |
|
|
|
|
|
|
$ |
3,106,423 |
|
|
$ |
3,479,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 30,
2006, and December 31, 2005, the cost and value of
subordinated debt 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) |
Unitranche debt is a single debt investment that is a blend of
senior and subordinated debt terms. |
|
(3) |
The total principal balance outstanding on loans and debt
securities was $2,637.0 million and $2,216.3 million
at June 30, 2006, and December 31, 2005, respectively. The
difference between principal and cost is represented by
unamortized loan origination fees and costs, original issue
discounts, and market discounts totaling $28.3 million and
$27.2 million at June 30, 2006, and December 31, 2005,
respectively. |
The Companys private finance investment activity
principally involves providing financing through privately
negotiated long-term debt and equity investments. The
Companys private finance
S-57
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
investments are generally issued by private companies and are
generally illiquid and may be subject to certain restrictions on
resale.
The Companys 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 June 30, 2006, 86% of the private finance loans and debt
securities had a fixed rate of interest and 14% had a floating
rate of interest. At December 31, 2005, 87% of the private
finance loans and debt securities had a fixed rate of interest
and 13% had a floating rate of interest. Senior loans generally
carry a floating rate of interest, usually set as a spread over
LIBOR. Senior loans generally have contractual maturities of
three to six years and interest is generally paid to the Company
monthly or quarterly. Loans other than senior loans generally
carry a fixed rate of interest with contractual maturities of
five to ten years. Loan and debt securities generally have
interest-only payments in the early years and payments of both
principal and interest in the later years, although maturities
and principal amortization schedules may vary. Interest is
generally paid to the Company quarterly.
Equity securities consist primarily of securities issued by
private companies and may be subject to certain restrictions on
their resale and are generally illiquid. The Company may make
equity investments for minority stakes in portfolio companies in
conjunction with its debt investments. The Company may also
invest in the equity (preferred and/or voting or non-voting
common) of a portfolio company where the Companys equity
ownership may represent a significant portion of the equity, but
may or may not represent a controlling interest. If the Company
invests in non-voting equity in a buyout investment, the Company
generally has the option to acquire a controlling stake in the
voting securities of the portfolio company at fair market value.
The Company may incur costs associated with making buyout
investments that will be included in the cost basis of the
Companys equity investment. These include costs such as
legal, accounting and other professional fees associated with
diligence, referral and investment banking fees, and other
costs. 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 investment at value at June 30, 2006,
was in Business Loan Express, LLC (BLX). The
Companys largest investments at value at December 31,
2005, were in Advantage Sales & Marketing, Inc.
(Advantage) and BLX. On March 29, 2006, the
Company sold its majority equity interest in Advantage.
Business Loan Express, LLC. The Companys
investment in BLX totaled $293.2 million at cost and
$317.2 million at value at June 30, 2006, and
$299.4 million at cost and $357.1 million at value
S-58
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
at December 31, 2005. BLX is a small business lender that
participates in the U.S. Small Business
Administrations 7(a) Guaranteed Loan Program. At
June 30, 2006, and December 31, 2005, the Company
owned 94.9% of the voting Class C equity interests. BLX has
an equity appreciation rights plan for management which will
dilute the value available to the Class C equity interest
holders. BLX is headquartered in New York, NY.
Total interest and related portfolio income earned from the
Companys investment in BLX for the three and six months
ended June 30, 2006 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
Interest income on subordinated debt and Class A equity
interests
|
|
$ |
4.0 |
|
|
$ |
3.5 |
|
|
$ |
7.8 |
|
|
$ |
6.9 |
|
Dividend income on Class B equity interests
|
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
5.0 |
|
Fees and other income
|
|
|
2.0 |
|
|
|
2.3 |
|
|
|
4.3 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
6.0 |
|
|
$ |
8.8 |
|
|
$ |
12.1 |
|
|
$ |
16.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from BLX for the three and six months ended
June 30, 2006 included interest income of $1.9 million
and $3.7 million, respectively, which was paid in kind.
Interest income from BLX for the three and six months ended
June 30, 2005, included interest income of
$1.7 million and $3.3 million, respectively, which was
paid in kind. The interest paid in kind was paid to the Company
through the issuance of additional Class A equity interests.
Net change in unrealized appreciation or depreciation included a
net decrease in unrealized appreciation on the Companys
investment in BLX of $10.9 million and $33.6 million
for the three and six months ended June 30, 2006,
respectively. Net change in unrealized appreciation or
depreciation for the three and six months ended June 30,
2005, included a net increase in unrealized appreciation of
$7.6 million and $1.3 million, respectively, on the
Companys investment in BLX.
At December 31, 2005, the Company had a commitment to BLX
of $30.0 million in the form of a subordinated revolving
credit facility to provide working capital to BLX. There was
$10.0 million outstanding under this facility at
December 31, 2005. Outstanding borrowings under this
facility were repaid in full and this facility matured on
April 30, 2006.
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. 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 may declare dividends on its
Class B interests. If declared, BLX would determine the
amount of such dividend considering its estimated 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
S-59
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
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. At the date of BLXs reorganization, the Company
estimated that its future tax liability resulting from the
built-in gains may total up to a maximum of $40 million.
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 or its interests in BLX 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 or its interests in BLX within the
10-year period.
At June 30, 2006, and December 31, 2005, 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. At June 30, 2006, the
Company estimated that the
built-in gain tax
liability would be approximately $16 million.
At December 31, 2005, BLX had a three-year
$275.0 million revolving credit facility provided by third
party lenders that was scheduled to mature in January 2007. As
the controlling equity owner in BLX, the Company had 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. The total obligation guaranteed by the Company
at December 31, 2005, was $135.4 million.
On March 17, 2006, BLX closed on a new three-year
$500.0 million revolving credit facility that matures in
March 2009, which replaced the existing facility. The revolving
credit facility may be expanded through new or additional
commitments up to $600.0 million at BLXs option. This
new facility provides for a sub-facility for the issuance of
letters of credit for up to an amount equal to 25% of the
committed facility. The Company has provided an unconditional
guaranty to these 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 this facility. The amount guaranteed by the
Company at June 30, 2006, was $149.2 million. This
guaranty can be called by the lenders only in the event of a
default under the BLX credit facility, which includes certain
defaults under the Companys revolving credit facility. BLX
has determined it was in compliance with the terms of this
facility at June 30, 2006.
At June 30, 2006, the Company had also provided four
standby letters of credit totaling $32.0 million in
connection with four term securitization transactions completed
by BLX. In consideration for providing the revolving credit
facility guaranty and the standby letters of credit, BLX paid
the Company fees of $1.6 million and $1.5 million for the
three months ended June 30, 2006 and 2005, respectively,
and $3.1 million and $3.2 million for the six months
ended June 30, 2006 and 2005, respectively.
Advantage Sales and Marketing, Inc. In
June 2004, the Company completed the purchase of a majority
voting ownership in Advantage, which was subject to dilution by
a management option pool.
S-60
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
Advantage is a 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.
At December 31, 2005, the Companys investment in
Advantage totaled $257.7 million at cost and
$660.4 million at value, which included unrealized
appreciation of $402.7 million.
On March 29, 2006, the Company sold its majority equity
interest in Advantage. The Company was repaid its
$184 million in subordinated debt outstanding and realized
a gain on its equity investment sold of $433.7 million,
subject to post-closing adjustments. As consideration for the
common stock sold in the transaction, the Company received a
$150 million subordinated note, with the balance of the
consideration paid in cash. Approximately $34 million of
the Companys cash proceeds from the sale of the common
stock were placed in escrow, subject to certain holdback
provisions. In addition, there is potential for the Company to
receive additional consideration through an earn-out payment
that would be based on Advantages 2006 audited results.
The Companys realized gain of $433.7 million, subject
to post-closing
adjustments, excludes any earn-out amounts. In connection with
the transaction, the Company retained an equity investment in
the business valued at $15 million at closing as a minority
shareholder.
After the sale transaction, the Companys investment in
Advantage at June 30, 2006, which was composed of
subordinated debt and a minority equity interest, totaled
$152.1 million at cost and $165.1 million at value.
This investment was included in companies 5% to 25% owned in the
consolidated financial statements as the Company continues to
hold a seat on Advantages board of directors.
Total interest and related portfolio income earned from the
Companys investment in Advantage while the Company held a
majority equity interest for the six months ended June 30,
2006 and 2005, was $14.1 million and $18.5 million,
respectively.
There was no net change in unrealized appreciation or
depreciation for the three months ended June 30, 2006, related
to the Companys investment in Advantage. Net change in
unrealized appreciation or depreciation for the six months ended
June 30, 2006, included the reversal of $389.7 million
of previously recorded unrealized appreciation associated with
the realization of a gain on the sale of the Companys
majority equity interest in Advantage and for the three and
six months ended June 30, 2005, included an increase in
unrealized appreciation of $51.0 million and
$119.9 million, respectively, related to the Companys
investment in Advantage.
Collateralized Loan Obligations (CLOs)
and Collateralized Debt
Obligations (CDOs) At June 30,
2006, and December 31, 2005, the Company owned bonds and
preferred shares/income
S-61
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
notes in collateralized loan obligations (CLOs) and a
collateralized debt obligation (CDO) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Cost |
|
Value |
|
Cost |
|
Value |
($ in millions) |
|
|
|
|
|
|
|
|
Callidus Debt Partners CDO Fund I, Ltd.
|
|
$ |
28.4 |
|
|
$ |
28.4 |
|
|
$ |
28.5 |
|
|
$ |
28.5 |
|
Callidus Debt Partners CLO Fund III, Ltd.
|
|
|
23.8 |
|
|
|
23.8 |
|
|
|
24.2 |
|
|
|
24.2 |
|
Callidus Debt Partners CLO Fund IV, Ltd.
|
|
|
12.9 |
|
|
|
12.9 |
|
|
|
|
|
|
|
|
|
Callidus MAPS CLO Fund I LLC
|
|
|
67.6 |
|
|
|
67.6 |
|
|
|
65.1 |
|
|
|
65.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
132.7 |
|
|
$ |
132.7 |
|
|
$ |
117.8 |
|
|
$ |
117.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These CLO and CDO investments are managed by Callidus Capital, a
portfolio company controlled by the Company.
The bonds, preferred shares and income notes of the CLOs and CDO
in which the Company has invested are junior in priority for
payment of interest and principal to the more senior notes
issued by the CLOs and CDO. Cash flow from the underlying
collateral assets in the CLOs and CDO is generally allocated
first to the senior bonds in order of priority, then any
remaining cash flow is generally distributed to the preferred
shareholders and income note holders. To the extent there are
defaults and unrecoverable losses on the underlying collateral
assets that result in reduced cash flows, the preferred
shares/income notes would bear this loss first and then the
subordinated bonds would bear any loss after the preferred
shares/income notes.
At both June 30, 2006 and December 31, 2005, the face
value of the CLO and CDO bonds held by the Company were
subordinate to approximately 82% to 85% of the face value of the
securities issued in these CLOs and CDO. At both June 30,
2006 and December 31, 2005, the face value of the CLO
preferred shares/income notes held by the Company were
subordinate to approximately 86% to 91% of the face value of the
securities issued in these CLOs.
At June 30, 2006, and December 31, 2005, the
underlying collateral assets of these CLO and CDO investments,
consisting primarily of senior debt, were issued by
413 issuers and 336 issuers, respectively, and had balances
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Bonds
|
|
$ |
242.8 |
|
|
$ |
230.7 |
|
Syndicated Loans
|
|
|
1,304.9 |
|
|
|
704.0 |
|
Cash(1)
|
|
|
126.0 |
|
|
|
238.4 |
|
|
|
|
|
|
|
|
|
|
|
Total underlying collateral assets
|
|
$ |
1,673.7 |
|
|
$ |
1,173.1 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes undrawn liability amounts. |
At June 30, 2006, and December 31, 2005, there were no
delinquencies in the underlying collateral assets of the CLO and
CDO issuances owned by the Company.
The initial yields on the CLO and CDO bonds, preferred shares
and income notes are based on the estimated future cash flows
from the underlying collateral assets expected to be paid to
these CLO and CDO classes. As each CLO and CDO bond, preferred
share or income note ages, the
S-62
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
estimated future cash flows are updated based on the estimated
performance of the underlying collateral assets, and the
respective yield is adjusted as necessary. As future cash flows
are subject to uncertainties and contingencies that are
difficult to predict and are subject to future events that may
alter current assumptions, no assurance can be given that the
anticipated yields to maturity will be achieved.
Loans and Debt Securities on Non-Accrual Status.
At June 30, 2006, and December 31, 2005, private
finance loans and debt securities at value not accruing interest
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in thousands) |
|
|
|
|
Loans and debt securities in workout status (classified as
Grade 4 or 5)
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
17,670 |
|
|
$ |
15,622 |
|
|
Companies 5% to 25% owned
|
|
|
3,312 |
|
|
|
|
|
|
Companies less than 5% owned
|
|
|
24,598 |
|
|
|
11,417 |
|
Loans and debt securities not in workout status
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
40,775 |
|
|
|
58,047 |
|
|
Companies 5% to 25% owned
|
|
|
6,595 |
|
|
|
534 |
|
|
Companies less than 5% owned
|
|
|
3,922 |
|
|
|
49,458 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
96,872 |
|
|
$ |
135,078 |
|
|
|
|
|
|
|
|
|
|
Industry and Geographic Compositions. The industry
and geographic compositions of the private finance portfolio at
value at June 30, 2006, and December 31, 2005, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
Industry
|
|
|
|
|
|
|
|
|
Business services
|
|
|
31 |
% |
|
|
42 |
% |
Consumer products
|
|
|
24 |
|
|
|
14 |
|
Financial services
|
|
|
14 |
|
|
|
14 |
|
Industrial products
|
|
|
9 |
|
|
|
10 |
|
Consumer services
|
|
|
7 |
|
|
|
6 |
|
Healthcare services
|
|
|
3 |
|
|
|
2 |
|
Retail
|
|
|
2 |
|
|
|
3 |
|
Energy services
|
|
|
2 |
|
|
|
2 |
|
Other(1)
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes investments in senior debt CDO and CLO funds. These
funds invest in senior debt representing a variety of industries. |
S-63
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
|
|
|
|
|
|
|
|
|
|
Geographic
Region(1)
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
34 |
% |
|
|
29 |
% |
Midwest
|
|
|
26 |
|
|
|
21 |
|
West
|
|
|
20 |
|
|
|
34 |
|
Southeast
|
|
|
16 |
|
|
|
12 |
|
Northeast
|
|
|
4 |
|
|
|
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 in other geographic regions. |
|
|
|
Commercial Real Estate Finance |
At June 30, 2006, and December 31, 2005, the
commercial real estate finance portfolio consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Cost |
|
Value |
|
Yield(1) |
|
Cost |
|
Value |
|
Yield(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
$ |
97,154 |
|
|
$ |
96,547 |
|
|
|
8.1% |
|
|
$ |
103,878 |
|
|
$ |
102,569 |
|
|
|
7.6% |
|
Real estate owned
|
|
|
13,090 |
|
|
|
14,553 |
|
|
|
|
|
|
|
14,240 |
|
|
|
13,932 |
|
|
|
|
|
Equity interests
|
|
|
17,504 |
|
|
|
21,951 |
|
|
|
|
|
|
|
13,577 |
|
|
|
10,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
127,748 |
|
|
$ |
133,051 |
|
|
|
|
|
|
$ |
131,695 |
|
|
$ |
127,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average yield on the commercial mortgage loans 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. |
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 both June 30, 2006, and
December 31, 2005, approximately 97% and 3% of the
Companys commercial mortgage loan portfolio was composed
of fixed and adjustable interest rate loans, respectively. At
June 30, 2006, and December 31, 2005, loans with a
value of $15.7 million and $20.8 million,
respectively, were not accruing interest. Loans greater than
120 days delinquent generally do not accrue interest.
Equity interests consist primarily of equity securities issued
by privately owned companies that invest in single real estate
properties. These equity interests may be subject to certain
restrictions on their resale and are generally illiquid. Equity
interests generally do not produce a current return, but are
generally held in anticipation of investment appreciation and
ultimate realized gain on sale.
S-64
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
The property types and the geographic composition securing the
commercial mortgage loans and equity interests at value at
June 30, 2006, and December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
Property Type
|
|
|
|
|
|
|
|
|
Hospitality
|
|
|
36 |
% |
|
|
37 |
% |
Housing
|
|
|
27 |
|
|
|
30 |
|
Office
|
|
|
18 |
|
|
|
11 |
|
Retail
|
|
|
15 |
|
|
|
16 |
|
Other
|
|
|
4 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Geographic Region
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
33 |
% |
|
|
31 |
% |
Southeast
|
|
|
30 |
|
|
|
25 |
|
West
|
|
|
16 |
|
|
|
18 |
|
Midwest
|
|
|
15 |
|
|
|
21 |
|
Northeast
|
|
|
6 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Note 4. Debt
At June 30, 2006, and December 31, 2005, the Company
had the following debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
Annual |
|
|
Facility |
|
Amount |
|
Interest |
|
Facility |
|
Amount |
|
Interest |
|
|
Amount |
|
Drawn |
|
Cost(1) |
|
Amount |
|
Drawn |
|
Cost(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable
|
|
$ |
1,190,637 |
|
|
$ |
1,190,637 |
|
|
|
6.2 |
% |
|
$ |
1,164,540 |
|
|
$ |
1,164,540 |
|
|
|
6.2 |
% |
|
SBA debentures
|
|
|
16,500 |
|
|
|
16,500 |
|
|
|
7.4 |
% |
|
|
28,500 |
|
|
|
28,500 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and debentures
|
|
|
1,207,137 |
|
|
|
1,207,137 |
|
|
|
6.2 |
% |
|
|
1,193,040 |
|
|
|
1,193,040 |
|
|
|
6.3 |
% |
Revolving line of credit
|
|
|
922,500 |
|
|
|
1,750 |
|
|
|
6.4 |
%(2) |
|
|
772,500 |
|
|
|
91,750 |
|
|
|
5.6 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
2,129,637 |
|
|
$ |
1,208,887 |
|
|
|
6.6 |
%(3) |
|
$ |
1,965,540 |
|
|
$ |
1,284,790 |
|
|
|
6.5 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, other facility fees and amortization of debt
financing costs 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) |
The annual interest cost reflects the interest rate payable for
borrowings under the revolving line of credit. In addition to
the current interest rate payable, there were annual costs of
commitment fees, other facility fees and amortization of debt
financing costs of $3.8 million and $3.3 million at
June 30, 2006, and December 31, 2005, respectively. |
|
(3) |
The annual interest cost for total debt includes the annual cost
of commitment fees, other facility fees and amortization of debt
financing costs on the revolving line of credit regardless of
the amount outstanding on the facility as of the balance sheet
date. |
S-65
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
Notes Payable and Debentures
Unsecured Notes Payable. The Company has issued
unsecured long-term notes to institutional investors. The notes
require semi-annual interest payments until maturity and have
original terms of five or seven years. At June 30, 2006,
the notes had maturities from October 2006 to
May 2013. The notes may be prepaid in whole or in part,
together with an interest premium, as stipulated in the note
agreement.
On May 1, 2006, the Company issued $50 million of
seven-year, unsecured notes with a fixed interest rate of 6.75%.
This debt matures in May 2013. The proceeds from the issuance of
the notes were used to repay $25 million of 7.49% unsecured
long-term notes that matured on May 1, 2006, with the
remainder being used to fund new portfolio investments and for
general corporate purposes.
On July 25, 2006, the Company completed a public issuance
of $400 million of five-year, unsecured notes with a fixed
interest rate of 6.625%. This debt matures on July 15,
2011. The Company has the option to redeem these notes in whole
or in part, together with a redemption premium, as stipulated in
the notes. The Company has certain financial and operating
covenants that will be required by this public debt issuance,
including that the Company will maintain a minimum ratio of 200%
of total assets to total borrowings, as required by the
Investment Company Act of 1940, as amended, while these notes
are outstanding.
SBA Debentures. At June 30, 2006, and
December 31, 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 6.3% and 5.9% to 6.4%, respectively.
At June 30, 2006, the debentures had remaining maturities
of five to six years. The debentures 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
half of 2006 and 2005, the Company repaid $12.0 million and
$31.0 million, respectively, of the SBA debentures.
Scheduled Maturities. Scheduled future maturities
of notes payable and debentures at June 30, 2006, were as
follows:
|
|
|
|
|
|
Year |
|
Amount Maturing |
|
|
|
|
|
($ in thousands) |
2006
|
|
$ |
150,000 |
|
2007
|
|
|
|
|
2008
|
|
|
153,000 |
|
2009
|
|
|
268,137 |
|
2010
|
|
|
408,000 |
|
Thereafter
|
|
|
228,000 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,207,137 |
|
|
|
|
|
|
At December 31, 2005, the Company had an unsecured
revolving line of credit with a committed amount of
$772.5 million that expires on September 30, 2008. In
May 2006, the Company expanded the committed amount to
$922.5 million. The revolving line of credit is now fully
S-66
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
committed. At the Companys option, borrowings under the
revolving line of credit generally bear interest at a rate equal
to (i) LIBOR (for the period the Company selects) plus
1.05% 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 (whether used or unused).
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.
The annual cost of commitment fees, other facility fees and
amortization of debt financing costs was $3.8 million and
$3.3 million at June 30, 2006 and December 31,
2005, respectively.
The revolving credit facility provides for a sub-facility for
the issuance of letters of credit for up to an amount equal to
16.66% of the committed facility or $153.7 million. The
letter of credit fee is 1.05% per annum on letters of
credit issued, which is payable quarterly.
The average debt outstanding on the revolving line of credit was
$201.7 million and $64.4 million for the six months
ended June 30, 2006 and 2005, respectively. The maximum
amount borrowed under this facility and the weighted average
stated interest rate for the six months ended June 30, 2006
and 2005, were $540.3 million and 6.0%, respectively, and
$263.3 million and 4.4%, respectively. As of June 30,
2006, the amount available under the revolving line of credit
was $882.5 million, net of amounts committed for standby
letters of credit of $38.3 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 outstanding at June 30, 2006. These
covenants require the Company to maintain certain financial
ratios, including debt to equity and interest coverage, and a
minimum net worth. These credit facilities provide for customary
events of default, including, but not limited to, payment
defaults, breach of representations or covenants,
cross-defaults, bankruptcy events, failure to pay judgments,
attachment of our assets, change of control and the issuance of
an order of dissolution. Certain of these events of default are
subject to notice and cure periods or materiality thresholds.
The Companys credit facilities limit its ability to
declare dividends if the Company defaults under certain
provisions. As of June 30, 2006, and December 31,
2005, the Company was in compliance with these covenants.
Note 5. Guarantees and Commitments
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 June 30, 2006, and
December 31, 2005, the Company had issued guarantees of
debt, rental obligations, and lease obligations aggregating
$163.3 million and $148.6 million, respectively, and
had extended standby letters of credit aggregating
$38.3 million and $37.1 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
$201.6 million and $185.7 million at June 30,
2006, and December 31, 2005, respectively. At June 30,
2006, and December 31, 2005, $2.6 million and
$2.5 million, respectively,
S-67
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5. Guarantees, continued
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.
As of June 30, 2006, the guarantees and standby letters of
credit expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
After 2010 |
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$ |
163.3 |
|
|
$ |
2.5 |
|
|
$ |
0.7 |
|
|
$ |
3.0 |
|
|
$ |
151.6 |
|
|
$ |
|
|
|
$ |
5.5 |
|
Standby letters of
credit(1)
|
|
|
38.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
38.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
201.6 |
|
|
$ |
2.6 |
|
|
$ |
0.7 |
|
|
$ |
41.2 |
|
|
$ |
151.6 |
|
|
$ |
|
|
|
$ |
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 June 30, 2006, the Company had outstanding commitments
to fund investments totaling $362.1 million, including
$352.7 million related to private finance investments and
$9.4 million 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 $11.2 million at June 30, 2006.
Note 6. Shareholders Equity
Sales of common stock for the six months ended June 30,
2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005(1) |
(in thousands) |
|
|
|
|
Number of common shares
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$ |
87,750 |
|
|
$ |
|
|
Less costs, including underwriting fees
|
|
|
4,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
$ |
82,970 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Company did not sell any common stock during the six months
ended June 30, 2005. |
On July 24, 2006, the Company sold 4.5 million shares
of its common stock for proceeds of $118.1 million, net of
underwriting discounts and estimated offering expenses. On
August 1, 2006, the Company completed the sale of
0.7 million shares of common stock pursuant to the
underwriters over-allotment option for net proceeds, after
the underwriting discount and estimated offering expenses, of
$17.8 million.
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 six months
ended June 30, 2005.
S-68
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6. Shareholders Equity, continued
The Company issued 0.4 million and 0.6 million shares
of common stock upon the exercise of stock options during the
six months ended June 30, 2006 and 2005, 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 six
months ended June 30, 2006 and 2005, the Company issued new
shares in order to satisfy dividend reinvestment requests.
Dividend reinvestment plan activity for the six months ended
June 30, 2006 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
Ended June 30, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
Shares issued
|
|
|
243 |
|
|
|
151 |
|
Average price per share
|
|
$ |
29.63 |
|
|
$ |
27.58 |
|
Note 7. Earnings Per Common Share
Earnings per common share for the three and six months ended
June 30, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
For the Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations available
to common shareholders
|
|
$ |
33,729 |
|
|
$ |
311,885 |
|
|
$ |
133,316 |
|
|
$ |
431,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
140,024 |
|
|
|
133,701 |
|
|
|
139,395 |
|
|
|
133,493 |
|
Dilutive options outstanding
|
|
|
3,189 |
|
|
|
2,680 |
|
|
|
3,071 |
|
|
|
2,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding diluted
|
|
|
143,213 |
|
|
|
136,381 |
|
|
|
142,466 |
|
|
|
135,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.24 |
|
|
$ |
2.33 |
|
|
$ |
0.96 |
|
|
$ |
3.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.24 |
|
|
$ |
2.29 |
|
|
$ |
0.94 |
|
|
$ |
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
S-69
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Employee Compensation Plans, continued
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 June 30, 2006, and December 31, 2005,
totaled $17.1 million and $16.6 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 administered through a trust
by a third-party trustee. The administrator of the DCP II
is the Compensation Committee of the Companys Board of
Directors (DCP II Administrator).
The IPA is generally determined annually at the beginning of
each year but may be adjusted throughout the year. The IPA 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 both the
six months ended June 30, 2006 and 2005, 0.2 million
shares 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.
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
S-70
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Employee Compensation Plans, continued
with a corresponding charge or credit to employee compensation
expense. At June 30, 2006, and December 31, 2005,
common stock held in DCP II was $24.0 million and
$19.5 million, respectively, and the IPA liability was
$26.4 million and $22.3 million, respectively. At
June 30, 2006, and December 31, 2005, the DCP II
held 0.9 million and 0.7 million shares, respectively,
of the Companys common stock.
The IPA expenses for the three and six months ended
June 30, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Six |
|
|
Months Ended |
|
Months Ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
|
|
|
|
IPA contributions
|
|
$ |
2.1 |
|
|
$ |
1.9 |
|
|
$ |
3.8 |
|
|
$ |
3.8 |
|
IPA mark to market expense (benefit)
|
|
|
(1.5 |
) |
|
|
1.8 |
|
|
|
(0.6 |
) |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IPA expense
|
|
$ |
0.6 |
|
|
$ |
3.7 |
|
|
$ |
3.2 |
|
|
$ |
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also has an individual performance bonus
(IPB) plan which is distributed in cash to award
recipients in equal
bi-weekly installments
as long as the recipient remains employed by the Company. If a
recipient terminated employment during the year, any remaining
cash payments under the IPB would be forfeited. For the three
months ended June 30, 2006 and 2005, the IPB expense was
$2.2 million and $2.0 million, respectively. For both
the six months ended June 30, 2006 and 2005, the
IPB expense was $3.6 million. 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. Options granted to
non-officer directors
vest on the grant date.
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 June 30, 2006, and December 31, 2005, the
number of shares available to be granted under the Option Plan
was 1.8 million and 3.0 million, respectively.
S-71
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9. Stock Option Plan, continued
Information with respect to options granted, exercised and
forfeited under the Option Plan for the six months ended
June 30, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
Average |
|
Average |
|
Aggregate |
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic Value |
|
|
|
|
Price Per |
|
Remaining |
|
at June 30, |
|
|
Shares |
|
Share |
|
Term (Years) |
|
2006(1) |
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2006
|
|
|
22,259 |
|
|
$ |
24.52 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,505 |
|
|
$ |
29.75 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(373 |
) |
|
$ |
22.09 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(277 |
) |
|
$ |
27.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006
|
|
|
23,114 |
|
|
$ |
24.86 |
|
|
|
6.78 |
|
|
$ |
92,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006
|
|
|
16,848 |
|
|
$ |
23.71 |
|
|
|
6.11 |
|
|
$ |
86,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and expected to be exercisable at June 30,
2006(2)
|
|
|
22,442 |
|
|
$ |
24.77 |
|
|
|
6.73 |
|
|
$ |
92,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the difference between the market value of the
options at June 30, 2006, and the cost for the option
holders to exercise the options. |
|
(2) |
The amount of options expected to be exercisable at
June 30, 2006, is calculated based on an estimate of
expected forfeitures. |
The fair value of the shares vested during the six months ended
June 30, 2006 and 2005, was $16.1 million for both
periods. The total intrinsic value of options exercised during
the six months ended June 30, 2006 and 2005, was
$2.9 million and $4.1 million, respectively.
Note 10. Dividends and Distributions and Taxes
The Companys Board of Directors declared and the Company
paid a dividend of $0.59 and $0.60 per common share for the
first and second quarters of 2006, respectively, and
$0.57 per common share for each of the first and second
quarters of 2005. These dividends totaled $166.6 million
and $152.3 million for the six months ended June 30,
2006 and 2005, respectively. The Company declared an extra cash
dividend of $0.03 per share during 2005 and this was paid to
shareholders on January 27, 2006.
The Companys Board of Directors also declared a dividend
of $0.61 per common share for the third quarter of 2006.
The Company will generally be required to pay a nondeductible
excise tax equal to 4% of the amount by which 98% of the
Companys annual taxable income exceeds the distributions
for the year. The Company currently estimates that its 2006
annual taxable income will be in excess of its dividend
distributions from such taxable income in 2006, and that such
estimated excess taxable income will be carried over for
distribution in 2007. The Company accrues an excise tax on the
estimated excess taxable income earned for the respective
periods. For the three and six months ended June 30, 2006,
the Company accrued an excise tax of $3.2 million and
$11.6 million, respectively. There was no excise tax
accrual for the three months ended March 31, 2005, and the
Company accrued an excise tax of $4.0 million for the three
months ended June 30, 2005.
S-72
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 11. Supplemental Disclosure of Cash Flow
Information
For the six months ended June 30, 2006 and 2005, the
Company paid $46.0 million and $40.1 million,
respectively, for interest.
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 $0.2 million and $7.6 million for
the six months ended June 30, 2006 and 2005, respectively.
Non-cash operating activities for the six months ended
June 30, 2006, included the following:
|
|
|
|
|
a note received as consideration from the sale of the
Companys equity investment in Advantage of
$150.0 million; |
|
|
|
a note received as consideration from the sale of the
Companys equity investment in STS Operating, Inc. of
$30.0 million; |
|
|
|
the exchange of existing debt securities and accrued interest of
S.B. Restaurant Company with a cost basis of $29.2 million
for new debt securities; and |
|
|
|
the exchange of existing preferred stock and common stock of
Redox Brands, Inc. with a cost basis of $10.2 million for
common stock in CR Brands, Inc. |
Non-cash operating activities for the six months ended
June 30, 2005, included the following:
|
|
|
|
|
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; |
|
|
|
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. During the third quarter of 2005, GAC changed its name to
Triview Investments, Inc. |
For the six months ended June 30, 2006 and 2005, the
Companys non-cash financing activities included
$7.2 million and $4.2 million, respectively, related
to the issuance of common stock in lieu of cash distributions.
In addition, the non-cash financing activities for the six
months ended June 30, 2005, also included the issuance of
$7.2 million of the Companys common stock as
consideration for an additional investment in Mercury Air
Centers, Inc.
Note 12. Hedging Activities
The Company has invested in commercial mortgage loans that were
purchased at prices that were based in part on comparable
Treasury rates. The Company has entered into transactions with
one or more financial institutions to hedge against movement in
Treasury rates on certain of these
S-73
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12. Hedging Activities, continued
commercial mortgage loans. These transactions, referred to as
short sales, involve the Company receiving the proceeds from the
short sales of borrowed Treasury securities, with the obligation
to replenish the borrowed Treasury securities at a later date
based on the then current market price. Borrowed Treasury
securities and the related obligations to replenish the borrowed
Treasury securities at value, including accrued interest payable
on the obligations, as of June 30, 2006, and
December 31, 2005, consisted of the following:
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
Description of Issue |
|
2006 |
|
2005 |
|
|
|
|
|
5-year Treasury securities, due April 2010
|
|
$ |
17,156 |
|
|
$ |
17,666 |
|
As of June 30, 2006, and December 31, 2005, 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 $0.9 million
and $0.4 million, respectively.
The net proceeds related to the sales of the borrowed Treasury
securities were $17.9 million at both June 30, 2006,
and December 31, 2005. Under the terms of the transactions,
the Company had received cash payments of $0.7 million and
$0.2 million at June 30, 2006, and December 31,
2005, respectively, 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
agreements. The repurchase agreements are collateralized by
U.S. Treasury securities and are settled weekly. As of
June 30, 2006, the repurchase agreements were due on
July 5, 2006, and had an interest rate of 4.6%. The
interest rate on the repurchase agreements as of
December 31, 2005, was 3.3%.
S-74
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 13. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
|
|
|
Six Months Ended |
|
At and for the |
|
|
June 30, |
|
Year Ended |
|
|
|
|
December 31, |
|
|
2006(1) |
|
2005 |
|
2005 |
|
|
|
|
|
|
|
Per Common Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$ |
19.17 |
|
|
$ |
14.87 |
|
|
$ |
14.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income(2)
|
|
|
0.64 |
|
|
|
0.40 |
|
|
|
1.00 |
|
|
Net realized
gains(2)(3)
|
|
|
3.74 |
|
|
|
1.60 |
|
|
|
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income plus net realized
gains(2)
|
|
|
4.38 |
|
|
|
2.00 |
|
|
|
2.99 |
|
|
Net change in unrealized appreciation or depreciation
(2)(3)
|
|
|
(3.44 |
) |
|
|
1.17 |
|
|
|
3.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
(2)
|
|
|
0.94 |
|
|
|
3.17 |
|
|
|
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from shareholder distributions
|
|
|
(1.19 |
) |
|
|
(1.14 |
) |
|
|
(2.33 |
) |
Net increase in net assets from capital share
transactions(2)
|
|
|
0.25 |
|
|
|
0.11 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$ |
19.17 |
|
|
$ |
17.01 |
|
|
$ |
19.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value, end of period
|
|
$ |
28.77 |
|
|
$ |
29.11 |
|
|
$ |
29.37 |
|
Total
return(4)
|
|
|
1.9 |
% |
|
|
17.4 |
% |
|
|
23.5 |
% |
Ratios and Supplemental Data
($ and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending net assets
|
|
$ |
2,690,019 |
|
|
$ |
2,281,287 |
|
|
$ |
2,620,546 |
|
Common shares outstanding at end of period
|
|
|
140,312 |
|
|
|
134,131 |
|
|
|
136,697 |
|
Diluted weighted average common shares outstanding
|
|
|
142,466 |
|
|
|
135,982 |
|
|
|
137,274 |
|
Employee, stock option and administrative expenses/average net
assets
|
|
|
2.66 |
% |
|
|
3.91 |
% |
|
|
6.58 |
% |
Total operating expenses/average net assets
|
|
|
4.38 |
% |
|
|
5.79 |
% |
|
|
9.99 |
% |
Net investment income/average net assets
|
|
|
3.41 |
% |
|
|
2.57 |
% |
|
|
6.08 |
% |
Net increase in net assets resulting from operations/ average
net assets
|
|
|
4.97 |
% |
|
|
20.57 |
% |
|
|
38.68 |
% |
Portfolio turnover rate
|
|
|
21.20 |
% |
|
|
21.76 |
% |
|
|
47.72 |
% |
Average debt outstanding
|
|
$ |
1,395,791 |
|
|
$ |
1,097,851 |
|
|
$ |
1,087,118 |
|
Average debt per
share(2)
|
|
$ |
9.80 |
|
|
$ |
8.07 |
|
|
$ |
7.92 |
|
|
|
(1) |
The results for the six months ended June 30, 2006, 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, quarterly comparisons may not be meaningful. |
|
(4) |
Total return assumes the reinvestment of all dividends paid for
the periods presented. |
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
S-75
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 14. Litigation, continued
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.
S-76
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 June 30, 2006,
the related consolidated statements of operations for the three-
and six-month periods ended June 30, 2006 and 2005, and the
consolidated statement of changes in net assets and cash flows
and the financial highlights (included in Note 13) for the
six-month periods ended June 30, 2006 and 2005. 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, including the consolidated statement of
investments, as of December 31, 2005, and the related
consolidated statements of operations, changes in net assets and
cash flows (not presented herein), and the financial highlights,
for the year then ended; and in our report dated March 9,
2006, 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, 2005, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
Washington, D.C.
August 9, 2006
S-77
Schedule 12-14
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2005 |
|
Gross |
|
Gross |
|
June 30, 2006 |
(in thousands) |
|
Investment(1) |
|
to Income(6) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
Companies More Than 25% Owned |
|
Acme Paging, L.P.
|
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(Telecommunications)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Sales &
|
|
Subordinated Debt |
|
$ |
1,712 |
|
|
|
|
|
|
|
59,787 |
|
|
|
213 |
|
|
|
(60,000 |
) |
|
|
|
|
|
Marketing, Inc.(7)
|
|
Subordinated Debt |
|
|
5,555 |
|
|
|
|
|
|
|
124,000 |
|
|
|
374 |
|
|
|
(124,374 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
476,578 |
|
|
|
|
|
|
|
(476,578 |
) |
|
|
|
|
|
Alaris Consulting, LLC
|
|
Senior Loan(5) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
(32 |
) |
|
|
|
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Healthcare Services, Inc. and Affiliates |
|
Senior Loan(5) |
|
|
|
|
|
$ |
1 |
|
|
|
4,097 |
|
|
|
328 |
|
|
|
(96 |
) |
|
|
4,329 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
892 |
|
|
|
|
|
|
|
(119 |
) |
|
|
773 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance, Inc. |
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Loan Express, LLC |
|
Subordinated Debt |
|
|
38 |
|
|
|
|
|
|
|
10,000 |
|
|
|
15,000 |
|
|
|
(25,000 |
) |
|
|
|
|
|
(Financial Services)
|
|
Class A Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests |
|
|
7,807 |
|
|
|
|
|
|
|
60,693 |
|
|
|
3,734 |
|
|
|
|
|
|
|
64,427 |
|
|
|
Class B Equity Interests |
|
|
|
|
|
|
|
|
|
|
146,910 |
|
|
|
|
|
|
|
(16,020 |
) |
|
|
130,890 |
|
|
|
Class C Equity Interests |
|
|
|
|
|
|
|
|
|
|
139,521 |
|
|
|
|
|
|
|
(17,621 |
) |
|
|
121,900 |
|
|
Callidus Capital Corporation
|
|
Senior Loan |
|
|
399 |
|
|
|
|
|
|
|
600 |
|
|
|
8,705 |
|
|
|
(7,655 |
) |
|
|
1,650 |
|
|
(Financial Services)
|
|
Subordinated Debt |
|
|
464 |
|
|
|
|
|
|
|
4,832 |
|
|
|
444 |
|
|
|
|
|
|
|
5,276 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
7,968 |
|
|
|
4,125 |
|
|
|
|
|
|
|
12,093 |
|
|
Cambridge Capital Partners
|
|
Senior Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
250 |
|
|
(Financial Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,751 |
|
|
|
|
|
|
|
1,751 |
|
|
CR Brands, Inc.
|
|
Senior Loan |
|
|
1,109 |
|
|
|
|
|
|
|
|
|
|
|
37,219 |
|
|
|
(37,219 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Subordinated Debt |
|
|
2,344 |
|
|
|
|
|
|
|
|
|
|
|
38,712 |
|
|
|
|
|
|
|
38,712 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,431 |
|
|
|
|
|
|
|
37,431 |
|
|
Diversified Group
|
|
Preferred Stock |
|
|
33 |
|
|
|
|
|
|
|
728 |
|
|
|
14 |
|
|
|
(14 |
) |
|
|
728 |
|
|
Administrators, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
841 |
|
|
|
|
|
|
|
|
|
|
|
841 |
|
|
(Business Services)
|
|
Common Stock |
|
|
68 |
|
|
|
|
|
|
|
502 |
|
|
|
69 |
|
|
|
(249 |
) |
|
|
322 |
|
|
Financial Pacific Company
|
|
Subordinated Debt |
|
|
6,176 |
|
|
|
|
|
|
|
69,904 |
|
|
|
726 |
|
|
|
|
|
|
|
70,630 |
|
|
(Financial Services)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
13,116 |
|
|
|
1,344 |
|
|
|
|
|
|
|
14,460 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
44,180 |
|
|
|
749 |
|
|
|
(511 |
) |
|
|
44,418 |
|
|
ForeSite Towers, LLC
|
|
Equity Interests |
|
|
161 |
|
|
|
|
|
|
|
9,750 |
|
|
|
3,068 |
|
|
|
|
|
|
|
12,818 |
|
|
(Tower Leasing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Communications, LLC
|
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
|
15,957 |
|
|
|
|
|
|
|
|
|
|
|
15,957 |
|
|
(Business Services)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
11,198 |
|
|
|
138 |
|
|
|
(1,688 |
) |
|
|
9,648 |
|
|
|
Preferred Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
4,303 |
|
|
|
|
|
|
|
(4,303 |
) |
|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gordian Group, Inc.
|
|
Senior Loan(5) |
|
|
(10 |
) |
|
|
|
|
|
|
4,161 |
|
|
|
400 |
|
|
|
(4,561 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
(220 |
) |
|
|
|
|
|
Healthy Pet Corp.
|
|
Senior Loan |
|
|
772 |
|
|
|
|
|
|
|
4,086 |
|
|
|
12,652 |
|
|
|
(800 |
) |
|
|
15,938 |
|
|
(Consumer Services)
|
|
Subordinated Debt |
|
|
3,258 |
|
|
|
|
|
|
|
38,535 |
|
|
|
4,776 |
|
|
|
(186 |
) |
|
|
43,125 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
25,766 |
|
|
|
5,174 |
|
|
|
(2,788 |
) |
|
|
28,152 |
|
|
HMT, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
2,637 |
|
|
|
|
|
|
|
|
|
|
|
2,637 |
|
|
(Energy Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
5,343 |
|
|
|
2,599 |
|
|
|
|
|
|
|
7,942 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
2,057 |
|
|
|
1,001 |
|
|
|
|
|
|
|
3,058 |
|
|
Impact Innovations Group, LLC |
|
Equity Interests in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Business Services)
|
|
Affiliate |
|
|
|
|
|
|
|
|
|
|
742 |
|
|
|
128 |
|
|
|
|
|
|
|
870 |
|
|
See related footnotes at the end of this schedule.
S-78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2005 |
|
Gross |
|
Gross |
|
June 30, 2006 |
(in thousands) |
|
Investment(1) |
|
to Income(6) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
Insight Pharmaceuticals
|
|
Subordinated Debt |
|
$ |
4,790 |
|
|
|
|
|
|
$ |
58,298 |
|
|
$ |
769 |
|
|
$ |
|
|
|
$ |
59,067 |
|
|
Corporation
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
26,791 |
|
|
|
1,473 |
|
|
|
(2,015 |
) |
|
|
26,249 |
|
|
(Consumer Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
218 |
|
|
|
(236 |
) |
|
|
218 |
|
|
Jakel, Inc.
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,533 |
|
|
|
|
|
|
|
2,533 |
|
|
(Industrial Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Partners Group, LLC
|
|
Senior Loan (5) |
|
|
|
|
|
|
|
|
|
|
5,029 |
|
|
|
93 |
|
|
|
(74 |
) |
|
|
5,048 |
|
|
(Financial Services)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
(18 |
) |
|
|
|
|
|
Litterer Beteiligungs-GmbH
|
|
Subordinated Debt |
|
|
21 |
|
|
|
|
|
|
|
621 |
|
|
|
37 |
|
|
|
|
|
|
|
658 |
|
|
(Business Services)
|
|
Equity Interest |
|
|
|
|
|
|
|
|
|
|
2,226 |
|
|
|
763 |
|
|
|
(1,374 |
) |
|
|
1,615 |
|
|
Mercury Air Centers, Inc.
|
|
Senior Loan |
|
|
1,231 |
|
|
|
|
|
|
|
31,720 |
|
|
|
4,000 |
|
|
|
(35,720 |
) |
|
|
|
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
4,028 |
|
|
|
|
|
|
|
46,519 |
|
|
|
4,679 |
|
|
|
(3,000 |
) |
|
|
48,198 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
88,898 |
|
|
|
4,702 |
|
|
|
(412 |
) |
|
|
93,188 |
|
|
MVL Group, Inc.
|
|
Senior Loan |
|
|
1,742 |
|
|
|
|
|
|
|
27,218 |
|
|
|
79 |
|
|
|
(973 |
) |
|
|
26,324 |
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
2,506 |
|
|
|
|
|
|
|
32,417 |
|
|
|
1,504 |
|
|
|
|
|
|
|
33,921 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
3,211 |
|
|
|
|
|
|
|
(1,949 |
) |
|
|
1,262 |
|
|
Pennsylvania Avenue
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,864 |
|
|
|
1,193 |
|
|
|
(3,057 |
) |
|
|
|
|
|
Investors, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Powell Plant Farms, Inc.
|
|
Senior Loan |
|
|
2,390 |
|
|
|
|
|
|
|
23,792 |
|
|
|
6,075 |
|
|
|
(8,225 |
) |
|
|
21,642 |
|
|
(Consumer Products)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
7,364 |
|
|
|
1,093 |
|
|
|
(8,457 |
) |
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redox Brands, Inc.
|
|
Preferred Stock |
|
|
363 |
|
|
|
|
|
|
|
12,097 |
|
|
|
1,708 |
|
|
|
(13,805 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
84 |
|
|
|
(584 |
) |
|
|
|
|
|
Service Champ, Inc.
|
|
Subordinated Debt |
|
|
2,138 |
|
|
|
|
|
|
|
26,906 |
|
|
|
354 |
|
|
|
|
|
|
|
27,260 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
13,319 |
|
|
|
3,003 |
|
|
|
|
|
|
|
16,322 |
|
|
Staffing Partners Holding
|
|
Subordinated Debt(5) |
|
|
|
|
|
$ |
355 |
|
|
|
6,343 |
|
|
|
|
|
|
|
(5,183 |
) |
|
|
1,160 |
|
|
Company, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
1,812 |
|
|
|
|
|
|
|
(1,812 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Startec Global Communications
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
Senior Loan |
|
|
1,197 |
|
|
|
|
|
|
|
21,685 |
|
|
|
3,540 |
|
|
|
(3,299 |
) |
|
|
21,926 |
|
|
(Telecommunications)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,480 |
|
|
|
|
|
|
|
6,480 |
|
|
STS Operating, Inc.
|
|
Subordinated Debt |
|
|
328 |
|
|
|
|
|
|
|
6,593 |
|
|
|
123 |
|
|
|
(6,716 |
) |
|
|
|
|
|
(Industrial Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
64,963 |
|
|
|
32,039 |
|
|
|
(97,002 |
) |
|
|
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
560 |
|
|
|
292 |
|
|
|
(852 |
) |
|
|
|
|
|
Triview Investments, Inc.
|
|
Senior Loan |
|
|
587 |
|
|
|
|
|
|
|
7,449 |
|
|
|
6,852 |
|
|
|
|
|
|
|
14,301 |
|
|
(Broadcasting & Cable/
|
|
Subordinated Debt |
|
|
2,390 |
|
|
|
|
|
|
|
30,845 |
|
|
|
6,842 |
|
|
|
|
|
|
|
37,687 |
|
|
Consumer Products)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
19,520 |
|
|
|
|
|
|
|
|
|
|
|
19,520 |
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
29,171 |
|
|
|
5,011 |
|
|
|
(1,656 |
) |
|
|
32,526 |
|
|
Total companies more than 25% owned |
|
$ |
53,565 |
|
|
|
|
|
|
$ |
1,887,651 |
|
|
|
|
|
|
|
|
|
|
$ |
1,188,131 |
|
|
Companies 5% to 25% Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Sales &
|
|
Subordinated Debt |
|
$ |
4,732 |
|
|
|
|
|
|
|
|
|
|
$ |
150,056 |
|
|
$ |
|
|
|
$ |
150,056 |
|
|
Marketing, Inc.(7)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
15,000 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Medical Group Holdings LLC
|
|
Senior Loan |
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
1,512 |
|
|
|
|
|
|
|
1,512 |
|
|
(Healthcare Services)
|
|
Subordinated Debt |
|
|
2,145 |
|
|
|
|
|
|
|
42,267 |
|
|
|
34,950 |
|
|
|
(42,627 |
) |
|
|
34,590 |
|
|
|
|
Equity Interests |
|
|
1,694 |
|
|
|
|
|
|
|
4,025 |
|
|
|
2,372 |
|
|
|
(2,197 |
) |
|
|
4,200 |
|
|
Amerex Group, LLC
|
|
Subordinated Debt |
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
8,400 |
|
|
|
|
|
|
|
8,400 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,583 |
|
|
|
|
|
|
|
3,583 |
|
|
Aspen Pet Products, Inc.
|
|
Subordinated Debt |
|
|
1,130 |
|
|
|
|
|
|
|
19,959 |
|
|
|
399 |
|
|
|
(20,358 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Preferred Stock |
|
|
29 |
|
|
|
|
|
|
|
1,638 |
|
|
|
516 |
|
|
|
(2,154 |
) |
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
123 |
|
|
|
(140 |
) |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB&T Capital
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,867 |
|
|
|
|
|
|
|
5,867 |
|
|
Partners/Windsor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine Fund, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Subordinated Debt |
|
|
1,747 |
|
|
|
|
|
|
|
23,543 |
|
|
|
307 |
|
|
|
|
|
|
|
23,850 |
|
|
(Industrial Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
2,200 |
|
|
|
900 |
|
|
|
(700 |
) |
|
|
2,400 |
|
|
See related footnotes at the end of this schedule.
S-79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2005 |
|
Gross |
|
Gross |
|
June 30, 2006 |
(in thousands) |
|
Investment(1) |
|
to Income(6) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
BI Incorporated
|
|
Senior Loan |
|
$ |
125 |
|
|
|
|
|
|
$ |
|
|
|
$ |
15,000 |
|
|
$ |
(15,000 |
) |
|
$ |
|
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
1,390 |
|
|
|
|
|
|
|
|
|
|
|
29,856 |
|
|
|
|
|
|
|
29,856 |
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
The Debt Exchange Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
3,219 |
|
|
|
|
|
|
|
(3,219 |
) |
|
|
|
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MedBridge Healthcare, LLC
|
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
|
7,093 |
|
|
|
1,512 |
|
|
|
(2,010 |
) |
|
|
6,595 |
|
|
(Healthcare Services)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
534 |
|
|
|
1,364 |
|
|
|
(1,898 |
) |
|
|
|
|
|
|
Convertible |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501 |
|
|
|
(501 |
) |
|
|
|
|
|
Nexcel Synthetics, LLC
|
|
Subordinated Debt |
|
|
788 |
|
|
|
|
|
|
|
10,588 |
|
|
|
193 |
|
|
|
|
|
|
|
10,781 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,367 |
|
|
|
363 |
|
|
|
|
|
|
|
1,730 |
|
|
Pres Air Trol LLC
|
|
Unitranche Debt(5) |
|
|
|
|
|
$ |
184 |
|
|
|
5,820 |
|
|
|
10 |
|
|
|
(2,518 |
) |
|
|
3,312 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
318 |
|
|
|
11 |
|
|
|
(329 |
) |
|
|
|
|
|
Progressive International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
Subordinated Debt |
|
|
603 |
|
|
|
|
|
|
|
7,376 |
|
|
|
78 |
|
|
|
|
|
|
|
7,454 |
|
|
(Consumer Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
884 |
|
|
|
36 |
|
|
|
|
|
|
|
920 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
487 |
|
|
|
|
|
|
|
500 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regency Healthcare Group, LLC
|
|
Senior Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
980 |
|
|
|
|
|
|
|
980 |
|
|
(Healthcare Services)
|
|
Unitranche Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,900 |
|
|
|
|
|
|
|
19,900 |
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
|
|
|
|
1,500 |
|
|
SGT India Private Limited
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,608 |
|
|
|
|
|
|
|
3,608 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soteria Imaging Services, LLC
|
|
Subordinated Debt |
|
|
959 |
|
|
|
|
|
|
|
13,447 |
|
|
|
2,058 |
|
|
|
|
|
|
|
15,505 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
2,308 |
|
|
|
92 |
|
|
|
|
|
|
|
2,400 |
|
|
Universal Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services, LLC
|
|
Unitranche Debt |
|
|
859 |
|
|
|
|
|
|
|
10,862 |
|
|
|
94 |
|
|
|
|
|
|
|
10,956 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,328 |
|
|
|
651 |
|
|
|
(278 |
) |
|
|
1,701 |
|
|
Total companies 5% to 25% owned |
|
$ |
17,069 |
|
|
|
|
|
|
$ |
158,806 |
|
|
|
|
|
|
|
|
|
|
$ |
371,156 |
|
|
This schedule should be read in conjunction with the
Companys consolidated financial statements, including the
consolidated statement of investments and Note 3 to the
consolidated financial statements. Note 3 includes
additional information regarding activities in the private
finance portfolio.
|
|
(1) |
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. The
principal amount for loans and debt securities and the number of
shares of common stock and preferred stock is shown in the
consolidated statement of investments as of June 30, 2006. |
|
(2) |
Other includes interest, dividend, or other income which was
applied to the principal of the investment and therefore reduced
the total investment. These reductions are also included in the
Gross Reductions for the investment, as applicable. |
|
(3) |
Gross additions include increases in the cost basis of
investments resulting from new portfolio investments,
paid-in-kind interest or dividends, the amortization of
discounts and closing fees, the exchange of one or more existing
securities for one or more new securities and the movement of an
existing portfolio company into this category from a different
category. Gross additions also include net increases in
unrealized appreciation or net decreases in unrealized
depreciation. |
|
(4) |
Gross reductions include decreases in the cost basis of
investments resulting from principal collections related to
investment repayments or sales, the exchange of one or more
existing securities for one or more new securities and the
movement of an existing portfolio company out of this category
into a different category. Gross reductions also include net
increases in unrealized depreciation or net decreases in
unrealized appreciation. |
|
(5) |
Loan or debt security is on non-accrual status at June 30,
2006, and is therefore considered non-income producing. Loans or
debt securities on non-accrual status at the end of the period
may or may not have been on non-accrual status for the full
period. |
|
(6) |
Represents the total amount of interest or dividends credited to
income for the portion of the year an investment was included in
the companies more than 25% owned or companies 5% to 25% owned
categories, respectively. |
|
(7) |
Included in the companies more than 25% owned category while the
Company held a majority equity interest. On March 29, 2006,
the Company sold its majority equity interest in Advantage. The
Companys investment in Advantage after the sale
transaction is included in the companies 5% to 25% owned
category. See Note 3 to the consolidated financial
statements for further information. |
S-80
NOTICE REGARDING INDEPENDENT PUBLIC ACCOUNTANTS
REVIEW REPORT
With respect to the unaudited interim financial information as
of June 30, 2006, and for the three-month and six-month
periods ended June 30, 2006 and 2005, included herein, KPMG
LLP has reported that they applied limited procedures in
accordance with professional standards for a review of such
information. However, their separate report included herein
states that they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the
degree of reliance on their report on such information should be
restricted in light of the limited nature of the review
procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933
for their report on the unaudited interim financial information
because that report is not a report or a
part of the registration statement prepared or
certified by the accountants within the meaning of Sections 7
and 11 of the Securities Act of 1933.
S-81
PROSPECTUS
$1,000,000,000
Debt Securities
We may offer, from time to time, up to an aggregate principal
amount of $1,000,000,000 of one or more classes or series of
debt securities, including notes, debentures, medium-term notes,
commercial paper, retail notes or similar obligations evidencing
indebtedness in one or more offerings.
The debt securities may be offered at prices and on terms to be
described in one or more supplements to this prospectus.
We are an internally managed closed-end, non-diversified
management investment company that has elected to be regulated
as a business development company under the Investment Company
Act of 1940.
Our investment objective is to achieve current income and
capital gains. We seek to achieve our investment objective by
investing in primarily private middle market companies in a
variety of industries. No assurances can be given that we will
continue to achieve our objective.
Please read this prospectus, the accompanying prospectus
supplement, if any, and the pricing supplement, if any, before
investing in our debt securities and keep it for future
reference. The prospectus contains and the accompanying
prospectus supplement, if any, and the pricing supplement, if
any, will contain important information about us that a
prospective investor should know before investing in our debt
securities. We file annual, quarterly and current reports, proxy
statements and other information with the Securities and
Exchange Commission. This information is available free of
charge by contacting us at 1919 Pennsylvania Avenue, NW,
Washington, DC, 20006 or by telephone at (202) 721-6100 or
on our website at www.alliedcapital.com. The SEC also maintains
a website at www.sec.gov that contains such information.
|
|
|
You should review the information set forth under Risk
Factors on page 9 of this prospectus before investing
in our debt securities. |
|
|
|
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense. |
|
|
|
This prospectus may not be used to consummate sales of our
debt securities unless accompanied by a prospectus supplement
and, if applicable, a pricing supplement. |
June 22, 2006
We have not authorized any dealer, salesman or other person
to give any information or to make any representation other than
those contained in this prospectus or any prospectus supplement,
if any, or any pricing supplement, if any, to this prospectus.
You must not rely upon any information or representation not
contained in this prospectus or any such supplements as if we
had authorized it. This prospectus and any such supplements do
not constitute an offer to sell or a solicitation of any offer
to buy any security other than the registered securities to
which they relate, nor do they constitute an offer to sell or a
solicitation of an offer to buy any securities in any
jurisdiction to any person to whom it is unlawful to make such
an offer or solicitation in such jurisdiction. The information
contained in this prospectus and any such supplements is
accurate as of the dates on their covers; however, the
prospectus and any supplements will be updated to reflect any
material changes.
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page |
|
|
|
Summary
|
|
|
1 |
|
Selected Condensed Consolidated Financial Data
|
|
|
6 |
|
Where You Can Find Additional Information
|
|
|
8 |
|
Risk Factors
|
|
|
9 |
|
Use of Proceeds
|
|
|
19 |
|
Managements Discussion and Analysis of Financial Condition
and Results of Operations
|
|
|
21 |
|
Senior Securities
|
|
|
67 |
|
Business
|
|
|
71 |
|
Portfolio Companies
|
|
|
88 |
|
Determination of Net Asset Value
|
|
|
95 |
|
Management
|
|
|
98 |
|
Portfolio Management
|
|
|
104 |
|
Compensation of Executive Officers and Directors
|
|
|
107 |
|
Control Persons and Principal Holders of Securities
|
|
|
118 |
|
Certain Relationships and Related Party Transactions
|
|
|
121 |
|
Tax Status
|
|
|
122 |
|
Certain Government Regulations
|
|
|
123 |
|
Stock Trading Plans and Ownership Guidelines
|
|
|
127 |
|
Dividend Reinvestment Plan
|
|
|
128 |
|
Description of Capital Stock
|
|
|
129 |
|
Description of Notes
|
|
|
130 |
|
Special Considerations Under our Charter and Bylaws and Maryland
Law
|
|
|
142 |
|
Plan of Distribution
|
|
|
148 |
|
Legal Matters
|
|
|
149 |
|
Custodians, Transfer and Dividend Paying Agent and Registrar
|
|
|
149 |
|
Brokerage Allocation and Other Practices
|
|
|
149 |
|
Independent Registered Public Accounting Firm
|
|
|
150 |
|
Notice Regarding Arthur Andersen LLP
|
|
|
150 |
|
Index to Consolidated Financial Statements
|
|
|
F-1 |
|
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission using the
shelf registration process. Under the shelf
registration process, which constitutes a delayed offering in
reliance on Rule 415 under the Securities Act of 1933, as
amended, we may offer, from time to time, up to $1,000,000,000
in aggregate principal amount of debt securities on the terms to
be determined at the time of the offering. The debt securities
may be offered at prices and on terms described in one or more
supplements to this prospectus. This prospectus provides you
with a general description of the debt securities we may offer.
Each time we use this prospectus to offer debt securities, we
will provide a prospectus supplement and, if applicable, a
pricing supplement that will contain specific information about
the terms of that offering. Please carefully read this
prospectus and any such supplements together with the additional
information described under Where You Can Find Additional
Information in the Prospectus Summary and
Risk Factors sections before you make an investment
decision.
A prospectus supplement and, if applicable, a pricing supplement
may also add to, update or change information contained in this
prospectus.
(i)
PROSPECTUS SUMMARY
The following summary contains basic information about this
offering. It may not contain all the information that is
important to an investor. For a more complete understanding of
this offering, we encourage you to read this entire prospectus
and the documents that are referred to in this prospectus,
together with any accompanying supplements.
In this prospectus or any accompanying supplement, unless
otherwise indicated, Allied Capital, we,
us or our refer to Allied Capital
Corporation and its subsidiaries.
BUSINESS (Page 71)
We are a business development company and we are in the private
equity business. We provide long-term debt and equity capital to
primarily private middle market companies in a variety of
industries. We have participated in the private equity business
since we were founded in 1958 and have financed thousands of
companies nationwide. Our investment objective is to achieve
current income and capital gains.
We believe the private equity capital markets are important to
the growth of small and middle market companies because such
companies often have difficulty accessing the public debt and
equity capital markets. We use the term middle market to include
companies with annual revenues typically between
$50 million and $500 million. We believe that we are
well positioned to be a source of capital for such companies.
We primarily invest in the American entrepreneurial economy. Our
private finance portfolio includes investments in over 100
companies with aggregate annual revenue of over $12 billion
and employ more than 90,000 people.
We generally target companies in less cyclical industries in the
middle market with, among other things, high return on invested
capital, management teams with meaningful equity ownership,
well-constructed balance sheets, and the ability to generate
free cash flow. As a private equity investor, we spend
significant time and effort identifying, structuring, performing
due diligence, monitoring, developing, valuing and ultimately
exiting our investments.
Our investment activity is primarily focused on making long-term
investments in the debt and equity of primarily private middle
market companies. Debt investments may include senior loans,
unitranche debt (a single debt investment that is a blend of
senior and subordinated debt), or subordinated debt (with or
without equity features). 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 debt, 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.
Our investments in the debt and equity of primarily private
middle market companies are generally long-term in nature and
are privately negotiated, and no readily available market exists
for them. This makes our investments highly illiquid and, as
result, we cannot readily trade them. When we make an
investment, we enter into a long-term arrangement where our
ultimate exit from that investment may be three to ten years in
the future.
1
The capital we provide is used by portfolio companies to fund
buyouts, acquisitions, growth, recapitalizations, note
purchases, or other types of financings.
Our investments are typically structured to provide recurring
cash flow in the form of interest income to us as the investor.
In addition to earning interest income, we may structure our
investments to generate income from management, consulting,
diligence, structuring, or other fees. We may also enhance our
total return from capital gains through equity features, such as
nominal cost warrants, or by investing in equity investments.
We provide managerial assistance to our portfolio companies,
including management and consulting services related to
corporate finance, marketing, human resources, personnel and
board member recruiting, business operations, corporate
governance, risk management and other general business matters.
We have elected to be taxed as a regulated investment company
under the Internal Revenue Code of 1986, as amended, which we
refer to as the Code. Our status as a regulated investment
company generally eliminates a corporate-level income tax on
taxable income we timely distribute to our stockholders as
dividends, if certain requirements are met. See Tax
Status. We determine our regular quarterly dividends
considering our estimate of annual taxable income available for
distribution. Since 1963, our portfolio has generally provided
sufficient ordinary taxable income and net capital gains to
sustain or grow our dividends over time.
We are a Maryland corporation and a closed-end, non-diversified
management investment company that has elected to be regulated
as a business development company under the Investment Company
Act of 1940, which we refer to as the 1940 Act.
As a business development company, we are required to meet
certain regulatory tests, the most significant relating to our
investments and borrowings. A business development company is
required to invest at least 70% of its assets in eligible
portfolio companies. A business development company must also
maintain a coverage ratio of assets to senior securities of at
least 200%. See Certain Government Regulations and
Risk Factors.
Our executive offices are located at 1919 Pennsylvania
Avenue, NW, Washington, DC, 20006 and our telephone number
is (202) 721-6100. In addition, we have regional offices in
New York, Chicago and Los Angeles.
Our Internet website address is www.alliedcapital.com.
Information contained on our website is not incorporated by
reference into this prospectus and you should not consider
information contained on our website to be part of this
prospectus.
Our common stock is traded on the New York Stock Exchange
under the symbol ALD.
DETERMINATION OF
NET ASSET VALUE (Page 94)
Our portfolio investments are generally recorded at fair value
as determined in good faith by our Board of Directors in the
absence of readily available public market values.
Pursuant to the requirements of the 1940 Act, we value
substantially all of our portfolio investments at fair value as
determined in good faith by the 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
2
of these portfolio investments pursuant to our valuation policy
and 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. Instead we are required to specifically
value each individual investment 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 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 all debt and equity securities used to capitalize the
enterprise at a point in time. Conversely, we will record
unrealized appreciation if we believe that the underlying
portfolio company has appreciated in value and/or our equity
security has 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.
We adjust the valuation of our portfolio quarterly to reflect
the change in the value of each investment in our portfolio. Any
changes in value are recorded in our statement of operations as
net change in unrealized appreciation or
depreciation.
PLAN OF DISTRIBUTION (Page 146)
We may offer, from time to time, up to $1,000,000,000 aggregate
principal amount of debt securities, including notes,
debentures, medium-term notes, commercial paper, retail notes or
similar obligations evidencing indebtedness, on terms to be
determined at the time of the offering.
Our debt securities may be offered at prices and on terms
described in one or more supplements to this prospectus. Our
debt securities may be offered directly to one or more
purchasers, through agents designated from time to time by us,
or to or through underwriters or dealers. The supplements to
this prospectus relating to any offering of debt securities will
identify any agents or underwriters involved in the sale of our
debt securities, and will set forth any applicable purchase
price, fee and commission or discount arrangement or the basis
upon which such amount may be calculated.
We may not sell debt securities pursuant to this prospectus
without delivering a prospectus supplement and, if applicable, a
pricing supplement describing the method and terms of the
offering of such debt securities.
USE OF PROCEEDS (Page 19)
We intend to use the net proceeds from selling debt securities
for general corporate purposes, which includes investing in debt
or equity securities in primarily privately negotiated
transactions, repayment of indebtedness, acquisitions and other
general corporate purposes.
The supplements to this prospectus relating to any offering of
debt securities will more fully identify the use of proceeds
from such offering.
3
RISK FACTORS (Page 9)
Investment in our debt securities involves a number of
significant risks relating to our business and our investment
objective that you should consider before investing in our debt
securities.
Our portfolio of investments is generally illiquid. Our
portfolio includes securities primarily issued by private
companies. These investments may involve a high degree of
business and financial risk; they are illiquid, and may not
produce current returns or capital gains. If we were forced to
immediately liquidate some or all of the investments in the
portfolio, the proceeds of such liquidation could be
significantly less than the current value of such investments.
We may be required to liquidate some or all of our portfolio
investments to meet our debt service obligations or in the event
we are required to fulfill our obligations under agreements
pursuant to which we guarantee the repayment of indebtedness by
third parties.
An economic slowdown may affect the ability of a portfolio
company to engage in a liquidity event, which is a transaction
that involves the sale or recapitalization of all or part of a
portfolio company. These conditions could lead to financial
losses in our portfolio and a decrease in our revenues, net
income and assets. Numerous other 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.
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.
We may not borrow money unless we maintain asset coverage for
indebtedness of at least 200%, which may affect returns to
shareholders. We borrow funds to make investments. As a result,
we are exposed to the risks of leverage, which may be considered
a speculative investment technique. Borrowings, also known as
leverage, magnify the potential for gain and loss on amounts
invested and therefore increase the risks associated with
investing in our securities.
A large number of entities and individuals compete for the same
kind of investment opportunities as 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 of making private equity investments and
positioning them for liquidity events also may be affected by
current and future market conditions.
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.
We may not be able to pay dividends and failure to qualify as a
regulated investment company for tax purposes could have a
material adverse effect on the income available for debt service
and distributions to our shareholders, which may have a material
adverse effect on our total return to common shareholders, if
any.
Also, we are subject to certain risks associated with valuing
our portfolio, changing interest rates, accessing additional
capital, fluctuating financial results, and operating in a
regulated environment.
4
The market value of our debt securities may be volatile due to
market factors that may be beyond our control.
RATIOS OF EARNINGS TO FIXED CHARGES (Page 17)
Our ratio of earnings to fixed charges for the five years ended
December 31, 2005, was 12.4, 4.3, 3.4, 4.2 and 4.0,
respectively, and was 5.4 for the three months ended
March 31, 2006. For more information, see the section
entitled Ratios of Earnings to Fixed Charges in this
prospectus.
SENIOR SECURITIES (Page 67)
At March 31, 2006, we had $1.3 billion of outstanding
indebtedness bearing a weighted average annual interest cost of
6.5%. If our portfolio fails to produce adequate returns, we may
be unable to make interest or principal payments on our
indebtedness when they are due, which could give rise to a
default on and acceleration of our indebtedness. In order for us
to cover annual interest payments on indebtedness, we had to
achieve annual returns on our assets of at least 2.0% as of
March 31, 2006, which returns were achieved.
5
SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA
You should read the condensed consolidated financial information
below with the Consolidated Financial Statements and Notes
thereto included herein. Financial information at and for the
years ended December 31, 2005, 2004, 2003, and 2002, has
been derived from our financial statements that were audited by
KPMG LLP. Financial information at and for the year ended
December 31, 2001, has been derived from our financial
statements that were audited by Arthur Andersen LLP. For
important information about Arthur Andersen LLP, see the section
entitled Notice Regarding Arthur Andersen LLP.
Quarterly financial information is derived from unaudited
financial data, but in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments)
which are necessary to present fairly the results for such
interim periods. Interim results at and for the three months
ended March 31, 2006, are not necessarily indicative of the
results that may be expected for the year ending
December 31, 2006. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations below for more information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended March 31, |
|
Year Ended December 31, |
|
|
|
|
|
(in thousands, |
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and related portfolio income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
$ |
88,881 |
|
|
$ |
84,945 |
|
|
$ |
317,153 |
|
|
$ |
319,642 |
|
|
$ |
290,719 |
|
|
$ |
264,042 |
|
|
$ |
240,464 |
|
|
Loan prepayment premiums
|
|
|
5,286 |
|
|
|
1,677 |
|
|
|
6,250 |
|
|
|
5,502 |
|
|
|
8,172 |
|
|
|
2,776 |
|
|
|
2,504 |
|
|
Fees and other income
|
|
|
16,844 |
|
|
|
8,297 |
|
|
|
50,749 |
|
|
|
41,946 |
|
|
|
30,338 |
|
|
|
43,110 |
|
|
|
46,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
111,011 |
|
|
|
94,919 |
|
|
|
374,152 |
|
|
|
367,090 |
|
|
|
329,229 |
|
|
|
309,928 |
|
|
|
289,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
24,300 |
|
|
|
20,225 |
|
|
|
76,798 |
|
|
|
75,650 |
|
|
|
77,233 |
|
|
|
70,443 |
|
|
|
65,104 |
|
|
Employee
|
|
|
21,428 |
|
|
|
15,456 |
|
|
|
78,300 |
|
|
|
53,739 |
|
|
|
36,945 |
|
|
|
33,126 |
|
|
|
29,656 |
|
|
Stock options
|
|
|
3,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
11,519 |
|
|
|
20,754 |
|
|
|
70,267 |
|
|
|
34,686 |
|
|
|
22,387 |
|
|
|
21,504 |
|
|
|
15,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,853 |
|
|
|
56,435 |
|
|
|
225,365 |
|
|
|
164,075 |
|
|
|
136,565 |
|
|
|
125,073 |
|
|
|
110,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
50,158 |
|
|
|
38,484 |
|
|
|
148,787 |
|
|
|
203,015 |
|
|
|
192,664 |
|
|
|
184,855 |
|
|
|
179,051 |
|
|
Income tax expense (benefit), including excise tax
|
|
|
8,858 |
|
|
|
(268 |
) |
|
|
11,561 |
|
|
|
2,057 |
|
|
|
(2,466 |
) |
|
|
930 |
|
|
|
(412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
41,300 |
|
|
|
38,752 |
|
|
|
137,226 |
|
|
|
200,958 |
|
|
|
195,130 |
|
|
|
183,925 |
|
|
|
179,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
432,835 |
|
|
|
10,285 |
|
|
|
273,496 |
|
|
|
117,240 |
|
|
|
75,347 |
|
|
|
44,937 |
|
|
|
661 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(374,548 |
) |
|
|
70,584 |
|
|
|
462,092 |
|
|
|
(68,712 |
) |
|
|
(78,466 |
) |
|
|
(571 |
) |
|
|
20,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses)
|
|
|
58,287 |
|
|
|
80,869 |
|
|
|
735,588 |
|
|
|
48,528 |
|
|
|
(3,119 |
) |
|
|
44,366 |
|
|
|
21,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
99,587 |
|
|
$ |
119,621 |
|
|
$ |
872,814 |
|
|
$ |
249,486 |
|
|
$ |
192,011 |
|
|
$ |
228,291 |
|
|
$ |
200,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.70 |
|
|
$ |
0.88 |
|
|
$ |
6.36 |
|
|
$ |
1.88 |
|
|
$ |
1.62 |
|
|
$ |
2.20 |
|
|
$ |
2.16 |
|
Dividends per common
share(1)
|
|
$ |
0.59 |
|
|
$ |
0.57 |
|
|
$ |
2.33 |
|
|
$ |
2.30 |
|
|
$ |
2.28 |
|
|
$ |
2.23 |
|
|
$ |
2.01 |
|
Weighted average common shares outstanding diluted
|
|
|
141,738 |
|
|
|
135,579 |
|
|
|
137,274 |
|
|
|
132,458 |
|
|
|
118,351 |
|
|
|
103,574 |
|
|
|
93,003 |
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
At December 31, |
|
|
|
|
|
(in thousands, |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio at value
|
|
$ |
3,691,002 |
|
|
$ |
3,606,355 |
|
|
$ |
3,013,411 |
|
|
$ |
2,584,599 |
|
|
$ |
2,488,167 |
|
|
$ |
2,329,590 |
|
Total assets
|
|
|
4,121,225 |
|
|
|
4,025,880 |
|
|
|
3,260,998 |
|
|
|
3,019,870 |
|
|
|
2,794,319 |
|
|
|
2,460,713 |
|
Total debt
outstanding(2)
|
|
|
1,274,245 |
|
|
|
1,284,790 |
|
|
|
1,176,568 |
|
|
|
954,200 |
|
|
|
998,450 |
|
|
|
1,020,806 |
|
Preferred stock issued to Small Business
Administration(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
|
|
7,000 |
|
|
|
7,000 |
|
Shareholders equity
|
|
|
2,729,813 |
|
|
|
2,620,546 |
|
|
|
1,979,778 |
|
|
|
1,914,577 |
|
|
|
1,546,071 |
|
|
|
1,352,123 |
|
Shareholders equity per common share (net asset
value)(3)
|
|
$ |
19.50 |
|
|
$ |
19.17 |
|
|
$ |
14.87 |
|
|
$ |
14.94 |
|
|
$ |
14.22 |
|
|
$ |
13.57 |
|
Common shares outstanding at end of year
|
|
|
139,984 |
|
|
|
136,697 |
|
|
|
133,099 |
|
|
|
128,118 |
|
|
|
108,698 |
|
|
|
99,607 |
|
Asset coverage
ratio(4)
|
|
|
317 |
% |
|
|
309 |
% |
|
|
280 |
% |
|
|
322 |
% |
|
|
270 |
% |
|
|
245 |
% |
Debt to equity ratio
|
|
|
0.47 |
|
|
|
0.49 |
|
|
|
0.59 |
|
|
|
0.50 |
|
|
|
0.65 |
|
|
|
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
|
March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments funded
|
|
$ |
797,851 |
|
|
$ |
1,675,773 |
|
|
$ |
1,524,523 |
|
|
$ |
931,450 |
|
|
$ |
506,376 |
|
|
$ |
680,329 |
|
Principal collections related to investment repayments or sales
|
|
|
340,410 |
|
|
|
1,503,388 |
|
|
|
909,189 |
|
|
|
788,328 |
|
|
|
356,641 |
|
|
|
204,441 |
|
Realized gains
|
|
|
436,486 |
|
|
|
343,061 |
|
|
|
267,702 |
|
|
|
94,305 |
|
|
|
95,562 |
|
|
|
10,107 |
|
Realized losses
|
|
|
(3,651 |
) |
|
|
(69,565 |
) |
|
|
(150,462 |
) |
|
|
(18,958 |
) |
|
|
(50,625 |
) |
|
|
(9,446 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
(in thousands, |
|
Qtr 1 |
|
Qtr 4 |
|
Qtr 3 |
|
Qtr 2 |
|
Qtr 1 |
|
Qtr 4 |
|
Qtr 3 |
|
Qtr 2 |
|
Qtr 1 |
except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
111,011 |
|
|
$ |
98,169 |
|
|
$ |
94,857 |
|
|
$ |
86,207 |
|
|
$ |
94,919 |
|
|
$ |
100,962 |
|
|
$ |
96,863 |
|
|
$ |
87,500 |
|
|
$ |
81,765 |
|
Net investment income
|
|
|
41,300 |
|
|
|
37,073 |
|
|
|
46,134 |
|
|
|
15,267 |
|
|
|
38,752 |
|
|
|
54,678 |
|
|
|
52,745 |
|
|
|
48,990 |
|
|
|
44,545 |
|
Net increase in net assets resulting from operations
|
|
|
99,587 |
|
|
|
328,140 |
|
|
|
113,168 |
|
|
|
311,885 |
|
|
|
119,621 |
|
|
|
47,837 |
|
|
|
85,999 |
|
|
|
95,342 |
|
|
|
20,308 |
|
Diluted earnings per common share
|
|
$ |
0.70 |
|
|
$ |
2.36 |
|
|
$ |
0.82 |
|
|
$ |
2.29 |
|
|
$ |
0.88 |
|
|
$ |
0.35 |
|
|
$ |
0.66 |
|
|
$ |
0.73 |
|
|
$ |
0.15 |
|
Dividends declared per common share
(5)
|
|
|
0.59 |
|
|
|
0.61 |
|
|
|
0.58 |
|
|
|
0.57 |
|
|
|
0.57 |
|
|
|
0.59 |
|
|
|
0.57 |
|
|
|
0.57 |
|
|
|
0.57 |
|
Net asset value per common
share(3)
|
|
|
19.50 |
|
|
|
19.17 |
|
|
|
17.37 |
|
|
|
17.01 |
|
|
|
15.22 |
|
|
|
14.87 |
|
|
|
14.90 |
|
|
|
14.77 |
|
|
|
14.60 |
|
|
|
(1) |
Dividends are based on taxable income, which differs from income
for financial reporting purposes. |
|
(2) |
See Senior Securities for more information regarding
our level of indebtedness. |
(3) |
We determine net asset value per common share as of the last day
of the period presented. The net asset values shown are based on
outstanding shares at the end of each period presented. |
(4) |
As a business development company, we are generally required to
maintain a minimum ratio of 200% of total assets to total
borrowings. |
(5) |
Dividends declared per common share for the fourth quarter of
2004 included the regular quarterly dividend of $0.57 per common
share and an extra dividend of $0.02 per common share. Dividends
declared per common share for the fourth quarter of 2005
included the regular quarterly dividend of $0.58 per common
share and an extra dividend of $0.03 per common share. |
7
WHERE YOU CAN FIND
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form N-2
together with all amendments and related exhibits under the
Securities Act of 1933. The registration statement contains
additional information about us and the debt securities being
offered by this prospectus.
We file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange
Commission under the Securities Exchange Act of 1934. You can
inspect any materials we file with the Securities and Exchange
Commission, without charge, at the Securities and Exchange
Commissions Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. Please call the Securities and
Exchange Commission at
1-800-SEC-0330 for
further information on the Public Reference Room. The Securities
and Exchange Commission maintains a web site that contains
reports, proxy statements and other information regarding
registrants, including us, that file such information
electronically with the Securities and Exchange Commission. The
address of the Securities and Exchange Commissions web
site is www.sec.gov. Information contained on the
Securities and Exchange Commissions web site about us is
not incorporated into this prospectus and you should not
consider information contained on the Securities and Exchange
Commissions web site to be part of this prospectus.
8
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 subject to certain 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
could 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. Deterioration in a portfolio
companys financial condition and prospects may be
accompanied by deterioration in any collateral for the loan.
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 March 31, 2006,
portfolio investments recorded at fair value were 90% 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
9
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
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. Adverse economic conditions also may
decrease the value of collateral securing some of our loans.
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
10
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.
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
March 31, 2006, our largest investment at value was in
Business Loan Express, LLC (BLX) and represented 7.9% of our
total assets and 5.5% of our total interest and related
portfolio income for the three months ended March 31, 2006.
BLX is a lender under the Small Business
Administration 7(a) Guaranteed Loan Program. Our financial
results could be negatively affected if government funding for,
or regulations related to, this 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.
The debt securities we may issue pursuant to this prospectus,
the prospectus supplement, and the applicable pricing
supplement, if any, are a form of such borrowings. We borrow
from and issue senior debt securities to banks, insurance
companies, and other lenders or investors. Holders 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. We and, indirectly, our shareholders will bear the
cost associated with our leverage activity. 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 March 31, 2006, we had $1.3 billion of outstanding
indebtedness bearing a weighted average annual interest cost of
6.5%. If our portfolio of investments fails to produce adequate
returns, we may be unable to make interest or principal payments
on our indebtedness when they are due. In order for us to cover
annual interest payments on indebtedness, we had to achieve
annual returns on our assets of at least 2.0% as of
March 31, 2006, which returns were achieved.
11
Illustration. The following table illustrates the effect
of leverage on returns from an investment in our common stock
assuming various annual returns, net of expenses. The
calculations in the table below are hypothetical and actual
returns may be higher or lower than those appearing below. The
calculation assumes (i) $4,121.2 million in total
assets, (ii) an average cost of funds of 6.5%,
(iii) $1,274.2 million in debt outstanding and
(iv) $2,729.8 million of shareholders equity.
Assumed Return on Our Portfolio
(net of expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20% |
|
-10% |
|
-5% |
|
0% |
|
5% |
|
10% |
|
20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corresponding return to shareholder
|
|
|
-33.23% |
|
|
|
-18.13% |
|
|
|
-10.58% |
|
|
|
-3.03% |
|
|
|
4.51% |
|
|
|
12.06% |
|
|
|
27.16% |
|
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 or investors 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
March 31, 2006, our asset coverage for senior indebtedness
was 317%.
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
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 March 31, 2006, 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 net income by
approximately 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
12
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 eligibility for the tax benefits available to
regulated investment companies. 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 or other investors 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 debt securities or common stock.
Loss of regulated investment company tax treatment would
substantially reduce net assets and income available for debt
service and 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 debt service and distributions 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 on
amounts carried over and distributed to shareholders in the next
year equal to 4% of the amount by which 98% of our annual
taxable income exceeds the distributions from such income for
the current year.
There is a risk that our common stockholders 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, certain of our 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 the tax benefits available to us 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
13
the requirement to distribute at least 90% of our investment
company taxable income to obtain tax benefits 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.
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.
In November 2004, the SEC issued proposed rules to correct the
unintended consequence of the Federal Reserves 1998 margin
rule amendments of apparently limiting
14
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 currently 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 paid by
stockholders, 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:
|
|
|
|
|
price and volume fluctuations in the overall stock market from
time to time; |
|
|
|
significant volatility in the market price and trading volume of
securities of business development companies or other financial
services companies; |
|
|
|
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; |
|
|
|
changes in laws or regulatory policies or tax guidelines with
respect to business development companies or regulated
investment companies; |
|
|
|
actual or anticipated changes in our earnings or fluctuations in
our operating results or changes in the expectations of
securities analysts; |
|
|
|
general economic conditions and trends; |
|
|
|
loss of a major funding source; or |
|
|
|
departures of key personnel. |
The trading market or market value of our publicly issued
debt securities may be volatile. Upon issuance, our publicly
issued debt securities will not have an established trading
market. We cannot assure you that a trading market for our
publicly issued debt securities will ever develop or be
maintained if developed. In addition to our creditworthiness,
many factors may materially adversely affect the trading market
for, and market value of, our publicly issued debt securities.
These factors include, but are not limited to, the following:
|
|
|
|
|
the time remaining to the maturity of these debt securities; |
|
|
|
the outstanding principal amount of debt securities with terms
identical to these debt securities; |
|
|
|
the supply of debt securities trading in the secondary market,
if any; |
|
|
|
the redemption or repayment features, if any, of these debt
securities; |
15
|
|
|
|
|
the level, direction and volatility of market interest rates
generally; and |
|
|
|
market rates of interest higher or lower than rates borne by the
debt securities. |
You should also be aware that there may be a limited number of
buyers when you decide to sell your debt securities. This too
may materially adversely affect the market value of the debt
securities or the trading market for the debt securities.
Terms relating to redemption may materially adversely affect
your return on the debt securities. If your debt securities
are redeemable at our option, we may choose to redeem your debt
securities at times when prevailing interest rates are lower
than the interest rate paid on your debt securities. In
addition, if your debt securities are subject to mandatory
redemption, we may be required to redeem your debt securities
also at times when prevailing interest rates are lower than the
interest rate paid on your debt securities. In this
circumstance, you may not be able to reinvest the redemption
proceeds in a comparable security at an effective interest rate
as high as your debt securities being redeemed.
Our credit ratings may not reflect all risks of an investment
in the debt securities. Our credit ratings are an assessment
of our ability to pay our obligations. Consequently, real or
anticipated changes in our credit ratings will generally affect
the market value of the publicly issued debt securities. Our
credit ratings, however, may not reflect the potential impact of
risks related to market conditions generally or other factors
discussed above on the market value of or trading market for the
publicly issued debt securities.
16
RATIOS OF EARNINGS TO FIXED CHARGES
For the three months ended March 31, 2006, and the five
years ended December 31, 2005, the ratios of earnings to
fixed charges of the Company, computed as set forth below, were
as follows:
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Three Months |
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Ended March 31, |
|
Year Ended December 31, |
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2006(1) |
|
2005 |
|
2004 |
|
2003 |
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2002 |
|
2001 |
|
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|
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|
Earnings to Fixed Charges*
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|
5.4 |
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|
12.4 |
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|
4.3 |
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3.4 |
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4.2 |
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4.0 |
|
For purposes of computing the ratios of earnings to fixed
charges, earnings represent net increase in net assets resulting
from operations plus (or minus) income tax expense (benefit)
plus excise tax expense plus fixed charges. Fixed charges
include interest expense, a portion of rent expense and
preferred stock dividend expense. We have assumed that one-third
of the annual rent expense represents fixed charges.
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* |
Earnings include the net change in unrealized appreciation or
depreciation. Net change in unrealized appreciation or
depreciation can vary substantially from year to year. Excluding
the net change in unrealized appreciation or depreciation, the
earnings to fixed charges ratio would be 20.6 for the three
months ended March 31,
2006(1),
and 6.4, 5.2, 4.4, 4.2 and 3.7 for the five years ended
December 31, 2005, respectively. |
|
|
(1) |
The results for the three months ended March 31, 2006, are
not necessarily indicative of the operating results to be
expected for the full year. |
17
Disclosure Regarding Forward-Looking Statements
Information contained or incorporated by reference in this
prospectus and any prospectus supplement and pricing supplement,
if any, accompanying this prospectus contains
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 above in the Risk
Factors section. Other factors that could cause actual
results to differ materially include:
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|
changes in the economy and general economic conditions; |
|
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|
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. |
The matters described in Risk Factors and certain
other factors noted throughout this prospectus and any
prospectus supplement and pricing supplement, if any,
accompanying this prospectus and in any exhibits to the
registration statement of which this prospectus is a part,
constitute cautionary statements identifying important factors
with respect to any such
forward-looking
statements, including certain risks and uncertainties, that
could cause actual results to differ materially from those in
such forward-looking
statements.
Although we believe that the assumptions on which these
forward-looking statements are based are reasonable, any of
those assumptions could prove to be inaccurate, and as a result,
the forward-looking statements based on those assumptions also
could be incorrect. Important assumptions include our ability to
originate new investments, maintain certain margins and levels
of profitability, access the capital markets for debt and equity
capital, the ability to meet regulatory requirements and the
ability to maintain certain debt to asset ratios. In light of
these and other uncertainties, the inclusion of a projection or
forward-looking statement in this prospectus and any prospectus
supplement and pricing supplement, if any, accompanying this
prospectus should not be regarded as a representation by us that
our plans and objectives will be achieved. You should not place
undue reliance on these forward-looking statements, which apply
only as of the date of this prospectus and the date on the cover
of any such supplements.
18
USE OF PROCEEDS
We intend to use the net proceeds from selling debt securities
for general corporate purposes, which may include investing in
debt or equity securities in primarily privately negotiated
transactions, repayment of indebtedness, acquisitions and other
general corporate purposes. Because our primary business is to
provide long-term debt and equity capital to primarily
middle-market companies, we are continuously identifying,
reviewing and, to the extent consistent with our investment
objective, funding new investments. As a result, we typically
raise equity capital or issue debt as we deem appropriate to
fund such new investments.
We anticipate that substantially all of the net proceeds of any
offering of debt securities will be used as described above or
in any prospectus supplement and pricing supplement, if any,
accompanying this prospectus. Pending investment, we intend to
invest the net proceeds of any offering of debt securities in
time deposits, income-producing securities with maturities of
three months or less that are issued or guaranteed by the
federal government or an agency of the federal government, high
quality debt securities maturing in one year or less from the
time of investment or other qualifying investments. Our ability
to achieve our investment objective may be limited to the extent
that the net proceeds of any offering of debt securities,
pending full investment, are held in lower-yielding time
deposits and other short-term instruments.
19
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
Our common stock is traded on the New York Stock Exchange under
the symbol ALD. The following table lists the high
and low closing sales prices for our common stock, the closing
sales price as a percentage of net asset value (NAV) and
quarterly dividends per share. On June 20, 2006, the last
reported closing sale price of our common stock was
$29.41 per share.
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|
Closing Sales |
|
Premium |
|
Premium |
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|
Price |
|
of High |
|
of Low |
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|
|
|
Sales Price |
|
Sales Price |
|
Declared |
|
|
NAV(1) |
|
High |
|
Low |
|
to NAV(2) |
|
to NAV(2) |
|
Dividends |
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|
Year ending December 31, 2004
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
14.60 |
|
|
$ |
30.85 |
|
|
$ |
27.15 |
|
|
|
211 |
% |
|
|
186 |
% |
|
$ |
0.57 |
|
|
Second Quarter
|
|
$ |
14.77 |
|
|
$ |
30.25 |
|
|
$ |
23.06 |
|
|
|
205 |
% |
|
|
156 |
% |
|
$ |
0.57 |
|
|
Third Quarter
|
|
$ |
14.90 |
|
|
$ |
25.80 |
|
|
$ |
22.22 |
|
|
|
173 |
% |
|
|
149 |
% |
|
$ |
0.57 |
|
|
Fourth Quarter
|
|
$ |
14.87 |
|
|
$ |
28.47 |
|
|
$ |
24.46 |
|
|
|
191 |
% |
|
|
164 |
% |
|
$ |
0.57 |
|
|
Extra Dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.02 |
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
15.22 |
|
|
$ |
27.84 |
|
|
$ |
24.89 |
|
|
|
183 |
% |
|
|
164 |
% |
|
$ |
0.57 |
|
|
Second Quarter
|
|
$ |
17.01 |
|
|
$ |
29.29 |
|
|
$ |
25.83 |
|
|
|
172 |
% |
|
|
152 |
% |
|
$ |
0.57 |
|
|
Third Quarter
|
|
$ |
17.37 |
|
|
$ |
29.17 |
|
|
$ |
26.92 |
|
|
|
168 |
% |
|
|
155 |
% |
|
$ |
0.58 |
|
|
Fourth Quarter
|
|
$ |
19.17 |
|
|
$ |
30.80 |
|
|
$ |
26.11 |
|
|
|
161 |
% |
|
|
136 |
% |
|
$ |
0.58 |
|
|
Extra Dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.03 |
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
19.50 |
|
|
$ |
30.68 |
|
|
$ |
28.51 |
|
|
|
157 |
% |
|
|
146 |
% |
|
$ |
0.59 |
|
|
Second Quarter (through June 20, 2006)
|
|
|
* |
|
|
$ |
31.32 |
|
|
$ |
29.36 |
|
|
|
* |
|
|
|
* |
|
|
$ |
0.60 |
|
|
|
(1) |
Net asset value per share is determined as of the last day in
the relevant quarter and therefore may not reflect the net asset
value per share on the date of the high and low sales prices.
The net asset values shown are based on outstanding shares at
the end of each period. |
|
(2) |
Calculated as the respective high or low closing sales price
divided by NAV. |
|
|
* |
Not determinable at the time of filing. |
Our common stock continues to trade in excess of net asset
value. There can be no assurance, however, that our shares will
continue to trade at a premium to our net asset value.
We intend to pay quarterly dividends to shareholders of our
common stock. The amount of our quarterly dividends is
determined by our Board of Directors. Our Board of Directors has
established a dividend policy to review the dividend rate
quarterly, and may adjust the quarterly dividend rate throughout
the year. See Managements Discussion and Analysis of
Financial Condition and Results of Operations Debt
and Equity Capital and Tax Status. There can
be no assurance that we will achieve investment results or
maintain a tax status that will permit any particular level of
dividend payment. Certain of our credit facilities limit our
ability to declare dividends if we default under certain
provisions.
We maintain an opt in dividend reinvestment plan for
our common shareholders. As a result, if our Board of Directors
declares a dividend, then our shareholders will receive cash
dividends, unless they specifically opt in to the
dividend reinvestment plan to reinvest their dividends and
receive additional shares of common stock. See Dividend
Reinvestment Plan.
20
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section should be read in
conjunction with our Consolidated Financial Statements and the
Notes thereto. In addition, this prospectus 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 above in the Risk
Factors section. Other factors that could cause actual
results to differ materially include:
|
|
|
|
|
changes in the economy and general economic conditions; |
|
|
|
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.
21
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, which
included 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 real estate related 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 to
middle market U.S. companies 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. Our
investment objective is to achieve current income and capital
gains.
Our portfolio composition at March 31, 2006 and 2005, and
December 31, 2005, 2004, and 2003, was as follows:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
96 |
% |
|
|
74 |
% |
|
|
96 |
% |
|
|
76 |
% |
|
|
74 |
% |
Commercial real estate finance
|
|
|
4 |
% |
|
|
26 |
% |
|
|
4 |
% |
|
|
24 |
% |
|
|
26 |
% |
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, operating
expenses and income taxes including excise tax. 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, interest rates on the types of loans we
make, 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.
22
PORTFOLIO AND INVESTMENT ACTIVITY
The total portfolio at value, investment activity, and the yield
on interest-bearing investments at and for the three months
ended March 31, 2006 and 2005, and at and for the years
ended December 31, 2005, 2004, and 2003, were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
|
|
|
Three Months |
|
At and for the |
|
|
Ended March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
Portfolio at value
|
|
$ |
3,691.0 |
|
|
$ |
3,195.0 |
|
|
$ |
3,606.4 |
|
|
$ |
3,013.4 |
|
|
$ |
2,584.6 |
|
Investments
funded(1)
|
|
$ |
797.9 |
|
|
$ |
265.6 |
|
|
$ |
1,675.8 |
|
|
$ |
1,524.5 |
|
|
$ |
931.5 |
|
Change in accrued or reinvested interest and dividends
(2)
|
|
$ |
(2.1 |
) |
|
$ |
10.5 |
|
|
$ |
6.6 |
|
|
$ |
52.2 |
|
|
$ |
45.0 |
|
Principal collections related to investment repayments
or sales
|
|
$ |
340.4 |
|
|
$ |
158.3 |
|
|
$ |
1,503.4 |
|
|
$ |
909.2 |
|
|
$ |
788.3 |
|
Yield on interest-bearing
investments(3)
|
|
|
12.3 |
% |
|
|
13.6 |
% |
|
|
12.8 |
% |
|
|
14.0 |
% |
|
|
14.7 |
% |
|
|
(1) |
Investments funded for the three months ended March 31,
2006, included a $150 million subordinated debt investment
in Advantage Sales & Marketing, Inc. received in
conjunction with the sale of Advantage as discussed below. |
|
(2) |
Includes a change in accrued or reinvested interest of
$1.1 million for the three months ended March 31,
2006, related to our investments in money market securities. |
|
(3) |
The weighted average yield on interest-bearing investments is
computed as the (a) annual stated interest plus the annual
amortization of loan origination fees, original issue discount,
and market discount on accruing interest-bearing investments
less the annual amortization of loan origination costs, divided
by (b) total interest-bearing investments at value. The
weighted average yield is computed as of the balance sheet date. |
Private Finance
The private finance portfolio at value, investment activity, and
the yield on loans and debt securities at and for the three
months ended March 31, 2006 and 2005, and at and for the
years ended December 31, 2005, 2004, and 2003, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
|
|
|
Three Months Ended |
|
At and for the |
|
|
March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
Yield(2) |
|
Value |
|
Yield(2) |
|
Value |
|
Yield(2) |
|
Value |
|
Yield(2) |
|
Value |
|
Yield(2) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
420.1 |
|
|
|
9.3 |
% |
|
$ |
253.5 |
|
|
|
8.6 |
% |
|
$ |
239.8 |
|
|
|
9.5 |
% |
|
$ |
234.6 |
|
|
|
8.5 |
% |
|
$ |
165.5 |
|
|
|
9.2 |
% |
|
|
Unitranche debt
|
|
|
362.7 |
|
|
|
11.1 |
% |
|
|
44.2 |
|
|
|
14.8 |
% |
|
|
294.2 |
|
|
|
11.4 |
% |
|
|
43.9 |
|
|
|
14.8 |
% |
|
|
24.9 |
|
|
|
15.6 |
% |
|
|
Subordinated debt
|
|
|
1,747.2 |
|
|
|
13.6 |
% |
|
|
1,258.7 |
|
|
|
14.9 |
% |
|
|
1,560.9 |
|
|
|
13.8 |
% |
|
|
1,324.4 |
|
|
|
14.9 |
% |
|
|
1,024.5 |
|
|
|
16.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
$ |
2,530.0 |
|
|
|
12.5 |
% |
|
$ |
1,556.4 |
|
|
|
13.8 |
% |
|
$ |
2,094.9 |
|
|
|
13.0 |
% |
|
$ |
1,602.9 |
|
|
|
13.9 |
% |
|
$ |
1,214.9 |
|
|
|
15.0 |
% |
|
Equity securities
|
|
|
1,031.6 |
|
|
|
|
|
|
|
822.1 |
|
|
|
|
|
|
|
1,384.4 |
|
|
|
|
|
|
|
699.2 |
|
|
|
|
|
|
|
687.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio
|
|
$ |
3,561.6 |
|
|
|
|
|
|
$ |
2,378.5 |
|
|
|
|
|
|
$ |
3,479.3 |
|
|
|
|
|
|
$ |
2,302.1 |
|
|
|
|
|
|
$ |
1,902.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
funded(1)
|
|
$ |
795.9 |
|
|
|
|
|
|
$ |
168.2 |
|
|
|
|
|
|
$ |
1,462.3 |
|
|
|
|
|
|
$ |
1,140.8 |
|
|
|
|
|
|
$ |
498.0 |
|
|
|
|
|
Change in accrued or reinvested interest and dividends
|
|
$ |
(4.2 |
) |
|
|
|
|
|
$ |
7.9 |
|
|
|
|
|
|
$ |
24.6 |
|
|
|
|
|
|
$ |
45.6 |
|
|
|
|
|
|
$ |
41.8 |
|
|
|
|
|
Principal collections related to investment repayments or sales
|
|
$ |
336.6 |
|
|
|
|
|
|
$ |
151.2 |
|
|
|
|
|
|
$ |
703.9 |
|
|
|
|
|
|
$ |
551.9 |
|
|
|
|
|
|
$ |
318.6 |
|
|
|
|
|
|
|
(1) |
Investments funded for the three months ended March 31,
2006, included a $150 million subordinated debt investment
in Advantage Sales & Marketing, Inc. received in
conjunction with the sale of Advantage 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. |
23
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,
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 and equity
capital upon the closing of certain buyout transactions, which
may include investments in lower-yielding senior debt.
Subsequent to the closing, the portfolio company may refinance
all or a portion of the lower-yielding senior debt, which would
reduce our investment. Senior loans at March 31, 2006,
included approximately $200 million of senior loans that
are in various stages of being refinanced. Repayments include
repayments of senior debt funded by us that was subsequently
refinanced or repaid by the portfolio companies.
We intend to take a balanced approach to private equity
investing that emphasizes a complementary mix of debt
investments and buyout investments. The combination of these two
types of investments provides current interest and related
portfolio income and the potential for future capital gains.
Recently, we believe many junior debt financing opportunities in
the market have become less attractive from a risk/return
perspective. To address the current market, our strategy is to
focus on buyout and recapitalization transactions where we can
manage risk through the structure and terms of our debt and
equity investments and where we can potentially realize more
attractive total returns from both current interest and fee
income and future capital gains. We are also focusing our debt
investing on smaller middle market companies where we can
provide both senior and subordinated debt or unitranche debt,
where our current yield may be lower than traditional
subordinated debt. We believe that providing both senior and
subordinated debt or unitranche debt provides greater protection
in the capital structures of our portfolio companies.
Investments Funded. Investments funded and the
weighted average yield on investments funded at and for the
three months ended March 31, 2006, and at and for the years
ended December 31, 2005, 2004, and 2003, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2006 |
|
|
|
|
|
Debt Investments |
|
Buyout Investments |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
85.0 |
|
|
|
9.1 |
% |
|
$ |
117.8 |
|
|
|
8.9 |
% |
|
$ |
202.8 |
|
|
|
9.0 |
% |
|
Unitranche
debt(2)
|
|
|
75.0 |
|
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
75.0 |
|
|
|
10.6 |
% |
|
Subordinated
debt(3)
|
|
|
279.3 |
|
|
|
12.5 |
% |
|
|
145.4 |
|
|
|
13.9 |
% |
|
|
424.7 |
|
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
|
439.3 |
|
|
|
11.5 |
% |
|
|
263.2 |
|
|
|
11.6 |
% |
|
|
702.5 |
|
|
|
11.6 |
% |
Equity
|
|
|
24.6 |
|
|
|
|
|
|
|
68.8 |
|
|
|
|
|
|
|
93.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
463.9 |
|
|
|
|
|
|
$ |
332.0 |
|
|
|
|
|
|
$ |
795.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Investments Funded |
|
|
|
|
|
Debt Investments |
|
Buyout Investments |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
loans(4)
|
|
$ |
76.8 |
|
|
|
10.0 |
% |
|
$ |
250.2 |
|
|
|
6.4 |
% |
|
$ |
327.0 |
|
|
|
7.2 |
% |
|
Unitranche
debt(2)
|
|
|
259.5 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
259.5 |
|
|
|
10.5 |
% |
|
Subordinated debt
|
|
|
296.9 |
|
|
|
12.3 |
% |
|
|
330.9 |
|
|
|
12.5 |
% |
|
|
627.8 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
|
633.2 |
|
|
|
11.3 |
% |
|
|
581.1 |
|
|
|
9.9 |
% |
|
|
1,214.3 |
|
|
|
10.6 |
% |
Equity
|
|
|
82.5 |
|
|
|
|
|
|
|
165.5 |
|
|
|
|
|
|
|
248.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
715.7 |
|
|
|
|
|
|
$ |
746.6 |
|
|
|
|
|
|
$ |
1,462.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Investments Funded |
|
|
|
|
|
Debt Investments |
|
Buyout Investments |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
25.1 |
|
|
|
9.1 |
% |
|
$ |
140.8 |
|
|
|
7.2 |
% |
|
$ |
165.9 |
|
|
|
7.5 |
% |
|
Unitranche
debt(2)
|
|
|
18.9 |
|
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
18.9 |
|
|
|
13.0 |
% |
|
Subordinated debt
|
|
|
396.4 |
|
|
|
13.4 |
% |
|
|
320.1 |
|
|
|
15.5 |
% |
|
|
716.5 |
|
|
|
14.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
|
440.4 |
|
|
|
13.2 |
% |
|
|
460.9 |
|
|
|
13.0 |
% |
|
|
901.3 |
|
|
|
13.1 |
% |
Equity
|
|
|
72.3 |
|
|
|
|
|
|
|
167.2 |
|
|
|
|
|
|
|
239.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
512.7 |
|
|
|
|
|
|
$ |
628.1 |
|
|
|
|
|
|
$ |
1,140.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Investments Funded |
|
|
|
|
|
Debt Investments |
|
Buyout Investments |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
|
Amount |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
44.6 |
|
|
|
9.4 |
% |
|
$ |
28.6 |
|
|
|
2.6 |
% |
|
$ |
73.2 |
|
|
|
6.7 |
% |
|
Unitranche
debt(2)
|
|
|
25.0 |
|
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
|
|
25.0 |
|
|
|
15.5 |
% |
|
Subordinated debt
|
|
|
354.8 |
|
|
|
14.6 |
% |
|
|
1.2 |
|
|
|
25.0 |
% |
|
|
356.0 |
|
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt securities
|
|
|
424.4 |
|
|
|
14.1 |
% |
|
|
29.8 |
|
|
|
3.5 |
% |
|
|
454.2 |
|
|
|
13.4 |
% |
Equity
|
|
|
15.6 |
|
|
|
|
|
|
|
28.2 |
|
|
|
|
|
|
|
43.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
440.0 |
|
|
|
|
|
|
$ |
58.0 |
|
|
|
|
|
|
$ |
498.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The weighted average yield on interest-bearing investments is
computed as the (a) annual stated interest on accruing
interest-bearing investments, divided by (b) total
interest-bearing investments funded. |
|
(2) |
Unitranche debt is a single debt investment that is a blend of
senior and subordinated debt. The yield on a unitranche
investment reflects the blended yield of senior and subordinated
debt combined. |
|
(3) |
Debt investments for the three months ended March 31, 2006,
included a $150 million, 12.0% subordinated debt investment
in Advantage Sales & Marketing, Inc. received in conjunction
with the sale of Advantage as discussed below. |
|
(4) |
Buyout senior loans funded include $174.9 million which was
repaid during the year. |
In April 2006, we funded private finance investments totaling
$254.9 million.
25
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.
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 2005 and
has continued into 2006, which has resulted in an increase in
private finance investment opportunities, as well as increased
repayments. We continue to have an active pipeline of new
investments under consideration. We believe that merger and
acquisition activity for middle market companies will remain
strong in 2006.
Portfolio Yield. The yield on the private finance
loans and debt securities was 12.5% at March 31, 2006,
13.8% at March 31, 2005, and 13.0%, 13.9%, and 15.0% at
December 31, 2005, 2004, and 2003, respectively. 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 funded, the yield on
loans and debt securities repaid, the amount of loans and debt
securities for which interest is not accruing and the amount of
lower-yielding senior or unitranche debt in the portfolio at the
end of the period. The yield on the private finance portfolio
has declined partly due to our strategy to pursue more buyout
and recapitalization transactions, which may include investing
in lower-yielding senior debt, as well as pursue unitranche
investments.
Outstanding Investment Commitments. At
March 31, 2006, we had outstanding private finance
investment commitments totaling $316.3 million, including
the following:
|
|
|
|
|
$33.3 million in the form of debt to Promo Works, LLC. |
|
|
|
$30.0 million in the form of debt to Business Loan Express,
LLC. |
|
|
|
$29.9 million in the form of equity to eleven private
equity and venture capital funds. |
|
|
|
$14.0 million in the form of debt to S.B. Restaurant
Company. |
|
|
|
$14.0 million in the form of debt to Integrity Interactive
Corp. |
|
|
|
$9.6 million in the form of debt to 3SI Security Systems
Inc. |
|
|
|
$8.3 million in the form of debt to Hot Stuff Foods, LLC. |
|
|
|
$7.8 million in the form of debt to Mercury Air Centers,
Inc. |
|
|
|
$6.5 million in co-investment commitments to Pine Creek
Equity Partners, LLC. |
|
|
|
We have various commitments to Callidus Capital Corporation
(Callidus), which owns 80% (subject to dilution) of Callidus
Capital Management, LLC, an asset |
26
|
|
|
|
|
management company that
structures and manages collateralized debt obligations (CDOs),
collateralized loan obligations (CLOs), and other related
investments. Our commitment to Callidus consisted of the
following at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Committed |
|
Amount |
|
Available |
|
|
Amount |
|
Drawn |
|
to be Drawn |
($ in millions) |
|
|
|
|
|
|
Subordinated debt to support warehouse facilities &
warehousing
activities(1)
|
|
$ |
40.0 |
|
|
$ |
|
|
|
$ |
40.0 |
|
Revolving line of credit facility to support warehousing
activities(2)
|
|
|
50.0 |
|
|
|
3.7 |
|
|
|
46.3 |
|
Revolving line of credit for working capital
|
|
|
4.0 |
|
|
|
3.8 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
94.0 |
|
|
$ |
7.5 |
|
|
$ |
86.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Callidus has a secured warehouse credit facilities with a third
party for up to $400 million. The facility is used
primarily to finance the acquisition of loans pending
securitization through a CDO or CLO. In conjunction with this
warehouse credit facility, we have agreed to designate our
$40 million subordinated debt commitment for Callidus to
draw upon to provide first loss capital as needed to support the
warehouse facility. |
|
(2) |
This facility supports Callidus purchase of middle market
senior loans pending the sale of such loans to its warehouse
credit facilities. |
|
|
|
In addition, at March 31, 2006, we had a commitment to
Callidus to purchase preferred equity in future CLO transactions
of $32.4 million. |
In addition to these outstanding investment commitments at
March 31, 2006, 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 $184.7 million. See Financial
Condition, Liquidity and Capital Resources.
Our largest investment at value at March 31, 2006, was in
Business Loan Express, LLC (BLX) and our largest investments at
value at December 31, 2005, were in Advantage Sales &
Marketing, Inc. and BLX. See Results of Operations
for a discussion of the net change in unrealized appreciation or
depreciation related to these investments.
Business Loan Express,
LLC. At March 31,
2006, our investment in BLX totaled $291.3 million at cost
and $326.2 million at value, or 7.9% of our total assets,
which included unrealized appreciation of $35.0 million. At
December 31, 2005, our investment in BLX totaled
$299.4 million at cost and $357.1 million at value, or
8.9% of our total assets, which included unrealized appreciation
of $57.7 million. We acquired BLX in 2000.
Total interest and related portfolio income earned from the
Companys investment in BLX for the three months ended
March 31, 2006 and 2005, and for the years ended
December 31, 2005, 2004, and 2003, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended March 31, |
|
Year Ended December 31, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
3.9 |
|
|
$ |
3.4 |
|
|
$ |
14.3 |
|
|
$ |
23.2 |
|
|
$ |
21.9 |
|
Dividend income
|
|
|
|
|
|
|
2.0 |
|
|
|
14.0 |
|
|
|
14.8 |
|
|
|
7.8 |
|
Loan prepayment premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Fees and other income
|
|
|
2.2 |
|
|
|
2.4 |
|
|
|
9.2 |
|
|
|
12.0 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6.1 |
|
|
$ |
7.8 |
|
|
$ |
37.5 |
|
|
$ |
50.0 |
|
|
$ |
46.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Interest and dividend income from BLX for the three months ended
March 31, 2006 and 2005, and for the years ended
December 31, 2005, 2004, and 2003, included interest and
dividend income of $1.8 million, $1.6 million,
$8.9 million, $25.4 million, and $17.5 million,
respectively, which 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 and other assets at March 31, 2006, included
accrued interest and fees due from BLX totaling
$3.4 million, of which $2.2 million was paid in cash
in the second quarter of 2006.
Net change in unrealized appreciation or depreciation included a
net decrease in unrealized appreciation on our investment in BLX
of $22.7 million and $6.3 million for the
three months ended March 31, 2006 and 2005,
respectively. Net change in unrealized appreciation or
depreciation included a net increase in unrealized appreciation
on our investment in BLX of $2.9 million for the year ended
December 31, 2005, a net decrease in unrealized
appreciation of $32.3 million for the year ended
December 31, 2004, and a net increase in unrealized
appreciation of $51.7 million for the year ended
December 31, 2003. See Results of Operations
for a discussion of the net change in unrealized appreciation or
depreciation related to this investment.
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 and
small investment real estate loans. 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.
We had a commitment to BLX of $30.0 million in the form of
a subordinated revolving credit facility to provide working
capital to the company that expired on April 30, 2006.
There were no amounts outstanding under this facility at
March 31, 2006.
At December 31, 2005, BLX had a three-year
$275.0 million revolving credit facility provided by third
party lenders that was scheduled to mature in January 2007. As
the controlling equity owner in BLX, we had 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 December 31, 2005, the principal amount
of loans outstanding on the revolving credit facility was
$228.2 million and letters of credit issued under the
facility were $41.7 million. The total obligation
guaranteed by us at December 31, 2005, was
$135.4 million.
28
On March 17, 2006, BLX closed on a new three-year
$500.0 million revolving credit facility that matures in
March 2009, which replaced the existing facility. The revolving
credit facility may be expanded through new or additional
commitments up to $600.0 million at BLXs option. This
new facility provides for a sub-facility for the issuance of
letters of credit for up to an amount equal to 25% of the
committed facility. We have provided an unconditional guaranty
to these 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 this facility. At March 31, 2006, the
principal amount outstanding on the revolving credit facility
was $240.2 million and letters of credit issued under the
facility were $41.7 million. The total obligation
guaranteed by us at March 31, 2006, was
$141.1 million. This guaranty can be called by the lenders
only in the event of a default under the BLX credit facility,
which includes certain defaults under our revolving credit
facility. BLX was in compliance with the terms of this facility
at March 31, 2006. At March 31, 2006, we had also
provided four standby letters of credit totaling
$34.1 million in connection with four term securitization
transactions completed by BLX.
Advantage Sales & Marketing,
Inc. At December 31,
2005, our investment in Advantage totaled $257.7 million at
cost and $660.4 million at value, or 16.4% of our total
assets, which included unrealized appreciation of
$402.7 million. We completed the purchase of a majority
ownership in Advantage in June 2004.
On March 29, 2006, we sold our majority equity interest in
Advantage. We were repaid our $184 million in subordinated
debt outstanding and realized a gain on our equity investment
sold of $433.1 million, subject to post-closing
adjustments. As consideration for the common stock sold in the
transaction, we received a $150 million subordinated note,
with the balance of the consideration paid in cash.
Approximately $34 million of our cash proceeds from the
sale of the common stock have been held in escrow, subject to
certain holdback provisions. In addition, there is potential for
us to receive additional consideration through an earn-out
payment that would be based on Advantages 2006 audited
results. Our realized gain of $433.1 million excludes any
earn-out amounts. For tax purposes, the receipt of the
$150 million subordinated note as part of our consideration
for the common stock sold will allow us, through installment
treatment, to defer the recognition of taxable income for a
portion of our realized gain until the note is collected. In
connection with the transaction, we retained an equity
investment in the business valued at $15 million as a
minority shareholder.
Total interest and related portfolio income earned from our
investment in Advantage while we held a majority equity interest
for the three months ended March 31, 2006 and 2005,
and for the years ended December 31, 2005 and 2004, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended |
|
Year Ended |
|
|
March 31, |
|
December 31, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2005 |
|
2004 |
($ in millions) |
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
7.3 |
|
|
$ |
7.7 |
|
|
$ |
30.9 |
|
|
$ |
15.5 |
|
Loan prepayment premiums
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and other income
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
6.5 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
14.1 |
|
|
$ |
9.2 |
|
|
$ |
37.4 |
|
|
$ |
21.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
In addition, we earned structuring fees of $2.3 million on
our new $150 million subordinated debt investment in
Advantage upon the closing of the sale transaction.
After the completion of the sale transaction, our investment in
Advantage at March 31, 2006, which was composed of
subordinated debt and a minority equity interest, totaled
$151.3 million at cost and $164.3 million at value,
which included unrealized appreciation of $13.0 million.
Subsequent to the completion of the sale transaction, we
estimate that our interest income from our subordinated debt
investment in Advantage will be approximately $4.5 million
per quarter.
Advantage is a 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.
STS Operating, Inc. On May 1, 2006, we
announced the completion of the sale of STS Operating, Inc.
(STS). We were repaid our $6.8 million in subordinated debt
outstanding and we realized a gain on the sale of our common
stock in STS of approximately $94 million, subject to
post-closing adjustments. The cost basis of our equity was
$3.5 million. As part of the consideration for the sale of
our equity, we received a $30 million subordinated note.
Approximately $10.7 million of our proceeds are subject to
certain holdback provisions and post-closing adjustments. For
tax purposes, the receipt of the $30 million subordinated
note as part of our consideration for the common stock sold will
allow us, through installment treatment, to defer the
recognition of taxable income for a portion of our realized gain
until the note is collected.
The Hillman Companies, Inc. 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 $150.3 million on the transaction.
30
Commercial Real Estate Finance
The commercial real estate finance portfolio at value,
investment activity, and the yield on interest-bearing
investments at and for the three months ended March 31,
2006 and 2005, and at and for the years ended December 31,
2005, 2004, and 2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
|
|
|
Three Months Ended March 31, |
|
At and for the Years Ended December 31, |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds
|
|
$ |
|
|
|
|
|
|
|
$ |
466.1 |
|
|
|
13.0% |
|
|
$ |
|
|
|
|
|
|
|
$ |
373.8 |
|
|
|
14.6% |
|
|
$ |
394.0 |
|
|
|
14.1% |
|
|
CDO bonds and preferred shares
|
|
|
|
|
|
|
|
|
|
|
227.1 |
|
|
|
15.8% |
|
|
|
|
|
|
|
|
|
|
|
212.6 |
|
|
|
16.8% |
|
|
|
186.6 |
|
|
|
16.7% |
|
|
Commercial mortgage loans
|
|
|
102.7 |
|
|
|
7.6% |
|
|
|
89.7 |
|
|
|
6.4% |
|
|
|
102.6 |
|
|
|
7.6% |
|
|
|
95.0 |
|
|
|
6.8% |
|
|
|
83.6 |
|
|
|
8.6% |
|
|
Real estate owned
|
|
|
15.0 |
|
|
|
|
|
|
|
18.4 |
|
|
|
|
|
|
|
13.9 |
|
|
|
|
|
|
|
16.9 |
|
|
|
|
|
|
|
12.8 |
|
|
|
|
|
|
Equity interests
|
|
|
11.7 |
|
|
|
|
|
|
|
15.2 |
|
|
|
|
|
|
|
10.6 |
|
|
|
|
|
|
|
13.0 |
|
|
|
|
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio
|
|
$ |
129.4 |
|
|
|
|
|
|
$ |
816.5 |
|
|
|
|
|
|
$ |
127.1 |
|
|
|
|
|
|
$ |
711.3 |
|
|
|
|
|
|
$ |
681.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments funded
|
|
$ |
2.0 |
|
|
|
|
|
|
$ |
97.4 |
|
|
|
|
|
|
$ |
213.5 |
|
|
|
|
|
|
$ |
383.7 |
|
|
|
|
|
|
$ |
433.5 |
|
|
|
|
|
Change in accrued or reinvested interest
(2)
|
|
$ |
1.0 |
|
|
|
|
|
|
$ |
2.6 |
|
|
|
|
|
|
$ |
(18.0 |
) |
|
|
|
|
|
$ |
6.6 |
|
|
|
|
|
|
$ |
3.2 |
|
|
|
|
|
Principal collections related to investment repayments or
sales(2)
|
|
$ |
3.8 |
|
|
|
|
|
|
$ |
7.1 |
|
|
|
|
|
|
$ |
799.5 |
|
|
|
|
|
|
$ |
357.3 |
|
|
|
|
|
|
$ |
469.7 |
|
|
|
|
|
|
|
(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. |
|
(2) |
Principal collections related to investment repayments or sales
for the year ended December 31, 2005, included
$718.1 million related to the sale of our CMBS and CDO
portfolio in May 2005. Change in accrued or reinvested interest
for the year ended December 31, 2005, included the
collection of $21.7 million related to the sale of this
portfolio. |
Our commercial real estate investments funded for the three
months ended March 31, 2006, and for the years ended
December 31, 2005, 2004, and 2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face |
|
|
|
Amount |
|
|
Amount |
|
Discount |
|
Funded |
($ in millions) |
|
|
|
|
|
|
For the Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
$ |
0.6 |
|
|
$ |
|
|
|
$ |
0.6 |
|
Equity interests
|
|
|
1.4 |
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2.0 |
|
|
$ |
|
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds (4 new
issuances)(2)
|
|
$ |
211.5 |
|
|
$ |
(90.5 |
) |
|
$ |
121.0 |
|
Commercial mortgage loans
|
|
|
88.5 |
|
|
|
(0.8 |
) |
|
|
87.7 |
|
Equity interests
|
|
|
4.8 |
|
|
|
|
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
304.8 |
|
|
$ |
(91.3 |
) |
|
$ |
213.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face |
|
|
|
Amount |
|
|
Amount |
|
Discount |
|
Funded |
($ in millions) |
|
|
|
|
|
|
For the Year Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds (15 new
issuances(1))
|
|
$ |
508.5 |
|
|
$ |
(225.9 |
) |
|
$ |
282.6 |
|
CDO bonds and preferred shares (3 issuances)
|
|
|
145.8 |
|
|
|
(0.4 |
) |
|
|
145.4 |
|
Commercial mortgage loans
|
|
|
3.0 |
|
|
|
|
|
|
|
3.0 |
|
Equity interests
|
|
|
2.5 |
|
|
|
|
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
659.8 |
|
|
$ |
(226.3 |
) |
|
$ |
433.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
CMBS investments also include investments in issuances in which
we have previously purchased CMBS bonds. |
(2) |
The CMBS bonds invested in during the year ended
December 31, 2005, were sold on May 3, 2005. |
At March 31, 2006, we had outstanding funding commitments
related to commercial mortgage loans and equity interests of
$13.6 million and commitments in the form of standby
letters of credit and guarantees related to equity interests of
$7.0 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, in the second quarter of 2005. 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 was 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
$244 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, or through May 2008, 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
32
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 year ended December 31, 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 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
$17.5 million, $17.7 million and $38.2 million at
March 31, 2006, and December 31, 2005 and 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 $17.5 million, $17.7 million and
$38.2 million at March 31, 2006, and December 31,
2005 and 2004, respectively. The hedge at March 31, 2006,
and December 31, 2005, related to commercial mortgage loans
and the hedge at December 31, 2004, related primarily to
CMBS and CDO bonds. The amount of the hedge will vary from
period to period depending upon the amount of commercial real
estate assets that we own and have hedged as of the balance
sheet date.
Accrued Interest and Dividends Receivable
Accrued interest and dividends receivable as of March 31,
2006, and December 31, 2005 and 2004, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
($ in millions) |
|
|
|
|
|
|
Private finance
|
|
$ |
47.5 |
|
|
$ |
58.7 |
|
|
$ |
59.8 |
|
Commercial real estate finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS and CDO bonds
|
|
|
|
|
|
|
|
|
|
|
18.9 |
|
|
Commercial mortgage loans and other
|
|
|
2.5 |
|
|
|
1.7 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
50.0 |
|
|
$ |
60.4 |
|
|
$ |
79.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued interest and dividends receivable declined from
December 31, 2004, to December 31, 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.
33
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.
At March 31, 2006, and December 31, 2005 and 2004, our
portfolio was graded as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Portfolio |
|
Percentage of |
|
Portfolio |
|
Percentage of |
|
Portfolio |
|
Percentage of |
Grade |
|
at Value |
|
Total Portfolio |
|
at Value |
|
Total Portfolio |
|
at Value(1) |
|
Total Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$ |
1,287.9 |
|
|
|
34.9 |
% |
|
$ |
1,643.0 |
|
|
|
45.6 |
% |
|
$ |
952.5 |
|
|
|
31.6 |
% |
2
|
|
|
2,183.2 |
|
|
|
59.2 |
|
|
|
1,730.8 |
|
|
|
48.0 |
|
|
|
1,850.5 |
|
|
|
61.4 |
|
3
|
|
|
89.1 |
|
|
|
2.4 |
|
|
|
149.1 |
|
|
|
4.1 |
|
|
|
121.2 |
|
|
|
4.0 |
|
4
|
|
|
64.5 |
|
|
|
1.7 |
|
|
|
26.5 |
|
|
|
0.7 |
|
|
|
11.7 |
|
|
|
0.4 |
|
5
|
|
|
66.3 |
|
|
|
1.8 |
|
|
|
57.0 |
|
|
|
1.6 |
|
|
|
77.5 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,691.0 |
|
|
|
100.0 |
% |
|
$ |
3,606.4 |
|
|
|
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. |
|
Grade 1 portfolio assets decreased from $1.6 billion
at December 31, 2005, to $1.3 billion at
March 31, 2006, primarily as a result of the sale of
Advantage Sales & Marketing, Inc. (Advantage) on
March 29, 2006. Advantage had a value of
$660.4 million, including $402.7 million of unrealized
appreciation, at December 31, 2005. Our investment in
Advantage after the sale transaction was $164.3 million at
value, including $13.0 million of unrealized appreciation,
at March 31, 2006, and was included in Grade 1 assets. See
Portfolio and Investment Activity above
for further discussion. Grade 2 portfolio assets increased from
$1.7 billion at December 31, 2005, to
$2.2 billion at March 31, 2006, primarily as a result
of the level of new investments made during the first quarter of
2006, as new investments generally enter the portfolio as Grade
2 assets.
Grade 1 portfolio assets increased from $952.5 million
at December 31, 2004, to $1.6 billion at
December 31, 2005, primarily as a result of the
appreciation in value of our investment in Advantage Sales &
Marketing, Inc. (Advantage) as well as certain other companies.
Advantage had a value of $660.4 million, including
$402.7 million of unrealized appreciation, at
December 31, 2005, as compared to a value of
$283.0 million, including $24.3 million of unrealized
appreciation, at December 31, 2004. See further discussion
of the valuation of Advantage below. As noted above, in March
2006, we sold our majority interest in Advantage.
Total Grade 3, 4 and 5 portfolio assets were $219.9
million, $232.6 million, and $210.4 million,
respectively, or were 5.9%, 6.4%, and 7.0%, respectively, of the
total portfolio at value at March 31, 2006, and
December 31, 2005 and 2004.
Grade 4 and 5 assets include loans, debt securities, and
equity securities. We expect that a number of portfolio
companies will be in the Grades 4 or 5 categories from time
to time. Part of the private equity business is working with
troubled portfolio companies to improve their businesses and
protect our investment. The number of portfolio companies and
related investment amount included in Grade 4 and 5 may
fluctuate from period to period. We continue to follow our
historical practice of working with such companies in order to
recover the maximum amount of our investment.
34
Loans and Debt Securities on Non-Accrual Status.
At March 31, 2006, and December 31, 2005 and
2004, loans and debt securities at value not accruing interest
for the total investment portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
($ in millions) |
|
|
|
|
|
|
Loans and debt securities in workout status (classified as
Grade 4 or
5)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
29.0 |
|
|
$ |
15.6 |
|
|
$ |
34.4 |
|
|
|
Companies 5% to 25% owned
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
Companies less than 5% owned
|
|
|
51.8 |
|
|
|
11.4 |
|
|
|
16.5 |
|
|
Commercial real estate finance
|
|
|
12.6 |
|
|
|
12.9 |
|
|
|
5.6 |
|
Loans and debt securities not in workout status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
40.6 |
|
|
|
58.0 |
|
|
|
29.4 |
|
|
|
Companies 5% to 25% owned
|
|
|
5.1 |
|
|
|
0.5 |
|
|
|
0.7 |
|
|
|
Companies less than 5% owned
|
|
|
4.4 |
|
|
|
49.5 |
|
|
|
15.8 |
|
|
Commercial real estate finance
|
|
|
8.6 |
|
|
|
7.9 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
157.7 |
|
|
$ |
155.8 |
|
|
$ |
114.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total portfolio
|
|
|
4.3% |
|
|
|
4.3% |
|
|
|
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 March 31, 2006, and
December 31, 2005 and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
Private finance
|
|
$ |
82.6 |
|
|
$ |
74.6 |
|
|
$ |
73.5 |
|
Commercial real estate finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS bonds
|
|
|
|
|
|
|
|
|
|
|
49.0 |
|
|
Commercial mortgage loans
|
|
|
6.0 |
|
|
|
6.1 |
|
|
|
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
88.6 |
|
|
$ |
80.7 |
|
|
$ |
132.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total portfolio
|
|
|
2.4% |
|
|
|
2.2% |
|
|
|
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.
Our loans and debt securities on non-accrual status increased by
$40.9 million during 2005. This net increase during the
year resulted primarily from the move of two loans to
non-accrual status totaling $46.7 million at value at
December 31, 2005, offset by a net decrease in the value of
loans that were on non-accrual status at both December 31,
2005 and 2004.
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
$88.6 million, $60.7 million and $43.9 million at
March 31, 2006, and December 31, 2005 and 2004,
respectively.
35
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 2006 and
2005
The following table summarizes the Companys operating
results for the three months ended March 31, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
|
|
|
Ended March 31, |
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
2006 |
|
2005 |
|
Change |
|
Change |
($ in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
Interest and Related Portfolio Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
$ |
88,881 |
|
|
$ |
84,945 |
|
|
$ |
3,936 |
|
|
|
5 |
% |
|
Loan prepayment premiums
|
|
|
5,286 |
|
|
|
1,677 |
|
|
|
3,609 |
|
|
|
215 |
% |
|
Fees and other income
|
|
|
16,844 |
|
|
|
8,297 |
|
|
|
8,547 |
|
|
|
103 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
111,011 |
|
|
|
94,919 |
|
|
|
16,092 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
24,300 |
|
|
|
20,225 |
|
|
|
4,075 |
|
|
|
20 |
% |
|
Employee
|
|
|
21,428 |
|
|
|
15,456 |
|
|
|
5,972 |
|
|
|
39 |
% |
|
Stock options
|
|
|
3,606 |
|
|
|
|
|
|
|
3,606 |
|
|
|
100 |
% |
|
Administrative
|
|
|
11,519 |
|
|
|
20,754 |
|
|
|
(9,235 |
) |
|
|
(44 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,853 |
|
|
|
56,435 |
|
|
|
4,418 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
50,158 |
|
|
|
38,484 |
|
|
|
11,674 |
|
|
|
30 |
% |
Income tax expense (benefit), including excise tax
|
|
|
8,858 |
|
|
|
(268 |
) |
|
|
9,126 |
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
41,300 |
|
|
|
38,752 |
|
|
|
2,548 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
432,835 |
|
|
|
10,285 |
|
|
|
422,550 |
|
|
|
* |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(374,548 |
) |
|
|
70,584 |
|
|
|
(445,132 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains
|
|
|
58,287 |
|
|
|
80,869 |
|
|
|
(22,582 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
99,587 |
|
|
$ |
119,621 |
|
|
$ |
(20,034 |
) |
|
|
(17 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.70 |
|
|
$ |
0.88 |
|
|
$ |
(0.18 |
) |
|
|
(20 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
141,738 |
|
|
|
135,579 |
|
|
|
6,159 |
|
|
|
5 |
% |
|
|
* |
Net realized gains (losses) and net change in unrealized
appreciation or depreciation can fluctuate significantly from
period to period. As a result, quarterly comparisons may not be
meaningful. |
|
** |
Percentage change is not meaningful. |
36
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.
Interest and Dividends. Interest and dividend income for
the three months ended March 31, 2006 and 2005, was
composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
Private finance loans and debt securities
|
|
$ |
82.6 |
|
|
$ |
56.8 |
|
|
CMBS and CDO portfolio
|
|
|
|
|
|
|
22.1 |
|
|
Commercial mortgage loans
|
|
|
2.8 |
|
|
|
1.5 |
|
|
Cash and cash equivalents and other
|
|
|
2.9 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
|
|
|
88.3 |
|
|
|
80.8 |
|
Dividends
|
|
|
0.6 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
$ |
88.9 |
|
|
$ |
84.9 |
|
|
|
|
|
|
|
|
|
|
Our interest income from our private finance loans and debt
securities has increased period over period as a result of the
growth in this portfolio since March 31, 2005, as shown
below. In addition, during the first quarter of 2006, we resumed
accruing interest for certain private finance portfolio
companies. Such additional interest income totaled
$3.8 million for the three months ended March 31, 2006.
There was no interest income from the CMBS and CDO portfolio in
the first quarter of 2006 as we sold this portfolio on
May 3, 2005. The CMBS and CDO portfolio sold had a cost
basis of $718.1 million and a weighted average yield on the
cost basis of the portfolio of approximately 13.8%. We generally
reinvested the principal proceeds from the CMBS and CDO
portfolio into our private finance portfolio.
The level of interest income, which includes interest paid in
cash and in kind, is directly related to the balance of the
interest-bearing investment portfolio outstanding during the
period multiplied by the weighted average yield. The
interest-bearing investments in the portfolio at value and the
weighted average yield on the interest-bearing investments in
the portfolio at March 31, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
Average |
|
|
Value |
|
Yield(1) |
|
Value |
|
Yield(1) |
($ in millions) |
|
|
|
|
|
|
|
|
Private finance loans and debt securities
|
|
$ |
2,530.0 |
|
|
|
12.5 |
% |
|
$ |
1,556.4 |
|
|
|
13.8 |
% |
CMBS and CDO portfolio
|
|
|
|
|
|
|
|
|
|
|
693.2 |
|
|
|
13.9 |
% |
Commercial mortgage loans
|
|
|
102.7 |
|
|
|
7.6 |
% |
|
|
89.7 |
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,632.7 |
|
|
|
12.3 |
% |
|
$ |
2,339.3 |
|
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. The weighted
average yield is computed as of the balance sheet date. |
37
The private finance portfolio yield at March 31, 2006, of
12.5% as compared to the private finance portfolio yield of
13.8% at March 31, 2005, reflects the mix of debt
investments in the private finance portfolio. 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.
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 for the three months ended March 31, 2006 and
2005, included $0 and $2.0 million, respectively, of
dividends from BLX on the Class B equity interests held by us,
which were paid in cash.
Loan Prepayment Premiums. Loan prepayment premiums were
$5.3 million and $1.7 million for the three months
ended March 31, 2006 and 2005, respectively. Loan
prepayment premiums for the three months ended March 31,
2006, included $5.0 million related to the repayment of our
subordinated debt in connection with the sale of our majority
equity interest in Advantage. See Portfolio and
Investment Activity above for further discussion. While
the scheduled maturities of private finance and commercial real
estate loans generally range from five to ten years, it is not
unusual for our borrowers to refinance or pay off their debts to
us ahead of schedule. Therefore, we generally structure our
loans to require a prepayment premium for the first three to
five years of the loan. Accordingly, the amount of prepayment
premiums will vary depending on the level of repayments and the
age of the loans at the time of repayment.
Fees and Other Income. Fees and other income primarily
include fees related to financial structuring, diligence,
transaction services, management and consulting services to
portfolio companies, guarantees, and other services. As a
business development company, we are required to make
significant managerial assistance available to the companies in
our investment portfolio. Managerial assistance includes, but is
not limited to, management and consulting services related to
corporate finance, marketing, human resources, personnel and
board member recruiting, business operations, corporate
governance, risk management and other general business matters.
Fees and other income for the three months ended March 31,
2006 and 2005, included fees relating to the following:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Structuring and diligence
|
|
$ |
11.0 |
|
|
$ |
1.3 |
|
Transaction and other services provided to portfolio companies
|
|
|
0.1 |
|
|
|
1.2 |
|
Management, consulting and other services provided to portfolio
companies and guaranty fees
|
|
|
5.7 |
|
|
|
4.8 |
|
Other income
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
$ |
16.8 |
|
|
$ |
8.3 |
|
|
|
|
|
|
|
|
|
|
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.
38
Structuring and diligence fees for the three months ended
March 31, 2006, included structuring fees from Advantage
Sales and Marketing, CR Brands, Hot Stuff Foods, and 3SI
Security Systems totaling $8.1 million. Structuring and
diligence fees may vary substantially from period to period
based on the level of new investment originations and the market
rates for these types of fees. Private finance investments
funded were $795.9 million for the three months ended
March 31, 2006, as compared to $168.2 million for the
three months ended March 31, 2005.
Management fees for the three months ended March 31, 2006,
included $1.8 million in management fees from Advantage prior to
its sale on March 29, 2006. See Portfolio and
Investment Activity above for further discussion.
Fees and other income related to the CMBS and CDO portfolio for
the three months ended March 31, 2005, were
$1.7 million. As noted above, we sold our CMBS and CDO
portfolio on May 3, 2005.
BLX and Advantage. BLX was our largest investment at
value at March 31, 2006, and represented 7.9% of our total
assets. Advantage and BLX were our largest investments at
March 31, 2005, and together represented 19.5% of our total
assets.
Total interest and related portfolio income from these
investments for the three months ended March 31, 2005 and
2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Advantage(1)
|
|
$ |
14.1 |
|
|
$ |
9.2 |
|
BLX
|
|
$ |
6.1 |
|
|
$ |
7.8 |
|
|
|
(1) |
Includes income from the period we held a majority equity
interest only. See Portfolio and Investment
Activity above for further discussion. |
Operating Expenses. Operating expenses include
interest, employee, and administrative expenses.
Interest Expense. The fluctuations in interest expense
during the three months ended March 31, 2006 and 2005, 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
months ended March 31, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
|
Three Months Ended |
|
|
March 31, |
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Total outstanding debt
|
|
$ |
1,274.2 |
|
|
$ |
1,296.4 |
|
Average outstanding debt
|
|
$ |
1,491.5 |
|
|
$ |
1,125.0 |
|
Weighted average
cost(1)
|
|
|
6.5 |
% |
|
|
6.4 |
% |
|
|
(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
$0.5 million for the three months ended March 31, 2006
and 2005, respectively.
39
Employee Expense. Employee expenses for the three months
ended March 31, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Salaries and employee
benefits(1)
|
|
$ |
17.3 |
|
|
$ |
12.0 |
|
Individual performance award (IPA)
|
|
|
1.7 |
|
|
|
1.9 |
|
IPA mark to market expense (benefit)
|
|
|
1.0 |
|
|
|
0.1 |
|
Individual performance bonus (IPB)
|
|
|
1.4 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
Total employee expense
|
|
$ |
21.4 |
|
|
$ |
15.5 |
|
|
|
|
|
|
|
|
|
|
Number of employees at end of period
|
|
|
155 |
|
|
|
158 |
|
|
|
(1) |
Salaries and employee benefits included accrued bonuses of
$7.9 million and $3.7 million for the three months
ended March 31, 2006 and 2005, respectively. |
The change in salaries and employee benefits reflects the effect
of wage increases and the change in mix of employees given their
area of responsibility and relevant experience level. Salaries
and employee benefits expense has generally increased due to
changes in the composition of our employee resources and
compensation increases.
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 generally in four
equal installments, 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 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 determined that for 2005 and 2006 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 of each respective year) as long as the
recipient remains employed by us.
The Compensation Committee and the Board of Directors have
determined the IPA and the IPB for 2006. We currently estimate
the IPA and IPB to be approximately $8.1 million each;
however, the Compensation Committee may adjust the IPA or IPB as
needed, or make new awards as new officers are hired. 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.
In connection with our 2006 Annual Meeting of Stockholders, the
stockholders approved the issuance of up to
2,500,000 shares of our common stock in exchange for the
cancellation of vested
in-the-money
stock options granted to certain officers and directors under
the Amended Stock Option Plan. Under the initiative, which has
been reviewed and approved by our Board of Directors, all
optionees who hold vested stock options with exercise prices
below the market value of the stock (or
in-the-money
options), would be offered the opportunity to receive cash and
common stock in exchange for their voluntary cancellation of
their vested stock options. The sum of the cash and common stock
to be received by each optionee would equal the
in-the-money
value of the stock option
40
cancelled. As part of this initiative, the Board of Directors is
also considering the adoption of a target ownership structure
that would establish minimum ownership levels for our senior
officers and continue to further align the interests of our
officers with those of our stockholders. Unlike the accounting
treatment typically associated with a stock option exercise, the
option cancellation payment (OCP) would be recorded as an
expense for financial reporting purposes, and the expense may be
significant. Based on the 13 million vested options
outstanding and the market price of $30.50 of our stock on
March 10, 2006, the expense related to the OCP would be
approximately $106 million if all option holders choose to
cancel all vested
in-the-money options in
exchange for the OCP. For income tax purposes, our tax expense
resulting from the OCP would be similar to the tax expense that
would result from an exercise of stock options in the market.
Any tax deduction for us resulting from the OCP or an exercise
of stock options in the market would be limited by
Section 162(m) of the Code for persons subject to
Section 162(m).
Employee Stock Options Expense. 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 was effective
January 1, 2006, and it applies to our stock option plan.
Our stock options are typically granted with ratable vesting
provisions, and we amortize the compensation cost over the
service period. With respect to options granted prior to
January 1, 2006, we have used the modified
prospective method for adoption of the Statement. Under
this method, the unamortized cost of previously awarded options
that were unvested as of January 1, 2006, is recognized
over the service period in the statement of operations beginning
in 2006. With respect to options granted on or after
January 1, 2006, compensation cost is recognized in the
statement of operations over the service period. The effect of
this adoption for the three months ended March 31, 2006,
was employee-related stock option expense of $3.6 million,
which included $3.4 million related to previously awarded
options that were unvested as of January 1, 2006, and
$0.2 million related to options granted during the three
months ended March 31, 2006.
We estimate that the stock option expense that will be recorded
in our statement of operations under the Statement, will be
approximately $14.3 million, $9.3 million, and
$2.8 million for the years ended December 31, 2006,
2007, and 2008, respectively, which includes stock option
expense related to options granted in the first quarter of 2006
of approximately $0.8 million, $0.5 million, and
$0.2 million, respectively. This estimate may change if the
Companys assumptions related to future option forfeitures
change. This estimate does not include any expense related to
future stock option grants as the fair value of those stock
options will be determined at the time of grant.
Administrative Expense. Administrative expenses include
legal and accounting fees, valuation assistance fees, insurance
premiums, the cost of leases for our headquarters in
Washington, DC, and our regional offices, portfolio
origination and development expenses, stock record expenses,
directors fees, and various other expenses. Administrative
expenses for the three months ended March 31, 2006 and
2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Administrative expenses, excluding investigation related costs
|
|
$ |
8.6 |
|
|
$ |
8.5 |
|
Investigation related costs
|
|
|
2.9 |
|
|
|
12.3 |
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
$ |
11.5 |
|
|
$ |
20.8 |
|
|
|
|
|
|
|
|
|
|
41
Investigation related costs include costs associated with
requests for information in connection with two government
investigations. These expenses remain difficult to predict. See
Legal Proceedings.
Income Tax Expense (Benefit), Including Excise
Tax. Income tax expense
(benefit) for the three months ended March 31, 2006 and
2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Income tax expense (benefit)
|
|
$ |
0.5 |
|
|
$ |
(0.3 |
) |
Excise tax expense
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit), including excise tax
|
|
$ |
8.9 |
|
|
$ |
(0.3 |
) |
|
|
|
|
|
|
|
|
|
Our wholly owned subsidiary, A.C. Corporation, 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,
our estimated annual taxable income for 2006 currently exceeds
our estimated dividend distributions to shareholders from such
taxable income in 2006, and such estimated excess taxable income
will be distributed in 2007. Therefore, we will be required to
pay a 4% excise tax on the excess of 98% of our taxable income
over the amount of actual distributions from such taxable
income. Accordingly, we have accrued an estimated excise tax of
$8.4 million for the three months ended March 31,
2006, based upon our estimated excess taxable income earned for
that period. See Financial Condition, Liquidity and
Capital Resources.
Realized Gains and Losses. Net realized gains
primarily result from the sale of equity securities associated
with certain private finance investments, the sale of CMBS bonds
and CDO bonds and preferred shares, and the realization of
unamortized discount resulting from the sale and early repayment
of private finance loans and commercial mortgage loans, offset
by losses on investments. Net realized gains for the three
months ended March 31, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
Months Ended |
|
|
March 31, |
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Realized gains
|
|
$ |
436.5 |
|
|
$ |
14.7 |
|
Realized losses
|
|
|
(3.7 |
) |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
$ |
432.8 |
|
|
$ |
10.3 |
|
|
|
|
|
|
|
|
|
|
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
42
months ended March 31, 2006 and 2005, we reversed
previously recorded unrealized appreciation or depreciation when
gains or losses were realized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
Months Ended |
|
|
March 31, |
|
|
|
($ in millions) |
|
2006 |
|
2005 |
|
|
|
|
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
|
$ |
(393.6 |
) |
|
$ |
(9.9 |
) |
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
|
|
2.7 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
Total reversal
|
|
$ |
(390.9 |
) |
|
$ |
(5.1 |
) |
|
|
|
|
|
|
|
|
|
Realized gains for the three months ended March 31, 2006
and 2005, were as follows:
($ in millions)
|
|
|
|
|
|
2006 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Advantage Sales & Marketing, Inc.
|
|
$ |
433.1 |
|
Nobel Learning Communities, Inc.
|
|
|
1.5 |
|
The Debt Exchange Inc.
|
|
|
1.1 |
|
Other
|
|
|
0.2 |
|
|
|
|
|
|
|
Total private finance
|
|
|
435.9 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
0.6 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
0.6 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
436.5 |
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Polaris Pool Systems, Inc.
|
|
$ |
7.4 |
|
U.S. Security Holdings, Inc.
|
|
|
3.3 |
|
Oriental Trading Company, Inc.
|
|
|
1.0 |
|
Woodstream Corporation
|
|
|
0.9 |
|
DCS Business Services, Inc.
|
|
|
0.7 |
|
Other
|
|
|
0.9 |
|
|
|
|
|
|
|
Total private finance
|
|
|
14.2 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
0.5 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
0.5 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
14.7 |
|
|
|
|
|
|
Realized losses for the three months ended March 31, 2006
and 2005, were as follows:
($ in millions)
|
|
|
|
|
|
|
2006 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Aspen Pet Products, Inc.
|
|
$ |
1.5 |
|
Nobel Learning Communities, Inc.
|
|
|
1.4 |
|
Other
|
|
|
0.5 |
|
|
|
|
|
|
|
Total private finance
|
|
|
3.4 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
0.3 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Alderwoods Group, Inc.
|
|
$ |
0.8 |
|
Other
|
|
|
0.3 |
|
|
|
|
|
|
|
Total private finance
|
|
|
1.1 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
3.3 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
3.3 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
4.4 |
|
|
|
|
|
|
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
43
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 March 31, 2006, and December 31, 2005,
portfolio investments recorded at fair value were approximately
90% 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.
As a business development company, we have invested in illiquid
securities including debt and equity securities of companies.
The structure of each 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 may be subject to certain 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 Private Finance. Our
process for determining the fair value of a private finance
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
44
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 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.
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
45
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 three months ended March 31, 2006 and 2005, we received
third-party valuation assistance from Duff & Phelps, LLC
(Duff & Phelps) and Houlihan Lokey Howard and Zukin
(Houlihan Lokey) for our private finance portfolio as follows:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
Number of private finance portfolio companies reviewed:
|
|
|
|
|
|
|
|
|
Duff &
Phelps(1)
|
|
|
76 |
|
|
|
35 |
|
Houlihan Lokey
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Total number of private finance portfolio companies reviewed
|
|
|
78 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
Percentage of private finance portfolio reviewed at value:
|
|
|
|
|
|
|
|
|
Duff &
Phelps(1)
|
|
|
82.2 |
% |
|
|
59.6 |
% |
Houlihan Lokey
|
|
|
4.8 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
Percentage of private finance portfolio reviewed at value
|
|
|
87.0 |
% |
|
|
74.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
During the third quarter of 2005, S&P Corporate Value
Consulting merged with Duff & Phelps, LLC, a financial
advisory and investment banking firm. The merged company
operates under the name of Duff & Phelps, LLC. |
Professional fees for third-party valuation assistance were $1.4
million for the year ended December 31, 2005, and are estimated
to be approximately $1.5 million for 2006.
Valuation Methodology CMBS Bonds and CDO and CLO
Bonds and Preferred Shares/Income Notes (CMBS/CDO/CLO
Assets). CMBS/CDO/CLO Assets are carried at fair
value, which is based on a discounted cash flow model that
utilizes prepayment and loss assumptions based on historical
experience and projected performance, economic factors, the
characteristics of the underlying cash flow and comparable
yields for similar bonds and preferred shares/income notes, when
available. We recognize unrealized appreciation or depreciation
on our CMBS/CDO/CLO Assets as comparable yields in the market
change and/ or based on changes in estimated cash flows
resulting from changes in prepayment or loss assumptions in the
underlying collateral pool. As each bond ages, the expected
amount of losses and the expected timing of recognition of such
losses in the underlying collateral pool is updated and the
revised cash flows are used in determining the fair value of the
bonds. We determine the fair value of our CMBS/CDO/CLO Assets on
an individual security-by-security basis. When we sold a group
of these real estate related assets in a pool in one or more
transactions, the total value received for that pool was
generally different than the sum of the fair values of the
individual bonds or preferred shares/income notes.
46
Net Change in Unrealized Appreciation or Depreciation.
Net change in unrealized appreciation or depreciation for the
three months ended March 31, 2006 and 2005, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2006(1) |
|
2005(1) |
($ in millions) |
|
|
|
|
Net unrealized appreciation or depreciation
|
|
$ |
16.4 |
|
|
$ |
75.7 |
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
|
|
(393.6 |
) |
|
|
(9.9 |
) |
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
|
|
2.7 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation or depreciation
|
|
$ |
(374.5 |
) |
|
$ |
70.6 |
|
|
|
|
|
|
|
|
|
|
|
|
(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 March 31, 2006, our largest investment was in BLX. The
following is a summary of the methodology that we used to
determine the fair value of this investment.
Business Loan Express, LLC. To determine the value
of our investment in BLX at March 31, 2006, 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 March 31, 2006, and December 31, 2005.
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 March 31, 2006, was made up of CIT Group, Inc.,
Financial Federal Corporation, GATX Corporation, and Marlin
Business Services Corporation, which is consistent with the
comparable group at December 31, 2005.
Our investment in BLX at March 31, 2006, was valued at
$326.2 million. This fair value was within the range of
values determined by the four valuation analyses. Unrealized
appreciation on our investment was $35.0 million at
March 31, 2006. We decreased unrealized appreciation in the
first quarter of 2006 by $22.7 million from
December 31, 2005. This decrease resulted from a reduction
in enterprise value at March 31, 2006, of approximately 4%
as compared to the enterprise value at December 31, 2005.
BLX has experienced higher loan prepayments in recent months,
which BLX management believes is due to a robust economy and
increased competition from banks, and as a result, BLX
management has scaled back their projected loan originations as
a result of this more competitive lending environment.
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 141.7 million and
135.6 million for the three months ended March 31,
2006 and 2005, respectively.
47
Comparison of the Years Ended December 31, 2005, 2004,
and 2003
The following table summarizes our operating results for the
years ended December 31, 2005, 2004, and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
Percent |
|
|
2005 |
|
2004 |
|
Change |
|
Change |
|
2004 |
|
2003 |
|
Change |
|
Change |
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Related Portfolio Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
$ |
317,153 |
|
|
$ |
319,642 |
|
|
$ |
(2,489 |
) |
|
|
(1 |
)% |
|
$ |
319,642 |
|
|
$ |
290,719 |
|
|
$ |
28,923 |
|
|
|
10 |
% |
|
Loan prepayment premiums
|
|
|
6,250 |
|
|
|
5,502 |
|
|
|
748 |
|
|
|
14 |
% |
|
|
5,502 |
|
|
|
8,172 |
|
|
|
(2,670 |
) |
|
|
(33 |
)% |
|
Fees and other income
|
|
|
50,749 |
|
|
|
41,946 |
|
|
|
8,803 |
|
|
|
21 |
% |
|
|
41,946 |
|
|
|
30,338 |
|
|
|
11,608 |
|
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
374,152 |
|
|
|
367,090 |
|
|
|
7,062 |
|
|
|
2 |
% |
|
|
367,090 |
|
|
|
329,229 |
|
|
|
37,861 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
76,798 |
|
|
|
75,650 |
|
|
|
1,148 |
|
|
|
2 |
% |
|
|
75,650 |
|
|
|
77,233 |
|
|
|
(1,583 |
) |
|
|
(2 |
)% |
|
Employee
|
|
|
78,300 |
|
|
|
53,739 |
|
|
|
24,561 |
|
|
|
46 |
% |
|
|
53,739 |
|
|
|
36,945 |
|
|
|
16,794 |
|
|
|
45 |
% |
|
Administrative
|
|
|
70,267 |
|
|
|
34,686 |
|
|
|
35,581 |
|
|
|
103 |
% |
|
|
34,686 |
|
|
|
22,387 |
|
|
|
12,299 |
|
|
|
55 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
225,365 |
|
|
|
164,075 |
|
|
|
61,290 |
|
|
|
37 |
% |
|
|
164,075 |
|
|
|
136,565 |
|
|
|
27,510 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
148,787 |
|
|
|
203,015 |
|
|
|
(54,228 |
) |
|
|
(27 |
)% |
|
|
203,015 |
|
|
|
192,664 |
|
|
|
10,351 |
|
|
|
5 |
% |
|
|
Income tax expense (benefit), including excise tax
|
|
|
11,561 |
|
|
|
2,057 |
|
|
|
9,504 |
|
|
|
** |
|
|
|
2,057 |
|
|
|
(2,466 |
) |
|
|
4,523 |
|
|
|
** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
137,226 |
|
|
|
200,958 |
|
|
|
(63,732 |
) |
|
|
(32 |
)% |
|
|
200,958 |
|
|
|
195,130 |
|
|
|
5,828 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
|
273,496 |
|
|
|
117,240 |
|
|
|
156,256 |
|
|
|
133 |
% |
|
|
117,240 |
|
|
|
75,347 |
|
|
|
41,893 |
|
|
|
56 |
% |
|
Net change in unrealized appreciation or depreciation
|
|
|
462,092 |
|
|
|
(68,712 |
) |
|
|
530,804 |
|
|
|
* |
|
|
|
(68,712 |
) |
|
|
(78,466 |
) |
|
|
9,754 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses)
|
|
|
735,588 |
|
|
|
48,528 |
|
|
|
687,060 |
|
|
|
* |
|
|
|
48,528 |
|
|
|
(3,119 |
) |
|
|
51,647 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
872,814 |
|
|
$ |
249,486 |
|
|
$ |
623,328 |
|
|
|
250 |
% |
|
$ |
249,486 |
|
|
$ |
192,011 |
|
|
$ |
57,475 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
6.36 |
|
|
$ |
1.88 |
|
|
$ |
4.48 |
|
|
|
238 |
% |
|
$ |
1.88 |
|
|
$ |
1.62 |
|
|
$ |
0.26 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
137,274 |
|
|
|
132,458 |
|
|
|
4,816 |
|
|
|
4 |
% |
|
|
132,458 |
|
|
|
118,351 |
|
|
|
14,107 |
|
|
|
12 |
% |
|
|
|
|
* |
Net change in unrealized appreciation or depreciation and net
gains (losses) can fluctuate significantly from year to year. |
|
|
** |
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.
48
Interest and dividend income for the years ended
December 31, 2005, 2004, and 2003, was composed of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private finance loans and debt securities
|
|
$ |
251.0 |
|
|
$ |
195.2 |
|
|
$ |
177.3 |
|
|
CMBS and CDO portfolio
|
|
|
29.4 |
|
|
|
93.3 |
|
|
|
86.2 |
|
|
Commercial mortgage loans
|
|
|
7.6 |
|
|
|
9.4 |
|
|
|
9.0 |
|
|
Cash and cash equivalents and other
|
|
|
9.4 |
|
|
|
3.1 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
|
|
|
297.4 |
|
|
|
301.0 |
|
|
|
275.3 |
|
Dividends
|
|
|
19.8 |
|
|
|
18.6 |
|
|
|
15.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
$ |
317.2 |
|
|
$ |
319.6 |
|
|
$ |
290.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2005, 2004, and 2003, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Interest-bearing portfolio at value
|
|
$ |
2,211.4 |
|
|
$ |
2,301.2 |
|
|
$ |
1,891.9 |
|
Portfolio yield
|
|
|
12.8 |
% |
|
|
14.0 |
% |
|
|
14.7 |
% |
We sold our CMBS and CDO portfolio on May 3, 2005. As a
result of this transaction, our interest income for the year
ended December 31, 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
money market securities until the cash was reinvested in the
portfolio.
The portfolio yield at December 31, 2005, of 12.8% as
compared to the portfolio yield of 14.0% and 14.7% at
December 31, 2004 and 2003, respectively, 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 $14.0 million,
$14.8 million, and $7.8 million for the years ended
December 31, 2005, 2004, and 2003, respectively. For the
year ended December 31, 2005, $12.0 million of these
dividends were paid in cash and $2.0 million of these
dividends were paid through the issuance of additional
Class B equity interests. For the
49
years ended December 31, 2004 and 2003, these dividends
were paid through the issuance of additional Class B equity
interests.
Loan prepayment premiums were $6.3 million,
$5.5 million, and $8.2 million for the years ended
December 31, 2005, 2004, and 2003, respectively. While the
scheduled maturities of private finance and commercial real
estate loans generally range from five to ten years, it is not
unusual for our borrowers to refinance or pay off their debts to
us ahead of schedule. Therefore, we generally structure our
loans to require a prepayment premium for the first three to
five years of the loan. Accordingly, the amount of prepayment
premiums will vary depending on the level of repayments and the
age of the loans at the time of repayment.
Fees and other income primarily include fees related to
financial structuring, diligence, transaction services,
management and consulting services to portfolio companies,
guarantees, and other services. As a business development
company, we are required to make significant managerial
assistance available to the companies in our investment
portfolio. Managerial assistance includes, but is not limited
to, management and consulting services related to corporate
finance, marketing, human resources, personnel and board member
recruiting, business operations, corporate governance, risk
management and other general business matters.
Fees and other income for the years ended December 31,
2005, 2004, and 2003, included fees relating to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Structuring and diligence
|
|
$ |
24.6 |
|
|
$ |
18.4 |
|
|
$ |
6.1 |
|
Transaction and other services provided to portfolio companies
|
|
|
2.9 |
|
|
|
3.2 |
|
|
|
4.5 |
|
Management, consulting and other services provided to portfolio
companies and guaranty fees
|
|
|
20.8 |
|
|
|
17.4 |
|
|
|
18.7 |
|
Other income
|
|
|
2.4 |
|
|
|
2.9 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
$ |
50.7 |
|
|
$ |
41.9 |
|
|
$ |
30.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 year ended December 31, 2005,
included structuring fees from Norwesco, Inc., Callidus Capital
Corporation, Triax Holdings, LLC, and Meineke Car Care Centers,
Inc. totaling $9.4 million. Fees and other income for the
year ended December 31, 2004, included structuring fees
from Advantage, Financial Pacific Company, Mercury Air Centers,
Inc. and Insight Pharmaceutical Corporation totaling
$10.0 million.
Fees and other income related to the CMBS and CDO portfolio were
$4.1 million, $6.2 million, and $2.8 million for
the years ended December 31, 2005, 2004, and 2003,
respectively.
Advantage and BLX were our largest investments at value at
December 31, 2005 and 2004, and together represented 25.3%
and 19.0%, of our total assets, respectively. BLX and
50
Hillman were our largest portfolio investments at December 31,
2003, and together represented 19.1% of our total assets at
December 31, 2003.
Total interest and related portfolio income from these
investments for the years ended December 31, 2005, 2004,
and 2003, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Advantage(1)(2)
|
|
$ |
37.4 |
|
|
$ |
21.3 |
|
|
$ |
|
|
BLX
|
|
$ |
37.5 |
|
|
$ |
50.0 |
|
|
$ |
46.7 |
|
Hillman(1)
|
|
$ |
|
|
|
$ |
2.5 |
|
|
$ |
9.7 |
|
|
|
(1) |
Includes income from our controlled investments only. |
|
(2) |
In March 2006, we sold our majority interest in Advantage. See
Management Discussion and Analysis above. |
Operating Expenses. Operating expenses include
interest, employee, and administrative expenses.
Interest Expense. The fluctuations in interest expense
during the years ended December 31, 2005, 2004, and 2003,
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 years ended December 31, 2005, 2004, and 2003, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Total outstanding debt
|
|
$ |
1,284.8 |
|
|
$ |
1,176.6 |
|
|
$ |
954.2 |
|
Average outstanding debt
|
|
$ |
1,087.1 |
|
|
$ |
985.6 |
|
|
$ |
943.5 |
|
Weighted average
cost(1)
|
|
|
6.5 |
% |
|
|
6.6 |
% |
|
|
7.5 |
% |
|
|
(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 $1.4 million, $5.2 million,
and $5.9 million for the years ended December 31,
2005, 2004, and 2003, respectively.
Employee Expense. Employee expenses for the years ended
December 31, 2005, 2004, and 2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Salaries and employee benefits
|
|
$ |
57.3 |
|
|
$ |
40.7 |
|
|
$ |
28.3 |
|
Individual performance award (IPA)
|
|
|
7.0 |
|
|
|
13.4 |
|
|
|
|
|
IPA mark to market expense (benefit)
|
|
|
2.0 |
|
|
|
(0.4 |
) |
|
|
|
|
Individual performance bonus (IPB)
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
Transition compensation, net
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
Retention award
|
|
|
|
|
|
|
|
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employee expense
|
|
$ |
78.3 |
|
|
$ |
53.7 |
|
|
$ |
36.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at end of period
|
|
|
131 |
|
|
|
162 |
|
|
|
125 |
|
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
51
below. Salaries and employee benefits expense has generally
increased due to changes in the composition of our employee
resources and compensation increases.
Transition compensation costs were $5.1 million for the
year ended December 31, 2005, including $3.1 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
$5.1 million for the year ended December 31, 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.
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
$4.5 million, $6.8 million, and $3.4 million for
the years ended December 31, 2005, 2004, and 2003,
respectively.
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 generally in four
equal installments, 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 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 and 2006 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 of each respective year) as long as the
recipient remains employed by us.
The Compensation Committee and the Board of Directors have
determined the IPA and the IPB for 2006 and they are currently
estimated to be approximately $8.1 million each; however,
the Compensation Committee may adjust the IPA or IPB as needed,
or make new awards as new officers are hired. If a recipient
terminates employment during the year, any further cash
contribution for the IPA or remaining cash payments under the
IPB would be forfeited.
52
Administrative Expense. Administrative expenses include
legal and accounting fees, valuation assistance fees, insurance
premiums, the cost of leases for our headquarters in
Washington, DC, and our regional offices, portfolio
origination and development expenses, stock record expenses,
directors fees, and various other expenses. Administrative
expenses for the years ended December 31, 2005, 2004, and
2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Administrative expenses, excluding investigation related costs
|
|
$ |
33.9 |
|
|
$ |
30.1 |
|
|
$ |
22.4 |
|
Investigation related costs
|
|
|
36.4 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total administrative expenses
|
|
$ |
70.3 |
|
|
$ |
34.7 |
|
|
$ |
22.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in administrative expenses, excluding investigation
related costs, for the year ended December 31, 2005, over
the year ended December 31, 2004, was primarily due to
increased expenses related to evaluating potential new
investments of $2.0 million, accounting fees of
$0.8 million, recruiting and employee training costs of
$0.6 million, and valuation assistance fees of
$0.5 million, offset by a decrease in expenses related to a
decline in portfolio workout expenses of $0.6 million.
Administrative expenses, excluding investigation related costs,
were $30.1 million for the year ended December 31,
2004, a $7.7 million increase over administrative expenses
of $22.4 million for the year ended December 31, 2003.
The increase in expenses primarily resulted from:
|
|
|
|
|
a net increase in accounting, consulting, and other fees of
$1.7 million. This increase is primarily attributable to
fees associated with the implementation of the requirements
under the Sarbanes-Oxley Act of 2002 (including Section 404) and
valuation assistance, |
|
|
|
an increase in deal costs related to evaluating potential new
investments of $1.6 million. Costs related to mezzanine
lending are generally paid by the borrower, however, costs
related to buyout investments are generally funded by us.
Accordingly, if a prospective deal does not close, we incur
expenses that are not recoverable, |
|
|
|
an increase in expenses related to portfolio development and
workout activities of $1.5 million, |
|
|
|
an increase in rent of $1.4 million associated with the
opening of an office in Los Angeles, CA and expanding our office
space in Chicago, IL and New York, NY, and |
|
|
|
an increase in other expenses, including stock record expense,
insurance premiums and directors fees of
$1.1 million, and travel expenses of $0.8 million. |
53
In addition, administrative expenses for the years ended
December 31, 2005 and 2004, included costs associated with
requests for information in connection with two government
investigations. These expenses remain difficult to predict. See
Legal Proceedings.
Income Tax Expense (Benefit), Including Excise
Tax. Income tax expense
(benefit) for the years ended December 31, 2005, 2004, and
2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$ |
5.4 |
|
|
$ |
1.1 |
|
|
$ |
(2.5 |
) |
Excise tax expense
|
|
|
6.2 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit), including excise tax
|
|
$ |
11.6 |
|
|
$ |
2.1 |
|
|
$ |
(2.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our wholly owned subsidiary, A.C. Corporation, 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,
our estimated annual taxable income for 2005 exceeded our
dividend distributions to shareholders for 2005 from such
taxable income, and such estimated excess taxable income will be
distributed in 2006. Therefore, we will 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 estimated excise tax of $6.2 million for the
year ended December 31, 2005, based upon our year-end
estimate of annual taxable income for 2005. See Financial
Condition, Liquidity and Capital Resources.
Realized Gains and Losses. Net realized gains
primarily result from the sale of equity securities associated
with certain private finance investments, the sale of CMBS bonds
and CDO bonds and preferred shares, and the realization of
unamortized discount resulting from the sale and early repayment
of private finance loans and commercial mortgage loans, offset
by losses on investments. Net realized gains for the years ended
December 31, 2005, 2004, and 2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Realized gains
|
|
$ |
343.1 |
|
|
$ |
267.7 |
|
|
$ |
94.3 |
|
Realized losses
|
|
|
(69.6 |
) |
|
|
(150.5 |
) |
|
|
(19.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
$ |
273.5 |
|
|
$ |
117.2 |
|
|
$ |
75.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 years ended December 31, 2005, 2004, and 2003, we
reversed previously recorded unrealized appreciation or
depreciation when gains or losses were realized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005(1) |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Reversal of previously recorded net unrealized appreciation
associated with realized gains
|
|
$ |
(108.0 |
) |
|
$ |
(210.5 |
) |
|
$ |
(78.5 |
) |
Reversal of previously recorded net unrealized depreciation
associated with realized losses
|
|
|
68.0 |
|
|
|
151.8 |
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reversal
|
|
$ |
(40.0 |
) |
|
$ |
(58.7 |
) |
|
$ |
(58.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $227.7 million reflects the total value received for the
portfolio as a whole. |
|
54
Realized gains for the years ended December 31, 2005, 2004,
and 2003, were as follows:
($ in millions)
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Housecall Medical Resources, Inc.
|
|
$ |
53.7 |
|
Fairchild Industrial Products Company
|
|
|
16.2 |
|
Apogen Technologies Inc.
|
|
|
9.0 |
|
Polaris Pool Systems, Inc.
|
|
|
7.4 |
|
MasterPlan, Inc.
|
|
|
3.7 |
|
U.S. Security Holdings, Inc.
|
|
|
3.3 |
|
Ginsey Industries, Inc.
|
|
|
2.8 |
|
E-Talk Corporation
|
|
|
1.6 |
|
Professional Paint, Inc.
|
|
|
1.6 |
|
Oriental Trading Company, Inc.
|
|
|
1.0 |
|
Woodstream Corporation
|
|
|
0.9 |
|
Impact Innovations Group, LLC
|
|
|
0.8 |
|
DCS Business Services, Inc.
|
|
|
0.7 |
|
Other
|
|
|
3.4 |
|
|
|
|
|
|
|
Total private finance
|
|
|
106.1 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
CMBS/CDO assets,
net(1)
|
|
|
227.7 |
|
Other
|
|
|
9.3 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
237.0 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
343.1 |
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
The Hillman Companies, Inc.
|
|
$ |
150.3 |
|
CorrFlex Graphics, LLC
|
|
|
25.7 |
|
Professional Paint, Inc.
|
|
|
13.7 |
|
Impact Innovations Group, LLC
|
|
|
11.1 |
|
The Hartz Mountain Corporation
|
|
|
8.3 |
|
Housecall Medical Resources, Inc.
|
|
|
7.2 |
|
International Fiber Corporation
|
|
|
5.2 |
|
CBA-Mezzanine Capital Finance, LLC
|
|
|
4.1 |
|
United Pet Group, Inc.
|
|
|
3.8 |
|
Oahu Waste Services, Inc.
|
|
|
2.8 |
|
Grant Broadcasting Systems II
|
|
|
2.7 |
|
Matrics, Inc.
|
|
|
2.1 |
|
SmartMail, LLC
|
|
|
2.1 |
|
Other
|
|
|
7.6 |
|
|
|
|
|
|
|
Total private finance
|
|
|
246.7 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
CMBS/CDO assets,
net(1)
|
|
|
17.4 |
|
Other
|
|
|
3.6 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
21.0 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
267.7 |
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Blue Rhino Corporation
|
|
$ |
12.6 |
|
CyberRep
|
|
|
9.6 |
|
Morton Grove Pharmaceuticals, Inc.
|
|
|
8.5 |
|
Warn Industries, Inc.
|
|
|
8.0 |
|
Woodstream Corporation
|
|
|
6.6 |
|
Kirklands Inc.
|
|
|
3.0 |
|
Julius Koch USA, Inc.
|
|
|
2.8 |
|
GC-Sun Holdings II, LP
|
|
|
2.5 |
|
Interline Brands, Inc.
|
|
|
1.7 |
|
WyoTech Acquisition Corporation
|
|
|
1.3 |
|
Advantage Mayer, Inc.
|
|
|
1.2 |
|
Other
|
|
|
3.2 |
|
|
|
|
|
|
|
Total private finance
|
|
|
61.0 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
CMBS/CDO assets,
net(1)
|
|
|
31.6 |
|
Other
|
|
|
1.7 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
33.3 |
|
|
|
|
|
|
Total gross realized gains
|
|
$ |
94.3 |
|
|
|
|
|
|
|
|
(1) |
Net of net realized losses from related hedges of
$0.7 million, $3.8 million, and $2.9 million for
the years ended December 31, 2005, 2004, and 2003,
respectively. |
Realized losses for the years ended December 31, 2005,
2004, and 2003, were as follows:
($ in millions)
|
|
|
|
|
|
2005 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Norstan Apparel Shops, Inc.
|
|
$ |
18.5 |
|
Acme Paging, L.P.
|
|
|
13.8 |
|
E-Talk Corporation
|
|
|
9.0 |
|
Garden Ridge Corporation
|
|
|
7.1 |
|
HealthASPex, Inc.
|
|
|
3.5 |
|
MortgageRamp, Inc.
|
|
|
3.5 |
|
Maui Body Works, Inc.
|
|
|
2.7 |
|
Packaging Advantage Corporation
|
|
|
2.2 |
|
Other
|
|
|
3.7 |
|
|
|
|
|
|
|
Total private finance
|
|
|
64.0 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
5.6 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
5.6 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
69.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
American Healthcare Services, Inc.
|
|
$ |
32.9 |
|
The Color Factory, Inc.
|
|
|
24.5 |
|
Executive Greetings, Inc.
|
|
|
19.3 |
|
Sydran Food Services II, L.P.
|
|
|
18.2 |
|
Ace Products, Inc.
|
|
|
17.6 |
|
Prosperco Finanz Holding AG
|
|
|
7.5 |
|
Logic Bay Corporation
|
|
|
5.0 |
|
Sun States Refrigerated Services, Inc.
|
|
|
4.7 |
|
Chickasaw Sales & Marketing, Inc.
|
|
|
3.8 |
|
Sure-Tel, Inc.
|
|
|
2.3 |
|
Liberty-Pittsburgh Systems, Inc.
|
|
|
2.0 |
|
EDM Consulting, LLC
|
|
|
1.9 |
|
Pico Products, Inc.
|
|
|
1.7 |
|
Impact Innovations Group, LLC
|
|
|
1.7 |
|
Interline Brands, Inc.
|
|
|
1.3 |
|
Startec Global Communications Corporation
|
|
|
1.1 |
|
Other
|
|
|
2.7 |
|
|
|
|
|
|
|
Total private finance
|
|
|
148.2 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
2.3 |
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
2.3 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
150.5 |
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
Portfolio Company |
|
Amount |
|
|
|
Private Finance:
|
|
|
|
|
Allied Office Products, Inc.
|
|
$ |
7.7 |
|
Candlewood Hotel Company
|
|
|
2.7 |
|
North American Archery, LLC
|
|
|
2.1 |
|
Other
|
|
|
0.5 |
|
|
|
|
|
|
|
Total private finance
|
|
|
13.0 |
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
Other
|
|
|
6.0 |
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
6.0 |
|
|
|
|
|
|
Total gross realized losses
|
|
$ |
19.0 |
|
|
|
|
|
|
55
Change in Unrealized Appreciation or Depreciation.
For a discussion of our fair value methodology, see
Change in Unrealized Appreciation or Depreciation
included in the Comparison of Three Months Ended
March 31, 2006 and 2005.
Private Finance. For the years ended December 31, 2005
and 2004, we received third-party valuation assistance from Duff
& Phelps, LLC (Duff & Phelps) and Houlihan Lokey Howard
and Zukin (Houlihan Lokey) for our private finance portfolio as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of private finance portfolio companies reviewed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duff &
Phelps(1)
|
|
|
35 |
|
|
|
72 |
|
|
|
88 |
|
|
|
78 |
|
|
|
22 |
|
|
|
33 |
|
|
|
28 |
|
|
|
22 |
|
Houlihan
Lokey(2)
|
|
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of private finance portfolio companies reviewed
(3)
|
|
|
36 |
|
|
|
72 |
|
|
|
89 |
|
|
|
80 |
|
|
|
22 |
|
|
|
33 |
|
|
|
28 |
|
|
|
22 |
|
|
|
|
|
|
Percentage of private finance portfolio reviewed at value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duff &
Phelps(1)
|
|
|
59.6 |
% |
|
|
83.0 |
% |
|
|
86.6 |
% |
|
|
87.9 |
% |
|
|
19.9 |
% |
|
|
21.6 |
% |
|
|
26.6 |
% |
|
|
42.2 |
% |
Houlihan
Lokey(2)
|
|
|
14.9 |
% |
|
|
14.9 |
% |
|
|
18.9 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of private finance portfolio reviewed at value
(3)
|
|
|
74.5 |
% |
|
|
83.0 |
% |
|
|
89.3 |
% |
|
|
92.4 |
% |
|
|
19.9 |
% |
|
|
21.6 |
% |
|
|
26.6 |
% |
|
|
42.2 |
% |
|
|
|
|
|
|
|
(1) |
During the third quarter of 2005, S&P Corporate Value
Consulting merged with Duff & Phelps, LLC, a financial
advisory and investment banking firm. The merged company
operates under the name of Duff & Phelps, LLC. |
|
(2) |
Houlihan Lokey was initially engaged in the first quarter of
2005. |
|
(3) |
Duff & Phelps and Houlihan Lokey both reviewed Advantage
Sales & Marketing, Inc. in Q2, Q3 and Q4 2005. In addition,
Duff & Phelps and Houlihan Lokey both reviewed one other
portfolio company in Q3 2005. |
Professional fees for third-party valuation assistance for the
years ended December 31, 2005 and 2004, were $1.4 million and
$0.9 million, respectively.
56
Net Change in Unrealized Appreciation or Depreciation.
For the portfolio, net change in unrealized appreciation or
depreciation for the years ended December 31, 2005, 2004,
and 2003, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005(1) |
|
2004(1) |
|
2003(1) |
($ in millions) |
|
|
|
|
|
|
Net unrealized appreciation or depreciation
|
|
$ |
502.1 |
|
|
$ |
(10.0 |
) |
|
$ |
(20.3 |
) |
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
|
|
(108.0 |
) |
|
|
(210.5 |
) |
|
|
(78.5 |
) |
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
|
|
68.0 |
|
|
|
151.8 |
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation or depreciation
|
|
$ |
462.1 |
|
|
$ |
(68.7 |
) |
|
$ |
(78.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The net change in unrealized appreciation or depreciation can
fluctuate significantly from year to year. As a result, annual
comparisons may not be meaningful. |
At December 31, 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. On
March 2, 2006, a definitive agreement was signed to sell
our majority equity interest in Advantage that indicated an
enterprise value of approximately $1.05 billion. See
Portfolio and Investment Activity above.
At December 31, 2005, we estimated the enterprise value of
Advantage to be $1.02 billion given that the closing of the
transaction was subject to certain closing conditions and the
sales price was subject to
pre- and
post-closing
adjustments and certain holdback provisions. Using the
enterprise value at December 31, 2005, we determined the
value of our investments in Advantage to be $660.4 million,
which resulted in unrealized appreciation on our investment of
$402.7 million at December 31, 2005. This was an
increase in unrealized appreciation in the fourth quarter of
2005 of $224.9 million and an increase of
$378.4 million for the year ended December 31, 2005.
Net change in unrealized appreciation or depreciation included a
net increase in unrealized appreciation on our investment in
Advantage of $24.3 million for the year ended December 31,
2004. Both Houlihan Lokey and Duff & Phelps assisted us
by reviewing our valuation of our investment in Advantage at
December 31, 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 December 31, 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 December 31, 2005 and 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 December 31, 2005, was made up of CIT Group, Inc.,
Financial Federal Corporation, GATX Corporation, and Marlin
Business Services Corporation. The December 31, 2004,
comparable group included CapitalSource, Inc., however, it has
been excluded from the December 31, 2005,
57
comparable group as it elected REIT status and no longer trades
as a commercial finance company. The remaining comparable group
for December 31, 2005, is consistent with the comparable
group at December 31, 2004.
Our investment in BLX at December 31, 2005, was valued at
$357.1 million. This fair value was within the range of
values determined by the four valuation analyses. Unrealized
appreciation on our investment was $57.7 million at
December 31, 2005. Net change in unrealized appreciation or
depreciation included a net increase in net unrealized
appreciation of $2.9 million for the year ended
December 31, 2005, a net decrease in unrealized
appreciation of $32.3 million for the year ended
December 31, 2004, and a net increase in unrealized
appreciation of $51.7 million for the year ended
December 31, 2003.
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 137.3 million,
132.5 million, and 118.4 million for the years ended
December 31, 2005, 2004, and 2003, respectively.
OTHER MATTERS
Regulated Investment Company Status. We have
elected to be taxed as a regulated investment company under
Subchapter M of the Code. 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 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 and obtain regulated investment company tax benefits, 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;
58
(3) meet asset diversification requirements as defined in
the Code; and (4) timely distribute to shareholders at
least 90% of our annual investment company taxable income as
defined in the Code. We intend to take all steps necessary to
continue to qualify as a regulated investment company. However,
there can be no assurance that we will continue to qualify for
such treatment in future years.
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 years ended December 31, 2005, 2004, and
2003, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$ |
116.0 |
|
|
$ |
(179.3 |
) |
|
$ |
80.3 |
|
Add: portfolio investments funded
|
|
|
1,668.1 |
|
|
|
1,472.4 |
|
|
|
930.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash provided by operating activities before new
investments
|
|
$ |
1,784.1 |
|
|
$ |
1,293.1 |
|
|
$ |
1,010.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Dividends to common shareholders for the three months ended
March 31, 2006, and for the years ended December 31,
2005, 2004, and 2003, were $82.5 million,
$314.5 million, $299.3 million, and
$267.8 million, respectively. Total regular quarterly
dividends were $0.59 per common share for the first quarter of
2006, and $2.30, $2.28, and $2.28 per common share for the years
ended December 31, 2005, 2004, and 2003, respectively. An
extra cash dividend of $0.03 and $0.02 per common share was
declared during 2005 and 2004, respectively, and was paid to
shareholders on January 27, 2006, and January 28,
2005, respectively.
The Board of Directors has declared a dividend of $0.60 per
common share for the second quarter of 2006.
Dividends are generally determined based upon an estimate of
annual taxable income and the amount of taxable income carried
over from the prior year for distribution in the current year.
Taxable income 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 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.
59
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 and the amount of
taxable income carried over from the prior year for distribution
in the current year. 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 Code. 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 estimate that the taxable income carried
over from 2005 for distribution to shareholders in 2006 is
$163.8 million. However, our taxable income for 2005 is an
estimate and will not be finally determined until we file our
2005 tax return in September 2006, and therefore, the amount of
excess taxable income carried over from 2005 into 2006 may be
different from this estimate.
We currently expect that our estimated annual taxable income for
2006 will be in excess of our estimated dividend distributions
to shareholders in 2006 from such taxable income, and,
therefore, we expect to carry over excess taxable income for
distribution to shareholders in 2007. We expect that we will
generally be required to pay a 4% excise tax on the excess of
98% of our taxable income for 2006 over the amount of actual
distributions from such taxable income in 2006. Accordingly, for
the three months ended March 31, 2006, we have accrued an
excise tax of $8.4 million. Excise taxes are accrued based
upon estimated excess taxable income as estimated taxable income
is earned, therefore, the excise tax accrued to date in 2006 may
be adjusted as appropriate in the remainder of 2006 to reflect
changes in our estimate of the carry over amount and additional
excise tax may be accrued during the remainder of 2006 as
additional excess taxable income is earned, if any. Our ability
to earn the estimated annual taxable income for 2006 depends on
many factors, including our ability to make new investments at
attractive yields, the level of repayments in the portfolio, the
realization of gains or losses from portfolio exits, and the
level of operating expenses incurred. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Risk
Factors and Note 10, Dividends and
Distributions and Excise Taxes of our Notes to
Consolidated Financial Statements.
Because we are a regulated investment company, we distribute our
taxable income and, therefore, from time to time we will raise
new debt or equity capital in order to fund our investments and
operations.
60
Liquidity and Capital Resources
At March 31, 2006, and December 31, 2005 and 2004, our
liquidity portfolio (see below), cash and investments in money
market securities, total assets, total debt outstanding, total
shareholders equity, debt to equity ratio and asset
coverage for senior indebtedness were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Liquidity portfolio (including money market securities:
2006-$101.1; 2005-$100.0; 2004-$0)
|
|
$ |
202.4 |
|
|
$ |
200.3 |
|
|
$ |
|
|
Cash and investments in money market securities (including money
market securities: 2006-$38.7; 2005-$22.0; 2004-$0)
|
|
$ |
43.5 |
|
|
$ |
53.3 |
|
|
$ |
57.2 |
|
Total assets
|
|
$ |
4,121.2 |
|
|
$ |
4,025.9 |
|
|
$ |
3,261.0 |
|
Total debt outstanding
|
|
$ |
1,274.2 |
|
|
$ |
1,284.8 |
|
|
$ |
1,176.6 |
|
Total shareholders equity
|
|
$ |
2,729.8 |
|
|
$ |
2,620.5 |
|
|
$ |
1,979.8 |
|
Debt to equity ratio
|
|
|
0.47 |
|
|
|
0.49 |
|
|
|
0.59 |
|
Asset coverage
ratio(1)
|
|
|
317 |
% |
|
|
309 |
% |
|
|
280 |
% |
|
|
(1) |
As a business development company, we are generally required to
maintain a minimum ratio of 200% of total assets to total
borrowings. |
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.
During the fourth quarter of 2005, we established a liquidity
portfolio that is composed of money market securities and U.S.
Treasury bills. At March 31, 2006, the value and yield of
the money market securities were $101.1 million and 4.6%,
respectively, and were held in money market funds. The value and
yield of the Treasury bills were $101.3 million and 4.2%,
respectively, at March 31, 2006. The Treasury bills are due
in June 2006. The liquidity portfolio was established to provide
a pool of liquid assets within our balance sheet. Our investment
portfolio is primarily composed of private, illiquid assets for
which there is no readily available market. Our liquidity was
reduced when we sold our portfolio of CMBS assets in May 2005,
particularly BB rated bonds, which were generally more liquid
than assets in our private finance portfolio. Given the level of
taxable income that we estimate has been carried over from 2005
for distribution in 2006, we established the liquidity portfolio
to provide a liquid resource from which to distribute this
excess taxable income. We will assess the amount held in and the
composition of the liquidity portfolio throughout the year.
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 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.
During the three months ended March 31, 2006, we sold
equity of $83.0 million. We did not sell new equity in a
public offering during the year ended December 31, 2005.
For the years ended December 31, 2004 and 2003, we sold
equity of $73.5 million and $422.9 million,
respectively. In addition, shareholders equity increased
by $7.7 million,
61
$77.5 million, $51.3 million, and $21.2 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 three
months ended March 31, 2006, and for the years ended
December 31, 2005, 2004, and 2003, respectively.
We employ an asset-liability management approach 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
$641.8 million on March 31, 2006. We evaluate our
interest rate exposure on an ongoing basis. Generally, we seek
to fund our primarily fixed-rate investment portfolio with
fixed-rate debt or equity capital. To the extent deemed
necessary, we may hedge variable and short-term interest rate
exposure through interest rate swaps or other techniques.
At March 31, 2006, and December 31, 2005, we had
outstanding debt as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
Annual |
|
|
|
|
Return to |
|
|
|
Return to |
|
|
|
|
Annual |
|
Cover |
|
|
|
Annual |
|
Cover |
|
|
Facility |
|
Amount |
|
Interest |
|
Interest |
|
Facility |
|
Amount |
|
Interest |
|
Interest |
|
|
Amount |
|
Outstanding |
|
Cost(1) |
|
Payments(2) |
|
Amount |
|
Outstanding |
|
Cost(1) |
|
Payments(2) |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable
|
|
$ |
1,164.7 |
|
|
$ |
1,164.7 |
|
|
|
6.2 |
% |
|
|
1.8 |
% |
|
$ |
1,164.5 |
|
|
$ |
1,164.5 |
|
|
|
6.2 |
% |
|
|
1.8 |
% |
|
SBA debentures
|
|
|
16.5 |
|
|
|
16.5 |
|
|
|
7.4 |
% |
|
|
0.0 |
% |
|
|
28.5 |
|
|
|
28.5 |
|
|
|
7.5 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and debentures
|
|
|
1,181.2 |
|
|
|
1,181.2 |
|
|
|
6.2 |
% |
|
|
1.8 |
% |
|
|
1,193.0 |
|
|
|
1,193.0 |
|
|
|
6.3 |
% |
|
|
1.9 |
% |
Revolving line of credit
|
|
|
772.5 |
|
|
|
93.0 |
|
|
|
6.2 |
%(2) |
|
|
0.2 |
% |
|
|
772.5 |
|
|
|
91.8 |
|
|
|
5.6 |
%(3) |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
1,953.7 |
|
|
$ |
1,274.2 |
|
|
|
6.5 |
%(3) |
|
|
2.0 |
% |
|
$ |
1,965.5 |
|
|
$ |
1,284.8 |
|
|
|
6.5 |
%(4) |
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
The annual portfolio return to cover interest payments is
calculated as the March 31, 2006, and December 31,
2005, annualized cost of debt per class of financing outstanding
divided by total assets at March 31, 2006, and
December 31, 2005. |
|
(3) |
The annual interest cost reflects the interest rate payable for
borrowings under the revolving line of credit. In addition to
the current interest rate payable, there were annual costs of
commitment fees and other facility fees of $3.3 million at
both March 31, 2006, and December 31, 2005. |
|
(4) |
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. |
Unsecured Notes Payable. We have issued unsecured
long-term notes to institutional investors, primarily insurance
companies. The notes have five- or seven-year maturities, with
maturity dates beginning in 2006 and generally have fixed rates
of interest. The notes generally require payment of interest
only semi-annually, and all principal is due upon maturity.
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 as 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%. During the second
quarter of 2005, we repaid $40.0 million of the unsecured
notes payable.
62
On May 1, 2006, we issued $50 million of seven-year,
unsecured notes with a fixed interest rate of 6.75%. This debt
matures in May 2013. The proceeds from the issuance of the
notes were used to repay $25 million of 7.49% unsecured
long-term notes that matured on May 1, 2006, with the
remainder being used to fund new portfolio investments and for
general corporate purposes.
Small Business Administration Debentures. Through
our small business investment company subsidiary, we have
debentures payable to the Small Business Administration (SBA)
with contractual maturities of ten years. The notes require
payment of interest only semi-annually, and all principal is due
upon maturity. During the years ended December 31, 2005 and
2004, we repaid $49.0 million and $17.0 million,
respectively, of this outstanding debt and we repaid $12.0
million during the first quarter of 2006. Under the small
business investment company program, we may borrow up to
$124.4 million from the SBA. We currently do not have plans
to borrow additional amounts from the SBA.
Revolving Line of Credit. At March 31, 2006,
we had an unsecured revolving line of credit with a committed
amount of $772.5 million. Effective May 22, 2006, we
expanded the committed amount under the facility by
$150.0 million, which brought the total committed amount to
$922.5 million. The facility is now fully committed. The
revolving line of credit expires on September 30, 2008.
On May 11, 2006, we amended the terms of the revolving
credit facility related to interest rates and certain reporting
requirements. The interest rate spread was reduced from 1.30% to
1.05%. The revolving line of credit now generally bears interest
at a rate equal to (i) LIBOR (for the period we select)
plus 1.05% 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 continues to require the payment of an annual
commitment fee equal to 0.20% of the committed amount (whether
used or unused). 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.
At March 31, 2006, there was $93.0 million outstanding
on our unsecured revolving line of credit. The amount available
under the line at March 31, 2006, was $641.8 million,
net of amounts committed for standby letters of credit of
$37.7 million. Net borrowings under the revolving line of
credit for the three months ended March 31, 2006, were
$1.3 million.
We have various financial and operating covenants required by
the revolving line of credit and notes payable and debentures.
These covenants require us to maintain certain financial ratios,
including debt to equity and interest coverage, and a minimum
net worth. These credit facilities provide for customary events
of default, including, but not limited to, payment defaults,
breach of representations or covenants, cross-defaults,
bankruptcy events, failure to pay judgments, attachment of our
assets, change of control and the issuance of an order of
dissolution. Certain of these events of default are subject to
notice and cure periods or materiality thresholds. Our credit
facilities also limit our ability to declare dividends if we
default under certain provisions. As of March 31, 2006, and
December 31, 2005, we were in compliance with these
covenants.
63
The following table shows our significant contractual
obligations for the repayment of debt and payment of other
contractual obligations as of March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year |
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2010 |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured long-term notes payable
|
|
$ |
1,164.7 |
|
|
$ |
175.0 |
|
|
$ |
|
|
|
$ |
153.0 |
|
|
$ |
267.2 |
|
|
$ |
408.0 |
|
|
$ |
161.5 |
|
|
SBA debentures
|
|
|
16.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.5 |
|
Revolving line of
credit(1)
|
|
|
93.0 |
|
|
|
|
|
|
|
|
|
|
|
93.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
27.9 |
|
|
|
3.3 |
|
|
|
4.4 |
|
|
|
4.5 |
|
|
|
4.7 |
|
|
|
4.4 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
1,302.1 |
|
|
$ |
178.3 |
|
|
$ |
4.4 |
|
|
$ |
250.5 |
|
|
$ |
271.9 |
|
|
$ |
412.4 |
|
|
$ |
184.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
At March 31, 2006, $641.8 million remained unused and
available, net of amounts committed for standby letters of
credit of $37.7 million issued under the credit facility. |
Off-Balance Sheet Arrangements
The following table shows our contractual commitments that may
have the effect of creating, increasing, or accelerating our
liabilities as of March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Year |
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2010 |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$ |
154.0 |
|
|
$ |
1.3 |
|
|
$ |
0.6 |
|
|
$ |
3.0 |
|
|
$ |
143.6 |
|
|
$ |
|
|
|
$ |
5.5 |
|
Standby letters of
credit(1)
|
|
|
37.7 |
|
|
|
0.1 |
|
|
|
|
|
|
|
37.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$ |
191.7 |
|
|
$ |
1.4 |
|
|
$ |
0.6 |
|
|
$ |
40.6 |
|
|
$ |
143.6 |
|
|
$ |
|
|
|
$ |
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $329.9 million at March 31, 2006. 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 and CDO and
CLO bonds and preferred shares/income notes. Our investments may
be subject to certain 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
64
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 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
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. The value of loan and debt securities may
be greater than our cost basis if the amount that would be
repaid on the loan or debt security upon the sale of the
portfolio company is greater than our cost basis.
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 a method that
approximates 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.
65
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.
Collateralized Debt Obligations (CDO) and
Collateralized Loan Obligations (CLO). CDO
and CLO bonds and preferred shares/income notes (CDO/ CLO
Assets) are carried at fair value, which is based on a
discounted cash flow model that utilizes 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 bonds
and preferred shares/income notes, when available. We recognize
unrealized appreciation or depreciation on its CDO/ CLO Assets
as comparable yields in the market change and/or based on
changes in estimated cash flows resulting from changes in
prepayment or loss assumptions in the underlying collateral
pool. We determine the fair value of its CDO/ CLO Assets on an
individual security-by-security basis.
We recognize 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 are revised when there are changes in actual and
estimated prepayment speeds or actual and estimated credit
losses. Changes in estimated yield are recognized as an
adjustment to the estimated yield over the remaining life of the
CDO/ CLO Assets 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, the change in the value of U.S.
Treasury bills and deposits of proceeds from sales of borrowed
Treasury securities, and depreciation on accrued interest and
dividends receivable and other assets where collection is
doubtful.
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.
66
SENIOR SECURITIES
Information about our senior securities is shown in the
following tables as of December 31 for the years indicated in
the table, unless otherwise noted. The report of our independent
registered public accounting firm on the senior securities table
as of December 31, 2005, is attached as an exhibit to the
registration statement of which this prospectus is a part. The
indicates information which the SEC expressly
does not require to be disclosed for certain types of senior
securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount |
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
Involuntary |
|
|
|
|
Exclusive of |
|
Asset |
|
Liquidating |
|
Average |
|
|
Treasury |
|
Coverage |
|
Preference |
|
Market Value |
Class and Year |
|
Securities(1) |
|
Per Unit(2) |
|
Per Unit(3) |
|
Per Unit(4) |
|
|
|
|
|
|
|
|
|
Unsecured Long-term Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
180,000,000 |
|
|
|
2,734 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
419,000,000 |
|
|
|
2,283 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
544,000,000 |
|
|
|
2,445 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
694,000,000 |
|
|
|
2,453 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
694,000,000 |
|
|
|
2,704 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
854,000,000 |
|
|
|
3,219 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
981,368,000 |
|
|
|
2,801 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
1,164,540,000 |
|
|
|
3,086 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
1,164,745,000 |
|
|
|
3,170 |
|
|
|
|
|
|
|
N/A |
|
Small Business Administration Debentures
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
61,300,000 |
|
|
$ |
2,485 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
54,300,000 |
|
|
|
2,215 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
47,650,000 |
|
|
|
2,734 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
62,650,000 |
|
|
|
2,283 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
78,350,000 |
|
|
|
2,445 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
94,500,000 |
|
|
|
2,453 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
94,500,000 |
|
|
|
2,704 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
94,500,000 |
|
|
|
3,219 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
77,500,000 |
|
|
|
2,801 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
28,500,000 |
|
|
|
3,086 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
16,500,000 |
|
|
|
3,170 |
|
|
|
|
|
|
|
N/A |
|
|
Overseas Private Investment Corporation
Loan |
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
8,700,000 |
|
|
$ |
2,485 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
8,700,000 |
|
|
|
2,215 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
5,700,000 |
|
|
|
2,734 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
5,700,000 |
|
|
|
2,283 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
5,700,000 |
|
|
|
2,445 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
5,700,000 |
|
|
|
2,453 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
5,700,000 |
|
|
|
2,704 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
5,700,000 |
|
|
|
3,219 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
5,700,000 |
|
|
|
2,801 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount |
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
Involuntary |
|
|
|
|
Exclusive of |
|
Asset |
|
Liquidating |
|
Average |
|
|
Treasury |
|
Coverage |
|
Preference |
|
Market Value |
Class and Year |
|
Securities(1) |
|
Per Unit(2) |
|
Per Unit(3) |
|
Per Unit(4) |
|
|
|
|
|
|
|
|
|
|
Revolving Lines of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
45,099,000 |
|
|
$ |
2,485 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
38,842,000 |
|
|
|
2,215 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
95,000,000 |
|
|
|
2,734 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
82,000,000 |
|
|
|
2,283 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
82,000,000 |
|
|
|
2,445 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
144,750,000 |
|
|
|
2,453 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
204,250,000 |
|
|
|
2,704 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
112,000,000 |
|
|
|
2,801 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
91,750,000 |
|
|
|
3,086 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
93,000,000 |
|
|
|
3,170 |
|
|
|
|
|
|
|
N/A |
|
|
Auction Rate Reset Note |
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
76,598,000 |
|
|
|
2,445 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
81,856,000 |
|
|
|
2,453 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
|
Master Repurchase Agreement and Master Loan and Security
Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
85,775,000 |
|
|
$ |
2,485 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
225,821,000 |
|
|
|
2,215 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
6,000,000 |
|
|
|
2,734 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
23,500,000 |
|
|
|
2,283 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
|
Senior Note
Payable(6) |
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
20,000,000 |
|
|
$ |
2,485 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
20,000,000 |
|
|
|
2,215 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount |
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
Involuntary |
|
|
|
|
Exclusive of |
|
Asset |
|
Liquidating |
|
Average |
|
|
Treasury |
|
Coverage |
|
Preference |
|
Market Value |
Class and Year |
|
Securities(1) |
|
Per Unit(2) |
|
Per Unit(3) |
|
Per Unit(4) |
|
|
|
|
|
|
|
|
|
|
Bonds Payable |
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
54,123,000 |
|
|
$ |
2,485 |
|
|
$ |
|
|
|
|
N/A |
|
1997
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
1998
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
1999
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2000
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2001
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2002
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2003
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2004
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
|
Redeemable Cumulative Preferred
Stock(5)(7) |
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
1,000,000 |
|
|
$ |
242 |
|
|
$ |
100 |
|
|
|
N/A |
|
1997
|
|
|
1,000,000 |
|
|
|
217 |
|
|
|
100 |
|
|
|
N/A |
|
1998
|
|
|
1,000,000 |
|
|
|
267 |
|
|
|
100 |
|
|
|
N/A |
|
1999
|
|
|
1,000,000 |
|
|
|
225 |
|
|
|
100 |
|
|
|
N/A |
|
2000
|
|
|
1,000,000 |
|
|
|
242 |
|
|
|
100 |
|
|
|
N/A |
|
2001
|
|
|
1,000,000 |
|
|
|
244 |
|
|
|
100 |
|
|
|
N/A |
|
2002
|
|
|
1,000,000 |
|
|
|
268 |
|
|
|
100 |
|
|
|
N/A |
|
2003
|
|
|
1,000,000 |
|
|
|
319 |
|
|
|
100 |
|
|
|
N/A |
|
2004
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
Non-Redeemable Cumulative
Preferred Stock(5) |
|
|
|
|
|
|
|
|
|
|
|
|
1996
|
|
$ |
6,000,000 |
|
|
$ |
242 |
|
|
$ |
100 |
|
|
|
N/A |
|
1997
|
|
|
6,000,000 |
|
|
|
217 |
|
|
|
100 |
|
|
|
N/A |
|
1998
|
|
|
6,000,000 |
|
|
|
267 |
|
|
|
100 |
|
|
|
N/A |
|
1999
|
|
|
6,000,000 |
|
|
|
225 |
|
|
|
100 |
|
|
|
N/A |
|
2000
|
|
|
6,000,000 |
|
|
|
242 |
|
|
|
100 |
|
|
|
N/A |
|
2001
|
|
|
6,000,000 |
|
|
|
244 |
|
|
|
100 |
|
|
|
N/A |
|
2002
|
|
|
6,000,000 |
|
|
|
268 |
|
|
|
100 |
|
|
|
N/A |
|
2003
|
|
|
6,000,000 |
|
|
|
319 |
|
|
|
100 |
|
|
|
N/A |
|
2004
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2005
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
2006 (as of March 31, unaudited)
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
N/A |
|
|
|
(1) |
Total amount of each class of senior securities outstanding at
the end of the period presented. |
|
(2) |
The asset coverage ratio for a class of senior securities
representing indebtedness is calculated as our consolidated
total assets, less all liabilities and indebtedness not
represented by senior securities, divided by senior securities
representing indebtedness. This asset coverage ratio is
multiplied by $1,000 to determine the Asset Coverage Per Unit.
The asset coverage ratio for a class of senior securities that
is preferred stock is calculated as our consolidated total
assets, less all liabilities and indebtedness not represented by
senior securities, divided by senior securities representing
indebtedness, plus the involuntary liquidation preference of the
preferred stock (see footnote 3). The Asset Coverage Per
Unit for preferred stock is expressed in terms of dollar amounts
per share. |
|
(3) |
The amount to which such class of senior security would be
entitled upon the involuntary liquidation of the issuer in
preference to any security junior to it. |
|
(4) |
Not applicable, as senior securities are not registered for
public trading. |
69
|
|
(5) |
Issued by our small business investment company subsidiary to
the Small Business Administration. These categories of senior
securities are not subject to the asset coverage requirements of
the 1940 Act. See Certain Government
Regulations Small Business Administration
Regulations. |
|
(6) |
We were the obligor on $15 million of the senior notes. Our
small business investment company subsidiary was the obligor on
the remaining $5 million, which is not subject to the asset
coverage requirements of the 1940 Act. |
|
(7) |
The Redeemable Cumulative Preferred Stock was reclassified to
Other Liabilities on the accompanying financial statements
during 2003 in accordance with SFAS No. 150. |
70
BUSINESS
General
We are a business development company, or BDC, and we are in the
private equity business. Specifically, we provide long-term debt
and equity capital to primarily private middle market companies
in a variety of industries. We believe the private equity
capital markets are important to the growth of small and middle
market companies because such companies often have difficulty
accessing the public debt and equity capital markets. We believe
that we are well positioned to be a source of capital for such
companies. We provide our investors the opportunity to
participate in the U.S. private equity industry through an
investment in our publicly traded stock.
We have participated in the private equity business since we
were founded in 1958. Since then, we have invested more than
$9 billion in thousands of companies nationwide. We
primarily invest in the American entrepreneurial economy,
helping to build middle market businesses and support American
jobs. We generally invest in established companies with adequate
cash flow for debt service. We are not venture capitalists, and
we generally do not provide seed, or early stage, capital. At
March 31, 2006, our private finance portfolio included
investments in over 100 companies that generate aggregate annual
revenues of over $12 billion and employ more than 90,000
people.
Our investment objective is to achieve current income and
capital gains. In order to achieve this objective, we invest in
companies in a variety of industries.
Private Equity Investing
As a private equity investor, we spend significant time and
effort identifying, structuring, performing due diligence,
monitoring, developing, valuing, and ultimately exiting our
investments. We generally target companies in less cyclical
industries with, among other things, high returns on invested
capital, management teams with meaningful equity ownership,
well-constructed balance sheets, and the ability to generate
free cash flow. Each investment is subject to an extensive due
diligence process. It is not uncommon for a single investment to
take from two months to a full year to complete, depending on
the complexity of the transaction.
71
Our investment activity is primarily focused on making long-term
investments in the debt and equity of primarily private middle
market companies. We have chosen these investments because they
can be structured to provide recurring cash flow to us as the
investor. In addition to earning interest income, we may earn
income from management, consulting, diligence, structuring or
other fees. We may also enhance our total return with capital
gains realized from equity features, such as nominal cost
warrants, or by investing in equity instruments. For the years
1998 through 2005, we have realized $575.1 million in
cumulative net realized gains from our investment portfolio. Net
realized gains for this period as a percentage of total assets
are shown in the chart below.
Our investments in the debt and equity of primarily private
middle market companies are generally long-term in nature and
are privately negotiated, and no readily available market exists
for them. This makes our investments highly illiquid and, as a
result, we cannot readily trade them. When we make an
investment, we enter into a long-term arrangement where our
ultimate exit from that investment may be three to ten years in
the future.
We believe illiquid investments generally provide better
investment returns on average over time than do more liquid
investments, such as public equities and public debt
instruments, because of the increased liquidity risk in holding
such investments. Investors in illiquid investments cannot
manage risk through investment trading techniques. In order to
manage our risk, we focus on careful investment selection,
thorough due diligence, portfolio monitoring and portfolio
diversification. Our investment management processes have been
designed to incorporate these disciplines. We are led by an
experienced management team with our senior officers possessing,
on average, 20 years of experience in the private equity
industry.
One measure of the performance of a private equity investor is
the internal rate of return generated by the investors
portfolio. Since our merger on December 31, 1997, through
December 31, 2005, our combined aggregate cash flow
Internal Rate of Return (IRR) has been approximately 20%
for private finance and CMBS/ CDO investments exited during this
period. The IRR is calculated using the aggregate portfolio cash
flow for all investments exited over this period. For
investments exited during this period, we invested capital
totaling $3.2 billion, earned $1.6 billion on this
invested capital, and
72
therefore, received $4.8 billion in total investment
proceeds from the exits of these investments. The weighted
average holding period of these investments was 34 months.
Investments are considered to be exited when the original
investment objective has been achieved through the receipt of
cash and/or non-cash consideration upon the repayment of our
debt investment or sale of an equity investment, or through the
determination that no further consideration was collectible and,
thus, a loss may have been realized. The aggregate cash flow IRR
for private finance investments was approximately 18% and for
CMBS/ CDO investments was approximately 24% for the same period.
These IRR results represent historical results. Historical
results are not necessarily indicative of future results.
We believe our business model is well suited for long-term
illiquid investing. Our balance sheet is capitalized with
significant equity capital and we use only a modest level of
debt capital, which allows us the ability to be patient and to
manage through difficult market conditions with less risk of
liquidity issues. Under the Investment Company Act of 1940, we
are restricted to a debt to equity ratio of approximately
one-to-one. Thus, our capital structure, which includes a modest
level of long-term leverage, is well suited for long-term
illiquid investments.
In general, we compete for investments with a large number of
private equity funds and mezzanine funds, other business
development companies, hedge funds, 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. However, we primarily compete with other providers of
long-term debt and equity capital to middle market companies,
including private equity funds and other business development
companies.
Private Finance Portfolio. Our private finance
portfolio is primarily composed of debt and equity securities.
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. These investments are also
generally illiquid.
Our capital is generally used to fund:
|
|
|
Buyouts
|
|
Recapitalizations |
Acquisitions
|
|
Note purchases |
Growth
|
|
Other types of financings |
When assessing a prospective private finance investment, we
generally look for companies in less cyclical industries in the
middle market (i.e., generally $50 million to
$500 million in revenues) with certain target
characteristics, which may or may not be present in the
companies in which we invest. Our target investments generally
are in companies with the following characteristics:
|
|
|
|
|
Management team with meaningful equity ownership |
|
|
|
Dominant or defensible market position |
|
|
|
High return on invested capital |
|
|
|
Stable operating margins |
|
|
|
Ability to generate free cash flow |
|
|
|
Well-constructed balance sheet |
73
We generally target investments in the following industries as
they tend to be less cyclical, cash flow intensive and generate
a high return on invested capital:
|
|
|
Business
Services
|
|
Healthcare Services |
Financial
Services
|
|
Energy Services |
Consumer
Products
|
|
|
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. It
is our preference to structure our investments with a focus on
current recurring interest and other income, which may include
management, consulting or other fees. We generally target debt
investments of $10 million to $100 million and buyout
investments of up to $250 million of invested capital.
Debt investments may include senior loans, 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
subordinated or mezzanine debt. We may make equity investments
for a minority equity stake in portfolio companies in
conjunction with our debt investments. We generally target a
minimum weighted average portfolio yield of 10% on the debt
component of our private finance portfolio. The weighted average
yield on our private finance loans and debt securities was 12.5%
at March 31, 2006.
Senior loans generally carry a floating rate of interest,
usually set as a spread over LIBOR, and generally require
payments of both principal and interest throughout the life of
the loan. Interest is generally paid to us monthly or quarterly.
Senior loans generally have maturities of three to five years.
Unitranche debt and subordinated debt generally carry a fixed
rate of interest generally with maturities of five to ten years
and generally have interest-only payments in the early years and
payments of both principal and interest in the later years,
although maturities and principal amortization schedules may
vary. Interest is generally paid to us quarterly. At
March 31, 2006, 80% of our private finance loans and debt
securities carried a fixed rate of interest and 20% carried a
floating rate of interest.
Through our wholly owned subsidiary, AC Finance LLC, (AC
Finance) we may underwrite senior loans related to our portfolio
investments or for other companies that are not in our
portfolio. When AC Finance underwrites senior loans, we may earn
a fee for such loan underwriting activities. Senior loans
originated and underwritten by AC Finance may or may not be
funded by us at closing. When these senior loans are closed, we
may fund all or a portion of the underwritten commitment pending
sale of the loan to other investors, which may include loan
sales to Callidus Capital Corporation (Callidus) or funds
managed by Callidus, a portfolio company controlled by us. After
completion of the sale process, we may or may not retain a
position in these senior loans. We may also invest in the bonds
or preferred shares/income notes of collateralized loan
obligations (CLOs) or collateralized debt obligations (CDOs),
where the underlying collateral pool consists of senior loans.
Certain of the CLOs and CDOs in which we invest may be managed
by Callidus Capital Management, a subsidiary of Callidus.
In a buyout transaction, we generally invest in senior debt,
subordinated debt and equity (preferred and/or voting or
non-voting common) where our equity ownership
74
represents a significant portion of the equity, but may or may
not represent a controlling interest. If we invest in non-voting
equity in a buyout investment, we generally have an option to
acquire a controlling stake in the voting securities of the
portfolio company at fair market value. We generally structure
our buyout investments such that we seek to earn a blended
current return on our total capital invested of approximately
10% through a combination of interest income on our senior loans
and subordinated debt, dividends on our preferred and common
equity, and management, consulting, or transaction services fees
to compensate us for the managerial assistance that we may
provide to the portfolio company. We believe that the
transaction fees charged for the services we provide to
portfolio companies are generally comparable with transaction
fees charged by others in the private equity industry for
performing similar services. As a result of our significant
equity investment in a buyout investment there is potential to
realize larger capital gains through buyout investing as
compared to debt or mezzanine investing.
The structure of each debt and equity security is specifically
negotiated to enable us to protect our investment, with a focus
on preservation of capital, 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 senior loans and unintranche
debt are generally secured, however in a liquidation scenario,
the collateral may not be sufficient to support our outstanding
investment. Our junior or mezzanine loans are generally
unsecured. Our investments may be subject to certain
restrictions on resale and generally have no established trading
market.
At March 31, 2006, 71.0% of the private finance portfolio
at value consisted of loans and debt securities and 29.0%
consisted of equity securities (equity securities included 26.3%
in investment cost basis and 2.7% in net unrealized
appreciation). At March 31, 2006, 39.0% of the private
finance investments at value were in companies more than 25%
owned, 9.6% were in companies 5% to 25% owned, and 51.4% were in
companies less than 5% owned.
75
Our ten largest investments at value at March 31, 2006,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2006 |
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Percentage of |
Portfolio Company |
|
Company Information |
|
Cost |
|
Value |
|
Total Assets |
|
|
|
|
|
|
|
|
|
Business Loan Express,
LLC(1)
|
|
Originates, sells, and services primarily real estate secured
small business loans specifically for businesses with financing
needs of up to $4.0 million. Provides SBA 7(a) loans,
conventional small business loans and small investment real
estate loans. Nationwide non-bank preferred lender in the
SBAs 7(a) guaranteed loan program. |
|
$ |
291.3 |
|
|
$ |
326.2 |
|
|
|
7.9% |
|
Mercury Air Centers, Inc.
|
|
Owns and operates fixed base operations under long-term leases
from local airport authorities, which generally consist of
terminal and hangar complexes that service the needs of the
general aviation community. |
|
$ |
121.5 |
|
|
$ |
180.0 |
|
|
|
4.4% |
|
Advantage Sales & Marketing, Inc.
(1)(2)
|
|
Sales and marketing agency providing outsourced sales,
merchandising, and marketing services to the consumer packaged
goods industry. |
|
$ |
151.3 |
|
|
$ |
164.3 |
|
|
|
4.0% |
|
Hot Stuff Foods, LLC
|
|
Provider of food service programs predominately to convenient
stores. Manufactures and distributes a broad line of branded
food products for on-site preparation and sales through in-store
Hot Stuff branded kitchens and grab and go service
points. |
|
$ |
155.3 |
|
|
$ |
155.3 |
|
|
|
3.8% |
|
Financial Pacific Company
|
|
Specialized commercial finance company that leases
business-essential equipment to small businesses nationwide. |
|
$ |
95.4 |
|
|
$ |
127.7 |
|
|
|
3.1% |
|
Norwesco, Inc.
|
|
Designs, manufactures and markets a broad assortment of
polyethylene tanks primarily to the agricultural and septic tank
markets. |
|
$ |
120.1 |
|
|
$ |
126.5 |
|
|
|
3.1% |
|
Meineke Car Care Centers, Inc.
|
|
Business format franchisor in the car care sector of the
automotive aftermarket industry with approximately 900 locations
worldwide. |
|
$ |
126.5 |
|
|
$ |
125.7 |
|
|
|
3.0% |
|
CR Brands, Inc.
|
|
Manufactures and markets consumer branded and private label
household cleaning and laundry products. |
|
$ |
109.1 |
|
|
$ |
113.2 |
|
|
|
2.7% |
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2006 |
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Percentage of |
Portfolio Company |
|
Company Information |
|
Cost |
|
Value |
|
Total Assets |
|
|
|
|
|
|
|
|
|
STS Operating,
Inc.(3)
|
|
Distributes systems, components and engineering services for
hydraulic, pneumatic, electronic and filtration systems. |
|
$ |
10.1 |
|
|
$ |
104.4 |
|
|
|
2.5% |
|
Healthy Pet Corp.
|
|
Veterinary hospitals offering medical and surgical services,
specialized treatments, diagnostic services, pharmaceutical
products, as well as routine health exams and vaccinations. |
|
$ |
90.1 |
|
|
$ |
90.8 |
|
|
|
2.2% |
|
|
|
(1) |
See Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
|
(2) |
In March 2006, we sold our majority interest in Advantage. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations for further detail. |
|
(3) |
In May 2006, we announced the completion of the sale of STS
Operating, Inc. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
for further detail. |
We monitor the portfolio to maintain diversity within the
industries in which we invest. Our portfolio is not concentrated
and we currently do not have a policy with respect to
concentrating (i.e., investing 25% or more of our
total assets) in any particular industry. We may or may not
concentrate in any industry or group of industries in the
future. The industry composition of the private finance
portfolio at value at March 31, 2006, and December 31,
2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
Industry
|
|
|
|
|
|
|
|
|
Business services
|
|
|
33 |
% |
|
|
45 |
% |
Consumer products
|
|
|
25 |
|
|
|
14 |
|
Financial services
|
|
|
14 |
|
|
|
15 |
|
Industrial products
|
|
|
11 |
|
|
|
10 |
|
Retail
|
|
|
3 |
|
|
|
3 |
|
Healthcare services
|
|
|
2 |
|
|
|
2 |
|
Energy services
|
|
|
2 |
|
|
|
2 |
|
Broadcasting and cable
|
|
|
1 |
|
|
|
1 |
|
Other(1)
|
|
|
9 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes investments in senior debt CDO and CLO funds. These
funds invest in senior debt representing a variety of industries. |
Commercial Real Estate Finance Portfolio. Since
1998, our commercial real estate investments have generally been
in the non-investment grade tranches of commercial
mortgage-backed securities, also known as CMBS, and in the bonds
and preferred shares of collateralized debt obligations, also
known as CDOs. With regard to CMBS, non-investment
grade means that nationally recognized statistical rating
organizations rate these securities below the top four
investment-grade rating categories (i.e., AAA
77
through BBB), and are sometimes referred to as
junk bonds. On May 3, 2005, we completed the
sale of our portfolio of CMBS and CDO investments to affiliates
of Caisse de dépôt et placement du Québec (the
Caisse). See Managements Discussion and Analysis of
Financial Condition and Results of Operations. After the
completion of this sale, our commercial real estate finance
portfolio consists of commercial mortgage loans, real estate
owned and equity interests, which totaled $129.4 million at
value on March 31, 2006.
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 sold certain commercial real estate related
assets, including servicer advances, intellectual property,
software and other platform assets, subject to certain
adjustments. 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.
Business Processes
Business Development and New Deal Origination. Over the
years, we believe we have developed and maintained a strong
industry reputation and an extensive network of relationships
with numerous private equity investors, investment banks,
business brokers, merger and acquisition advisors, financial
services companies, banks, law firms and accountants through
whom we source investment opportunities. Through these
relationships, we believe we have been able to strengthen our
position as a private equity investor. We are well known in the
private equity industry, and we believe that our experience and
reputation provide a competitive advantage in originating new
investments.
From time to time, we may receive referrals for new prospective
investments from our portfolio companies as well as other
participants in the capital markets. We generally pay referral
fees to those who refer transactions to us that we consummate.
New Deal Underwriting and Investment Execution. In a
typical transaction, we review, analyze, and substantiate
through due diligence, the business plan and operations of the
potential portfolio company. We perform financial due diligence,
perform operational due diligence, study the industry and
competitive landscape, and conduct reference checks with company
management or other employees, customers, suppliers, and
competitors, as necessary. We may work with external
consultants, including accounting firms and industry or
operational consultants, in performing due diligence and in
monitoring our portfolio investments.
Once we have determined that a prospective portfolio company is
suitable for investment, we work with the management and the
other capital providers, including senior, junior, and equity
capital providers, to structure a deal. We negotiate
among these parties to agree on the rights and terms of our
investment relative to the other capital in the portfolio
companys capital structure. The typical debt transaction
requires approximately two to six months of diligence and
structuring before funding occurs. The typical buyout
transaction may take up to one year to complete because the due
diligence and structuring process is significantly longer when
investing in a substantial equity stake in the company.
78
Our investments are tailored to the facts and circumstances of
each deal. The specific structure is designed to protect our
rights and manage our risk in the transaction. We generally
structure the debt instrument to require restrictive affirmative
and negative covenants, default penalties, lien protection, or
other protective provisions. In addition, each debt investment
is individually priced to achieve a return that reflects our
rights and priorities in the portfolio companys capital
structure, the structure of the debt instrument, and our
perceived risk of the investment. Our loans and debt securities
have an annual stated interest rate; however, that interest rate
is only one factor in pricing the investment. The annual 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 or upon prepayment. In addition to the interest
earned on loans and debt securities, our debt investments may
include equity features, such as warrants or options to buy a
minority interest in the portfolio company. The warrants we
receive with our debt securities generally require only a
nominal cost to exercise, and thus, if the portfolio company
appreciates in value, we achieve additional investment return
from this equity interest. We may structure the warrants to
provide minority rights provisions and event-driven puts. In
many cases, we will also obtain registration rights in
connection with these equity interests, which may include demand
and piggyback registration rights.
We have a centralized, credit-based approval process. The key
steps in our investment process are:
|
|
|
|
|
Initial investment screening; |
|
|
|
Initial investment committee approval; |
|
|
|
Due diligence, structuring and negotiation; |
|
|
|
Internal review of diligence results; |
|
|
|
Final investment committee approval; |
|
|
|
Approval by the Executive Committee of the Board of Directors
(for all debt investments that represent a commitment equal to
or greater than $20 million and every buyout transaction);
and |
|
|
|
Funding of the investment (due diligence must be completed with
final investment committee approval and Executive Committee
approval, as needed, before funds are disbursed). |
The investment process benefits from the significant
professional experience of the members of our investment
committee, which is chaired by our Chief Executive Officer and
includes our Chief Operating Officer, our Chief Financial
Officer, and certain of our Managing Directors.
Portfolio Monitoring and Development. Middle market
companies often lack the management expertise and experience
found in larger companies. As a BDC, we are required by the 1940
Act to make available significant managerial assistance to our
portfolio companies. Our senior level professionals work with
portfolio company management teams to assist them in building
their businesses. Managerial assistance includes, but is not
limited to, management and consulting services related to
corporate finance, marketing, human resources, personnel and
board member recruiting, business operations, corporate
governance, risk management and other general business matters.
Our corporate finance assistance includes supporting our
portfolio companies efforts to structure and
79
attract additional capital. We believe our extensive network of
industry relationships and our internal resources help make us a
collaborative partner in the development of our portfolio
companies.
Our team of investment professionals regularly monitors the
status and performance of each investment. This portfolio
company monitoring process generally includes review of the
portfolio companys financial performance against its
business plan, review of current financial statements and
compliance with financial covenants, evaluation of significant
current developments and assessment of future exit strategies.
For debt investments we may have board observation rights that
allow us to attend portfolio company board meetings. For buyout
investments, we generally hold a majority of the seats on the
board of directors where we own a controlling interest in the
portfolio company and we have board observation rights where we
do not own a controlling interest in the portfolio company.
Our portfolio management committee oversees the overall
performance of the portfolio, including reviewing the
performance of selected portfolio companies, overseeing
portfolio companies in workout status, reviewing and approving
certain amendments or modifications to existing investments,
reviewing and approving certain portfolio exits, and reviewing
and approving certain actions by portfolio companies whose
voting securities are more than 50% owned by us. Our portfolio
management committee is chaired by our Chief Executive Officer
and includes our Chief Operating Officer, Chief Financial
Officer, Chief Valuation Officer (non-voting member), and three
Managing Directors. From time to time we will identify
investments that require closer monitoring or become workout
assets. We develop a workout strategy for workout assets and the
portfolio management committee gauges our progress against the
strategy.
We seek to price our investments to provide an investment return
considering the fact that certain investments in the portfolio
may underperform or result in loss of investment return or
investment principal. As a private equity investor, we will
incur losses from our investing activities, however we have a
history of working with troubled portfolio companies in order to
recover as much of our investments as is practicable.
Portfolio Grading
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.
Portfolio Valuation
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
80
portfolio investments at fair value as determined in good faith
by the Board of Directors pursuant to a valuation policy and a
consistently applied valuation process. 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
appreciated in value. Changes in fair value are recorded in the
statement of operations as net change in unrealized appreciation
or depreciation.
As a business development company, we invest in illiquid
securities including debt and equity securities of companies.
The structure of each 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 may be subject to certain 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 a private finance 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
81
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 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. 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 as
discussed below.
Valuation Process. The portfolio valuation process
is managed by our Chief Valuation Officer (CVO). The
CVO works with the investment professionals responsible
82
for each investment. The following is a description of the steps
we take each quarter to determine the value of our portfolio.
|
|
|
|
|
Our valuation process begins with each portfolio company or
investment being initially valued by the deal team, led by the
Managing Director or senior officer who is responsible for the
portfolio company relationship. |
|
|
|
The CVO reviews the preliminary valuation as determined by the
deal team. |
|
|
|
The CVO, members of the valuation team, and third-party
consultants, as applicable (see below), meet with each Managing
Director or responsible senior officer to discuss the
preliminary valuation determined and documented by the deal team
for each of their respective investments. |
|
|
|
The CEO, COO, CFO and the managing directors meet with the CVO
to discuss the preliminary valuation results. |
|
|
|
Valuation documentation is distributed to the members of the
Board of Directors. |
|
|
|
The Audit Committee of the Board of Directors meets with the
third-party consultants (see below) to discuss the assistance
provided and results. |
|
|
|
The Board of Directors and the CVO meet to discuss and review
valuations. |
|
|
|
To the extent there are changes or if additional information is
deemed necessary, a
follow-up Board meeting
may take place. |
|
|
|
The Board of Directors determines the fair value of the
portfolio in good faith. |
In connection with our valuation process to determine the fair
value of a private finance investment, we work with third-party
consultants to obtain assistance and advice as additional
support in the preparation of our internal valuation analysis
for a portion of the portfolio each quarter. In addition, we may
receive other 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.
We have received third-party valuation assistance from Duff
& Phelps, LLC (Duff & Phelps) and Houlihan Lokey Howard
and Zukin (Houlihan Lokey). We currently intend to continue to
obtain valuation assistance from third parties. We currently
anticipate that we will generally obtain valuation assistance
for all companies in the portfolio where we own more than 50% of
the outstanding voting equity securities on a quarterly basis
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
calendar 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 and value less than $250,000. For the quarter ended
March 31, 2006, Duff & Phelps and Houlihan Lokey
assisted us by reviewing our valuation of 78 portfolio
companies, which represented 87.0% of the private finance
portfolio at value. See Managements Discussion and
Analysis of Financial Condition and Results of Operations.
83
Disposition of Investments
We manage our portfolio of investments in an effort to maximize
our expected returns. Our portfolio is large and we frequently
are repaid by our borrowers and exit our debt and equity
investments as portfolio companies are sold, recapitalized or
complete an initial public offering. In our debt investments
where we have equity features, we frequently are in a minority
ownership position in a portfolio company, and as a result,
generally exit the investment when the majority equity
stakeholder decides to sell or recapitalize the company. Where
we have a control position in an investment, as we may have in
buyout investments, we have more flexibility and can determine
whether or not we should exit our investment. Our most common
exit strategy for a buyout investment is the sale of a portfolio
company to a strategic or financial buyer. If an investment has
appreciated in value, we may realize a gain when we exit the
investment. If an investment has depreciated in value, we may
realize a loss when we exit the investment.
We are in the investment business, which includes acquiring and
exiting investments. It is our policy not to comment on
potential transactions in the portfolio prior to reaching a
definitive agreement or, in many cases, prior to consummating a
transaction. To the extent we enter into any material
transactions, we would provide disclosure as required.
Dividends
We have elected to be taxed as a regulated investment company
under Subchapter M of the Code. As such, we are not subject
to corporate-level income taxation on income we timely
distribute to our stockholders as dividends. We determine our
regular quarterly dividends based upon an estimate of annual
taxable income, which includes our taxable interest, dividend,
and fee income, as well as taxable net capital gains. 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. Taxable
income includes non-cash income, such as changes in accrued and
reinvested interest and dividends, which includes contractual
payment-in-kind interest, 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.
As a regulated investment company, we distribute substantially
all of our annual taxable income to shareholders through the
payment of cash dividends. Our Board of Directors reviews the
dividend rate quarterly, and may adjust the quarterly dividend
throughout the year. Dividends are declared considering 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 Code. The
amount of excess taxable income that may be carried over for
distribution in the next year under the Code is approximately
three quarters of dividend payments. 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). We believe that carrying over
excess taxable
84
income into future periods may provide increased visibility with
respect to taxable earnings available to pay the regular
quarterly dividend.
We began paying quarterly dividends in 1963, and our portfolio
has provided sufficient ordinary taxable income and realized net
capital gains to sustain or grow our dividends over time. Since
inception, our average annual total return to shareholders
(assuming all dividends were reinvested) was 18.0%. Over the
past one, three, five and ten years, our total return to
shareholders (assuming all dividends were reinvested) has been
23.5%, 20.6%, 17.1% and 19.8%, respectively, with the dividend
providing a meaningful portion of this return.
The percentage of our dividend generated by ordinary taxable
income versus capital gain income will vary from year to year.
The percentage of ordinary taxable income versus net capital
gain income supporting the dividend since 1986 is shown below.
Corporate Structure and Offices
We are a Maryland corporation and a closed-end, non-diversified
management investment company that has elected to be regulated
as a business development company under the 1940 Act. Our
predecessor corporation was incorporated under the laws of the
District of Columbia in 1958 and we reorganized as a Maryland
corporation in 1993. We have a wholly owned subsidiary, Allied
Investments L.P. (Allied Investments), that is licensed under
the Small Business Investment Act of 1958 as a Small Business
Investment Company. We own all of the partnership interests in
Allied Investments. The assets held by Allied Investments
represented 1.9% of our total assets at March 31, 2006. See
Certain Government Regulations below for further
information about small business investment company regulation.
In addition, we have a real estate investment trust subsidiary,
Allied Capital REIT, Inc., and several subsidiaries that are
single-member limited liability companies established for
specific purposes, including holding real estate property. We
also have a subsidiary, A.C. Corporation, that generally
provides diligence and structuring services on our transactions,
as well as structuring, transaction, management, and other
services to Allied
85
Capital and our portfolio companies. A.C. Corporation has a
wholly owned subsidiary, AC Finance LLC, that generally
underwrites and arranges senior loans for our portfolio
companies and other third parties.
Our executive offices are located at 1919 Pennsylvania
Avenue, 3rd Floor, NW, Washington, DC
20006-3434 and our
telephone number is
(202) 721-6100. In
addition, we have regional offices in Chicago, Los Angeles,
and New York.
Employees
At March 31, 2006, we employed 155 individuals including
investment and portfolio management professionals, operations
professionals and administrative staff. The majority of our
employees are located in our Washington, DC office. We believe
that our relations with our employees are excellent.
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.
86
PORTFOLIO COMPANIES
The following is a listing of each portfolio company or its
affiliate, together referred to as portfolio companies, in which
we had an equity investment at March 31, 2006. Percentages
shown for class of securities held by us represent percentage of
the class owned and do not necessarily represent voting
ownership or economic ownership. Percentages shown for equity
securities other than warrants or options represent the actual
percentage of the class of security held before dilution.
Percentages shown for warrants and options held represent the
percentage of class of security we may own assuming we exercise
our warrants or options before dilution.
The portfolio companies are presented in three categories:
companies more than 25% owned which represent portfolio
companies where we directly or indirectly own more than 25% of
the outstanding voting securities of such portfolio company and,
therefore, are deemed controlled by us under the 1940 Act;
companies owned 5% to 25% which represent portfolio companies
where we directly or indirectly own 5% to 25% of the outstanding
voting securities of such portfolio company or where we hold 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 we directly or indirectly own less
than 5% of the outstanding voting securities of such portfolio
company and where we have no other affiliations with such
portfolio company. We make available significant managerial
assistance to our portfolio companies. We generally receive
rights to observe the meetings of our portfolio companies
board of directors, and may have one or more voting seats on
their boards.
For information relating to the amount and nature of our
investments in portfolio companies, see our consolidated
statement of investments at March 31, 2006, at
pages F-7 to
F-16.
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Percentage |
Name and Address |
|
Nature of its |
|
Title of Securities |
|
of Class |
of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held |
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|
PRIVATE FINANCE
|
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Companies More Than 25% Owned
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|
Acme Paging,
L.P.(1)
|
|
Paging Services |
|
Common Stock in Affiliate |
|
|
80.0% |
|
|
6080 SW 40th Street, Suite 3
|
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Miami, FL 33155
|
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|
Alaris Consulting,
LLC(1)(2)
|
|
Consulting Firm |
|
Equity Interests |
|
|
100.0% |
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|
360 W. Butterfield Road |
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Suite 400 |
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Elmhurst, IL 60126
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|
|
|
Avborne,
Inc.(1)(6)
|
|
Aviation Services |
|
Series B Preferred Stock |
|
|
23.8% |
|
|
c/o Trivest, Inc.
|
|
|
|
Common Stock |
|
|
27.2% |
|
|
7500 NW 26th Street
|
|
|
|
|
|
|
|
|
|
Miami, FL 33122
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance,
Inc.(1)(6)
|
|
Aviation Services |
|
Series A Preferred Stock |
|
|
27.5% |
|
|
c/o Trivest, Inc.
|
|
|
|
Common Stock |
|
|
27.5% |
|
|
7500 26th Street N.W.
|
|
|
|
|
|
|
|
|
|
Miami, FL 33122
|
|
|
|
|
|
|
|
|
Business Loan Express,
LLC(1)
|
|
Small Business Lender |
|
Class A Equity Interests |
|
|
100.0% |
|
|
1633 Broadway
|
|
|
|
Class B Equity Interests |
|
|
100.0% |
|
|
New York, NY 10019
|
|
|
|
Class C Equity Interests |
|
|
94.9% |
|
|
|
|
|
|
Equity Interest in BLX |
|
|
|
|
|
|
|
|
Subsidiary(3) |
|
|
20.0% |
|
Callidus Capital
Corporation(1)(4)
|
|
Asset Manager and |
|
Common stock |
|
|
100.0% |
|
|
520 Madison Avenue
|
|
Finance Company |
|
|
|
|
|
|
|
New York, NY 10022
|
|
|
|
|
|
|
|
|
CR Brands,
Inc.(1)
|
|
Household Cleaning |
|
Common Stock |
|
|
78.2% |
|
|
141 Venture Boulevard
|
|
Products |
|
|
|
|
|
|
|
Spartanburg, SC 29306
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
Name and Address |
|
Nature of its |
|
Title of Securities |
|
of Class |
of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held |
|
|
|
|
|
|
|
Diversified Group Administrators, Inc.
|
|
Third Party |
|
Series B Preferred Stock |
|
|
64.7% |
|
|
201 Johnson Rd Building #1
|
|
Administrator for |
|
Series A Preferred Stock |
|
|
69.9% |
|
|
Houston, PA 15342
|
|
Self-funded Health |
|
Common Stock |
|
|
45.8% |
|
|
|
Benefit Plan |
|
|
|
|
|
|
Financial Pacific
Company(1)
|
|
Commercial Finance |
|
Series A Preferred Stock |
|
|
99.4% |
|
|
3455 South 344th Way, Suite 300
|
|
Leasing |
|
Common Stock |
|
|
99.4% |
|
|
Federal Way, WA 98001
|
|
|
|
|
|
|
|
|
ForeSite Towers,
LLC(1)
|
|
Tower Leasing |
|
Series A Preferred |
|
|
|
|
|
22 Iverness Center Parkway
|
|
|
|
Equity Interest |
|
|
100.0% |
|
|
Suite 50
|
|
|
|
Series B Preferred |
|
|
|
|
|
Birmingham, AL 35242
|
|
|
|
Equity Interest |
|
|
100.0% |
|
|
|
|
|
Series E Preferred Equity Interest |
|
|
100.0% |
|
|
|
|
|
Common Equity Interest |
|
|
77.3% |
|
Global Communications,
LLC(1)
|
|
Muzak Franchisee |
|
Preferred Equity Interest |
|
|
77.8% |
|
|
1000 North Dixie Highway
|
|
|
|
Options for Common |
|
|
|
|
|
West Palm Beach, FL 33401
|
|
|
|
Equity Interest |
|
|
59.3% |
|
Gordian Group,
Inc.(1)
|
|
Financial Advisory Services |
|
Common Stock |
|
|
100.0% |
|
|
499 Park Avenue
|
|
|
|
|
|
|
|
|
|
New York, NY 10022
|
|
|
|
|
|
|
|
|
Healthy Pet
Corp.(1)
|
|
Comprehensive Veterinary |
|
Common Stock |
|
|
98.7% |
|
|
1720 Post Road
|
|
Services |
|
|
|
|
|
|
|
Fairfield, CT 06430
|
|
|
|
|
|
|
|
|
HMT, Inc.
|
|
Storage Tank |
|
Class B Preferred Stock |
|
|
33.5% |
|
|
4422 FM 1960 West
|
|
Maintenance & |
|
Common Stock |
|
|
25.0% |
|
|
Suite 350
|
|
Repair |
|
Warrants to Purchase |
|
|
|
|
|
Houston, TX 77068
|
|
|
|
Common Stock |
|
|
9.7% |
|
Impact Innovations Group, LLC
|
|
Information Technology |
|
Equity Interest in |
|
|
|
|
|
12 Piedmont Center, Suite 210
|
|
Services Provider |
|
Affiliate(5) |
|
|
50.0% |
|
|
Atlanta, GA 30305
|
|
|
|
|
|
|
|
|
Insight Pharmaceuticals
Corporation(1)
|
|
Marketer of Over-The- |
|
Preferred Stock |
|
|
91.2% |
|
|
550 Township Line Road, Suite 300
|
|
Counter Pharmaceuticals |
|
Common Stock |
|
|
91.2% |
|
|
Blue Bell, PA 19422
|
|
|
|
|
|
|
|
|
Jakel,
Inc.(1)
|
|
Manufacturer of Electric |
|
Series A-1 Preferred Stock |
|
|
32.3% |
|
|
400 Broadway
|
|
Motors and Blowers |
|
Class B Common Stock |
|
|
100.0% |
|
|
Highlands, IL 62249
|
|
|
|
|
|
|
|
|
Legacy Partners Group,
LLC(1)
|
|
Merger and Acquisition |
|
Equity Interests |
|
|
100.0% |
|
|
520 Madison Avenue, 27th Floor
|
|
Advisor |
|
|
|
|
|
|
|
New York, NY 10022
|
|
|
|
|
|
|
|
|
Litterer Beteiligungs-GmbH
|
|
Scaffolding Company |
|
Equity Interest |
|
|
25.0% |
|
|
Uhlandstrasse 1
|
|
|
|
|
|
|
|
|
|
69493 Hirschberg
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
|
|
|
|
|
|
Mercury Air Centers,
Inc.(1)
|
|
Fixed Base Operations |
|
Series A Common Stock |
|
|
100.0% |
|
|
1951 Airport Road
|
|
|
|
Common Stock |
|
|
95.0% |
|
|
Atlanta, GA 30341
|
|
|
|
|
|
|
|
|
MVL Group,
Inc.(1)
|
|
Market Research |
|
Common Stock |
|
|
64.9% |
|
|
1061 E. Indiantown Road
|
|
Services |
|
|
|
|
|
|
|
Suite 300
|
|
|
|
|
|
|
|
|
|
Jupiter, FL 33477
|
|
|
|
|
|
|
|
|
Powell Plant Farms,
Inc.(1)
|
|
Plant Producer & |
|
Preferred Stock |
|
|
100.0% |
|
|
Route 3, Box 1058
|
|
Wholesaler |
|
Warrants to Purchase |
|
|
|
|
|
Troup, TX 75789
|
|
|
|
Common Stock |
|
|
83.5% |
|
Service Champ,
Inc.(1)
|
|
Wholesale Distributor of |
|
Common Stock |
|
|
63.9% |
|
|
180 New Britain Boulevard
|
|
Auto Parts |
|
|
|
|
|
|
|
Chalfont, PA 18914
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
Name and Address |
|
Nature of its |
|
Title of Securities |
|
of Class |
of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held |
|
|
|
|
|
|
|
Staffing Partners Holding
|
|
|
|
|
|
|
|
|
|
Company,
Inc.(1)
|
|
Temporary Employee |
|
Series B Preferred Stock |
|
|
71.4% |
|
|
104 Church Lane, #100
|
|
Services |
|
Redeemable Preferred Stock |
|
|
48.3% |
|
|
Baltimore, MD 21208
|
|
|
|
Class A-1 Common Stock |
|
|
50.0% |
|
|
|
|
|
|
Class A-2 Common Stock |
|
|
24.4% |
|
|
|
|
|
|
Class B Common Stock |
|
|
48.8% |
|
|
|
|
|
|
Warrants to purchase |
|
|
|
|
|
|
|
|
|
Class B Common Stock |
|
|
30.3% |
|
Startec Global Communications
|
|
|
|
|
|
|
|
|
|
Corporation(1)
|
|
Telecommunications |
|
Common Stock |
|
|
68.5% |
|
|
7631 Calhoun Drive
|
|
Services |
|
|
|
|
|
|
|
Rockville, MD 20850
|
|
|
|
|
|
|
|
|
STS Operating, Inc.
|
|
|
|
|
|
|
|
|
|
(d/b/a SunSource Technology |
|
|
|
|
|
|
|
|
|
Services,
Inc.)(1)(11) |
|
Industrial Distribution |
|
Common Stock |
|
|
77.1% |
|
|
2301 Windsor Court
|
|
|
|
Options to Purchase |
|
|
|
|
|
Addison, IL 60101
|
|
|
|
Common Stock |
|
|
1.0% |
|
Triview Investments,
Inc.(1)(10)
|
|
Multi-system Cable |
|
Common Stock |
|
|
99.5% |
|
|
1919 Pennsylvania Ave, N.W.
|
|
Operator and |
|
|
|
|
|
|
|
Washington, DC 20006
|
|
Pharmaceutical Marketer |
|
|
|
|
|
|
Companies 5% to 25% Owned
|
|
|
|
|
|
|
|
|
Advantage Sales & Marketing,
Inc.(1)
|
|
Sales and Marketing |
|
Class A Equity Units |
|
|
4.0% |
|
|
19100 Von Karman Avenue Suite 600
|
|
Agency |
|
|
|
|
|
|
|
Irvine, CA 92612
|
|
|
|
|
|
|
|
|
Air Evac Lifeteam LLC
|
|
Air Ambulance Service |
|
Series A Preferred |
|
|
|
|
|
1448 W. Eighth Street
|
|
|
|
Equity Interest |
|
|
6.6% |
|
|
West Plains, MO 65775
|
|
|
|
Series B Preferred Equity |
|
|
|
|
|
|
|
|
|
Interest |
|
|
6.2% |
|
BB&T Capital Partners/ Windsor
|
|
|
|
|
|
|
|
|
|
Mezzanine Fund, LLC
|
|
Private Equity Fund |
|
Class A Equity Interests |
|
|
7.5% |
|
|
200 West Second Street, 4th Floor
|
|
|
|
Class A-1 Equity Interests |
|
|
100.0% |
|
|
Winston-Salem, NC 27101
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Speciality Chemical |
|
Common Stock |
|
|
6.1% |
|
|
801 Dayton Avenue
|
|
Manufacturer |
|
|
|
|
|
|
|
Ames, IA 50010
|
|
|
|
|
|
|
|
|
BI Incorporated
|
|
Electronic Monitoring |
|
Common Stock |
|
|
7.1% |
|
|
1 North Franklin Street
|
|
Equipment |
|
|
|
|
|
|
|
Chicago, IL 60606
|
|
|
|
|
|
|
|
|
MedBridge Healthcare,
LLC(1)
|
|
Sleep Diagnostic Facilities |
|
Debt Convertible |
|
|
|
|
|
110 West North Street, Suite 100
|
|
|
|
into Equity Interests |
|
|
75.0% |
|
|
Greenville, SC 29601
|
|
|
|
Class C Equity Interests |
|
|
100.0% |
|
Nexcel Synthetics, LLC
|
|
Manufacturer of Carpet |
|
Class A Equity Interest |
|
|
6.8% |
|
|
6076 Southern Industrial Drive
|
|
Backing |
|
Class B Equity Interest |
|
|
6.8% |
|
|
Birmingham, AL 35235
|
|
|
|
|
|
|
|
|
Pres Air Trol LLC
|
|
Pressure Switch |
|
Class A Equity Interests |
|
|
32.8% |
|
|
1009 W. Boston Post Road
|
|
Manufacturer |
|
|
|
|
|
|
|
Mamaroneck, NY 10543
|
|
|
|
|
|
|
|
|
Progressive International
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
Retail Kitchenware |
|
Series A Redeemable |
|
|
|
|
|
6111 S. 228th Street
|
|
|
|
Preferred Stock |
|
|
12.5% |
|
|
Kent, WA 98064
|
|
|
|
Class A Common Stock |
|
|
1.0% |
|
|
|
|
|
|
Warrants to Purchase |
|
|
|
|
|
|
|
|
|
Class A Common Stock |
|
|
42.0% |
|
Soteria Imaging Services, LLC
|
|
Diagnostic Imaging |
|
Class A Preferred Equity |
|
|
|
|
|
6009 Brownsboro Park Blvd., Suite H
|
|
Facilities Operator |
|
Interest |
|
|
10.8% |
|
|
Louisville, KY 40207
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
Name and Address |
|
Nature of its |
|
Title of Securities |
|
of Class |
of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held |
|
|
|
|
|
|
|
Universal Environmental Services,
|
|
|
|
|
|
|
|
|
|
LLC
|
|
Used Oil Recycling |
|
Class A Preferred Equity |
|
|
|
|
|
411 Dividend Drive
|
|
|
|
Interests |
|
|
15.0% |
|
|
Peachtree City, GA 30269
|
|
|
|
Class B Preferred Equity |
|
|
|
|
|
|
|
|
|
Interests |
|
|
15.0% |
|
Companies Less Than 5% Owned
|
|
|
|
|
|
|
|
|
Advanced Circuits, Inc.
|
|
Printed Circuit Boards |
|
Common Stock |
|
|
3.0% |
|
|
30 South Wacker Drive, Suite 3700
|
|
Manufacturer |
|
|
|
|
|
|
|
Chicago, IL 60606
|
|
|
|
|
|
|
|
|
Amerex Group, LLC
|
|
Supplier of Outerwear |
|
Class B Equity Interests |
|
|
100.0% |
|
|
1500 Rahway Avenue
|
|
Apparel |
|
|
|
|
|
|
|
Avenal, NJ 07001
|
|
|
|
|
|
|
|
|
Benchmark Medical, Inc.
|
|
Outpatient Physical |
|
Warrant to Purchase |
|
|
|
|
|
101 Lindin Drive, Suite 420
|
|
Therapy Services |
|
Common Stock |
|
|
2.5% |
|
|
Malvern, PA 19355
|
|
|
|
|
|
|
|
|
Border Foods, Inc.
|
|
Mexican Ingredient & Food |
|
Series A Preferred Stock |
|
|
9.4% |
|
|
1750 Valley View Lane, Suite 350
|
|
Product Manufacturer |
|
Series B-2 Preferred Stock |
|
|
100.0% |
|
|
Farmers Branch, TX 75234
|
|
|
|
Warrants to Purchase |
|
|
|
|
|
|
|
|
Series B-2 Preferred Stock |
|
|
100.0% |
|
|
|
|
|
Common Stock |
|
|
12.4% |
|
|
|
|
|
Warrants to Purchase |
|
|
|
|
|
|
|
|
Common Stock |
|
|
73.8% |
|
Callidus Debt Partners CLO Fund III,
|
|
|
|
|
|
|
|
|
|
Ltd.(7)
|
|
Senior Debt Fund |
|
Preferred Shares |
|
|
68.4% |
|
|
135 Lasalle Street
|
|
|
|
|
|
|
|
|
|
Chicago, IL 60694
|
|
|
|
|
|
|
|
|
Camden Partners Strategic Fund II, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
One South Street
|
|
|
|
Interest |
|
|
3.9% |
|
|
Suite 2150
|
|
|
|
|
|
|
|
|
|
Baltimore, MD 21202
|
|
|
|
|
|
|
|
|
Catterton Partners V, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
7 Greenwich Office Park
|
|
|
|
Interest |
|
|
0.8% |
|
|
Greenwich, CT 06830
|
|
|
|
|
|
|
|
|
Centre Capital Investors IV, LP
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
30 Rockefeller Plaza, 50th Floor
|
|
|
|
Interest |
|
|
0.6% |
|
|
New York, NY 10020
|
|
|
|
|
|
|
|
|
Commercial Credit Group, Inc.
|
|
Equipment Finance |
|
Series C Preferred Stock |
|
|
100.0% |
|
|
212 South Tyron Street, Suite 1400
|
|
and Leasing |
|
Warrants to Purchase |
|
|
|
|
|
Charlotte, NC 28281
|
|
|
|
Common Stock |
|
|
28.5% |
|
Component Hardware Group, Inc.
|
|
Designer & Developer |
|
Class A Preferred Stock |
|
|
7.4% |
|
|
1890 Swarthmore Ave.
|
|
of Hardware |
|
Class B Common Stock |
|
|
13.5% |
|
|
Lakewood, NJ 08701
|
|
Components |
|
|
|
|
|
|
Cooper Natural Resources, Inc.
|
|
Sodium Sulfate Producer |
|
Series A Convertible |
|
|
|
|
|
P.O. Box 1477
|
|
|
|
Preferred Stock |
|
|
100.0% |
|
|
Seagraves, TX 79360
|
|
|
|
Warrants to Purchase |
|
|
|
|
|
|
|
|
Series A Convertible |
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
36.8% |
|
|
|
|
|
Warrants to Purchase |
|
|
|
|
|
|
|
|
Common Stock |
|
|
6.5% |
|
Coverall North America, Inc.
|
|
Contract Cleaning Services |
|
Preferred Stock |
|
|
100.0% |
|
|
5201 Congress Avenue, Suite 275
|
|
|
|
Warrant to Purchase |
|
|
|
|
|
Boca Raton, FL 33487
|
|
|
|
Common Stock |
|
|
21.4% |
|
Distant Lands Trading Co.
|
|
Provider of Premium |
|
Class A Common Stock |
|
|
4.4% |
|
|
11754 State Highway 64 West
|
|
Coffee and Coffee Beans |
|
|
|
|
|
|
|
Tyler, TX 75704
|
|
|
|
|
|
|
|
|
DVS VideoStream, LLC
|
|
Media Technical Post- |
|
Debt Convertible into |
|
|
|
|
|
2600 West Olive Avenue
|
|
Production Service Provider |
|
Equity Interests |
|
|
20.8% |
|
|
Burbank, CA 91505
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
Name and Address |
|
Nature of its |
|
Title of Securities |
|
of Class |
of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held |
|
|
|
|
|
|
|
Dynamic India Fund IV
|
|
Private Equity Fund |
|
Equity Interests |
|
|
2.4% |
|
|
3rd Floor, Les Cascades Edith
|
|
|
|
|
|
|
|
|
|
Cavell Street
|
|
|
|
|
|
|
|
|
|
Port Luis Mauritius
|
|
|
|
|
|
|
|
|
eCentury Capital Partners, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
8270 Greensboro Drive
|
|
|
|
Interest |
|
|
25.0% |
|
|
Suite 1025
|
|
|
|
|
|
|
|
|
|
McLean, VA 22102
|
|
|
|
|
|
|
|
|
Elexis Beta GmbH
|
|
Distance Measurement |
|
Options to Purchase |
|
|
|
|
|
Ulmenstraße 22
|
|
Device |
|
Shares |
|
|
9.8% |
|
|
60325 Frankfurt am Main
|
|
Manufacturer |
|
|
|
|
|
|
|
Germany
|
|
|
|
|
|
|
|
|
Frozen Specialties, Inc.
|
|
Private Label Frozen |
|
Warrants to Purchase |
|
|
|
|
|
720 Barre Road
|
|
Food Manufacturer |
|
Class A Common Stock |
|
|
2.7% |
|
|
Archbold, OH 43502
|
|
|
|
|
|
|
|
|
Geotrace Technologies, Inc.
|
|
Oil and Gas Reservoir |
|
Warrant to Purchase |
|
|
|
|
|
1011 Highway 6 South, Suite 220
|
|
Analysis |
|
Preferred Stock |
|
|
8.4% |
|
|
Houston, TX 77077
|
|
|
|
Warrant to Purchase |
|
|
|
|
|
|
|
|
Common Stock |
|
|
8.4% |
|
Grotech Partners, VI, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
c/o Grotech Capital Group
|
|
|
|
Interest |
|
|
2.4% |
|
|
9690 Deereco Road
|
|
|
|
|
|
|
|
|
|
Suite 800
|
|
|
|
|
|
|
|
|
|
Timonium, MD 21093
|
|
|
|
|
|
|
|
|
Havco Wood Products LLC
|
|
Hardwood Flooring |
|
Equity Interests |
|
|
4.5% |
|
|
P.O. BOX 1342
|
|
Products Manufacturer |
|
|
|
|
|
|
|
Cape Girardeau, MO 63702
|
|
|
|
|
|
|
|
|
Homax Holdings, Inc.
|
|
Supplier of Branded |
|
Preferred Stock |
|
|
0.1% |
|
|
468 West Horton Road
|
|
Consumer Products |
|
Common Stock |
|
|
0.1% |
|
|
Bellingham, WA 98226
|
|
|
|
Warrant to Purchase |
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
1.1% |
|
|
|
|
|
|
Warrant to Purchase |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
1.1% |
|
Hot Stuff Foods, LLC
|
|
Food services to |
|
Class B Common Stock
(9) |
|
|
100.0% |
|
|
2930 W Maple Street, Box 85210
|
|
Convenience Stores |
|
Warrants to Purchase |
|
|
|
|
|
Sioux Falls, SD 57118
|
|
|
|
Common Stock |
|
|
51.0% |
|
International Fiber Corporation
|
|
Cellulose and Fiber |
|
Series A Preferred Stock |
|
|
4.7% |
|
|
50 Bridge Street
|
|
Producer |
|
|
|
|
|
|
|
North Tonawanda, NY 14120
|
|
|
|
|
|
|
|
|
Kodiak Fund LP
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
2107 Wilson Boulevard, Suite 410
|
|
|
|
Interests |
|
|
4.0% |
|
|
Arlington, VA 22201
|
|
|
|
|
|
|
|
|
MedAssets, Inc.
|
|
Healthcare Outsourcing |
|
Series B Convertible |
|
|
|
|
|
100 Northpoint Center
|
|
|
|
Preferred Stock |
|
|
7.8% |
|
|
East #150
|
|
|
|
Warrants to Purchase |
|
|
|
|
|
Alpharetta, GA 30022
|
|
|
|
Common Stock |
|
|
0.6% |
|
Meineke Car Care Centers, Inc.
|
|
Franchisor of Car Care |
|
Class B Common |
|
|
|
|
|
128 South Tryon Street
|
|
Centers |
|
Stock(9) |
|
|
99.6% |
|
|
Suite 900
|
|
|
|
Warrant to Purchase |
|
|
|
|
|
Charlotte, NC 28202
|
|
|
|
Class A Common Stock |
|
|
51.0% |
|
MHF Logistical Solutions, Inc.
|
|
Third-Party |
|
Series A Preferred Stock |
|
|
3.6% |
|
|
800 Cranberry Woods Drive
|
|
Environmental Logistics |
|
Common Stock |
|
|
3.6% |
|
|
Suite 450
|
|
|
|
|
|
|
|
|
|
Cranberry Township, PA 16066
|
|
|
|
|
|
|
|
|
Mid-Atlantic Venture Fund IV, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
128 Goodman Drive
|
|
|
|
Interest |
|
|
6.7% |
|
|
Bethlehem, PA 18015
|
|
|
|
|
|
|
|
|
Mogas Energy, LLC
|
|
Natural Gas Pipeline |
|
Warrants to Purchase |
|
|
|
|
|
13137 Thunderhead Falls Lane
|
|
Operator |
|
Equity Interests |
|
|
20.0% |
|
|
Rapid City, SD 57702
|
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
Name and Address |
|
Nature of its |
|
Title of Securities |
|
of Class |
of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held |
|
|
|
|
|
|
|
Network Hardware Resale, Inc.
|
|
Provider of Pre-Owned |
|
Debt Convertible into |
|
|
|
|
|
26 Castilian Drive, Suite A
|
|
Networking Equipment |
|
Common Stock |
|
|
21.8% |
|
|
Santa Barbara, CA 93117
|
|
|
|
|
|
|
|
|
Norwesco, Inc.
|
|
Polyethylene Tanks |
|
Class B Nonvoting |
|
|
|
|
|
P.O. BOX 439
|
|
Manufacturer |
|
Common
Stock(9) |
|
|
96.3% |
|
|
4365 Steiner St.
|
|
|
|
Warrants to Purchase |
|
|
|
|
|
St. BoniFacius, MN 55375
|
|
|
|
Class A Common Stock |
|
|
50.2% |
|
Novak Biddle Venture Partners III, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
7501 Wisconsin Avenue
|
|
|
|
Interest |
|
|
2.5% |
|
|
East Tower, Suite 1380
|
|
|
|
|
|
|
|
|
|
Bethesda, MD 20814
|
|
|
|
|
|
|
|
|
Odyssey Investment Partners Fund III LP
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
280 Park Avenue, 38th Floor
|
|
|
|
Interest |
|
|
0.7% |
|
|
West Tower
|
|
|
|
|
|
|
|
|
|
New York, NY 10017
|
|
|
|
|
|
|
|
|
Opinion Research Corporation
|
|
Corporate Marketing |
|
Warrants to Purchase |
|
|
|
|
|
P.O. Box 183
|
|
Research Firm |
|
Common Stock |
|
|
6.4% |
|
|
Princeton, NJ 08542
|
|
|
|
|
|
|
|
|
Oriental Trading Company, Inc.
|
|
Direct Marketer |
|
Class A Common Stock |
|
|
1.7% |
|
|
108th Street, 4206 South
|
|
of Toys |
|
|
|
|
|
|
|
Omaha, NE 68137
|
|
|
|
|
|
|
|
|
Palm Coast Data, LLC
|
|
Magazines and |
|
Class B Common
Stock(9) |
|
|
100.0% |
|
|
11 Commerce Blvd
|
|
Subscribers Relationship |
|
Warrants to Purchase |
|
|
|
|
|
Palm Coast, FL 32164
|
|
Management |
|
Class A Common Stock |
|
|
56.9% |
|
Performant Financial Corporation
|
|
Collections and |
|
Common Stock |
|
|
2.9% |
|
|
333 N. Canyon Pkwy Suite 100
|
|
Default Prevention |
|
|
|
|
|
|
|
Livermore, CA 94551
|
|
Services |
|
|
|
|
|
|
Pro Mach, Inc.
|
|
Packaging Machinery |
|
Equity Interests |
|
|
2.3% |
|
|
1000 Abernathy Road, Suite 1110
|
|
Manufacturer |
|
|
|
|
|
|
|
Atlanta, GA 30328
|
|
|
|
|
|
|
|
|
S.B. Restaurant Company
|
|
|
|
|
|
|
|
|
|
(d/b/a Elephant Bar)
|
|
Restaurants |
|
Series B Convertible |
|
|
|
|
|
6326-A Lindmar Drive
|
|
|
|
Preferred Stock |
|
|
2.5% |
|
|
Goleta, CA 93117
|
|
|
|
Warrant to Purchase |
|
|
|
|
|
|
|
|
|
Series A Common Stock |
|
|
13.1% |
|
SBBUT, LLC
|
|
Holding Company |
|
Equity Interests in |
|
|
|
|
|
52 River Road
|
|
|
|
Affiliate Company |
|
|
10.4% |
|
|
Stowe, VT 05672
|
|
|
|
|
|
|
|
|
Soff-Cut Holdings, Inc.
|
|
Concrete Sawing |
|
Series A Preferred Stock |
|
|
14.3% |
|
|
1112 Olympic Drive
|
|
Equipment Manufacturer |
|
Common Stock |
|
|
2.7% |
|
|
Corona, CA 91719
|
|
|
|
|
|
|
|
|
SPP Mezzanine Fund, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
330 Madison Avenue, 28th Floor
|
|
|
|
Interest |
|
|
35.7% |
|
|
New York, NY 10017
|
|
|
|
|
|
|
|
|
Tradesmen International, Inc.
|
|
Outsourced Skilled |
|
Warrant to Purchase |
|
|
|
|
|
9760 Shepard Road
|
|
Construction Craftsmen |
|
Common Stock |
|
|
4.5% |
|
|
Macedonia, OH 44056
|
|
|
|
|
|
|
|
|
TransAmerican Auto Parts, LLC
|
|
Auto Parts and |
|
Preferred Equity Interests |
|
|
1.4% |
|
|
801 West Artesia Blvd
|
|
Accessories Retailer |
|
Common Equity Interests |
|
|
1.4% |
|
|
Compton, CA 90220
|
|
and Wholesaler |
|
|
|
|
|
|
United Site Services, Inc.
|
|
Portable Rest Room |
|
Common Stock |
|
|
1.3% |
|
|
200 Friberg Parkway, Suite 4000
|
|
Services |
|
|
|
|
|
|
|
Westborough, MA 01582
|
|
|
|
|
|
|
|
|
Updata Venture Partners II, L.P.
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
11600 Sunrise Valley Drive
|
|
|
|
Interest |
|
|
15.0% |
|
|
Reston, VA 20191
|
|
|
|
|
|
|
|
|
Venturehouse-Cibernet Investors, LLC
|
|
Third-Party Billing |
|
Equity Interest |
|
|
3.3% |
|
|
509 Seventh Street, NW
|
|
|
|
|
|
|
|
|
|
Washington, DC 20004
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
Name and Address |
|
Nature of its |
|
Title of Securities |
|
of Class |
of Portfolio Company |
|
Principal Business |
|
Held by the Company |
|
Held |
|
|
|
|
|
|
|
Venturehouse Group, LLC
|
|
Private Equity Fund |
|
Common Equity Interest |
|
|
3.1% |
|
|
1780 Tysons Boulevard, Suite 400
|
|
|
|
|
|
|
|
|
|
McLean, VA 22102
|
|
|
|
|
|
|
|
|
VICORP Restaurants, Inc.
|
|
Restaurants |
|
Warrant to Purchase |
|
|
|
|
|
400 W. 48th Avenue
|
|
|
|
Preferred Stock |
|
|
1.0% |
|
|
Denver, CO 80216
|
|
|
|
Warrant to Purchase |
|
|
|
|
|
|
|
|
Common Stock |
|
|
3.4% |
|
Walker Investment Fund II, LLLP
|
|
Private Equity Fund |
|
Limited Partnership |
|
|
|
|
|
3060 Washington Road
|
|
|
|
Interest |
|
|
5.1% |
|
|
Suite 200
|
|
|
|
|
|
|
|
|
|
Glenwood, MD 21738
|
|
|
|
|
|
|
|
|
Wear Me Apparel Corporation
|
|
Marketer of Childrens |
|
Warrant to Purchase |
|
|
|
|
|
31 West 34th Street
|
|
Apparel |
|
Common Stock |
|
|
2.0% |
|
|
New York, NY 10001
|
|
|
|
|
|
|
|
|
Woodstream Corporation
|
|
Pest Control |
|
Common Stock |
|
|
4.4% |
|
|
69 North Locust Street
|
|
Manufacturer |
|
Warrants to Purchase |
|
|
|
|
|
Lititz, PA 17543
|
|
|
|
Common Stock |
|
|
3.7% |
|
COMMERCIAL REAL ESTATE
FINANCE(8)
|
|
|
|
|
|
|
|
|
8830 Macon Highway Holding Company,
|
|
|
|
|
|
|
|
|
|
LLC(1)
|
|
Mobile Home Park |
|
Equity Interests |
|
|
100.0% |
|
|
1919 Pennsylvania Ave, N.W.
|
|
|
|
|
|
|
|
|
|
Washington, DC 20006
|
|
|
|
|
|
|
|
|
WSALD-CEH,
LLC(1)
|
|
Commercial Real |
|
Equity Interest |
|
|
50.0% |
|
|
1919 Pennsylvania Ave, N.W.
|
|
Estate Developer |
|
|
|
|
|
|
|
Washington, DC 20006
|
|
|
|
|
|
|
|
|
NPH,
Inc.(1)
|
|
Commercial Real |
|
Common Stock |
|
|
100.0% |
|
|
1919 Pennsylvania Ave, N.W.
|
|
Estate Developer |
|
|
|
|
|
|
|
Washington, DC 20006
|
|
|
|
|
|
|
|
|
Stemmons Freeway Hotel,
LLC(1)
|
|
Hotel |
|
Equity Interests |
|
|
100.0% |
|
|
1919 Pennsylvania Ave, N.W.
|
|
|
|
|
|
|
|
|
|
Washington, DC 20006
|
|
|
|
|
|
|
|
|
Timarron Capital,
Inc.(1)
|
|
Commercial Real |
|
Common Stock |
|
|
100.0% |
|
|
804 Worthington Court
|
|
Estate Loan Origination |
|
|
|
|
|
|
|
Southlake, TX 76092
|
|
and Securitization |
|
|
|
|
|
|
WSA Commons LLC
|
|
Residential Real |
|
Equity Interests |
|
|
50.0% |
|
|
421 East 4th Street
|
|
Estate Development |
|
|
|
|
|
|
|
Cincinnati, OH 45202
|
|
|
|
|
|
|
|
|
Van Ness Hotel,
Inc.(1)
|
|
Hotel |
|
Common Stock |
|
|
100.0% |
|
|
1919 Pennsylvania Ave, N.W.
|
|
|
|
|
|
|
|
|
|
Washington, DC 20006
|
|
|
|
|
|
|
|
|
|
|
(1) |
The portfolio company is deemed to be an affiliated person under
the 1940 Act because we hold one or more seats on the portfolio
companys board of directors, are the general partner, or
are the managing member. |
|
(2) |
Alaris Consulting, LLC owns 95% of Alaris Consulting, Inc. |
|
(3) |
Included in Class C Equity Interests in the Consolidated
Statement of Investments. |
|
(4) |
Callidus Capital Corporation owns 80% of Callidus Capital
Management, LLC. |
|
(5) |
The affiliate holds subordinated debt issued by Impact
Innovations Group, LLC. We made an investment in and exchanged
our existing subordinated debt for equity interests in the
affiliate. |
|
(6) |
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated
companies. |
|
(7) |
Callidus Capital Management, LLC is the manager of the fund (see
Note 4 above). |
|
(8) |
These portfolio companies are included in the Commercial Real
Estate Finance Equity Interests in the Consolidated
Statement of Investments. |
|
(9) |
Common stock is non-voting. In addition to non-voting stock
ownership, we have an option to acquire a majority of the voting
securities of the portfolio company at fair market value. |
|
|
(10) |
Triview Investments Inc. holds investments in Longview
Cable & Data, LLC and Triax Holdings, LLC. |
|
(11) |
In May 2006, we announced the completion of the sale of STS
Operating, Inc. See Managements Discussion and
Analysis of Financial Condition and Results of Operations
for further detail. |
93
DETERMINATION OF NET ASSET VALUE
Quarterly Net Asset Value Determination
We determine the net asset value per share of our common stock
quarterly. The net asset value per share is equal to the value
of our total assets minus liabilities divided by the total
number of common shares outstanding.
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 March 31, 2006,
portfolio investments recorded at fair value were 90% 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
appreciated in value. Changes in fair value are recorded in the
statement of operations as net change in unrealized appreciation
or depreciation.
As a business development company, we have invested in illiquid
securities including debt and equity securities of companies.
The structure of each 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 may be subject to certain 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 Private Finance. Our
process for determining the fair value of a private finance
investment begins with determining the enterprise value of the
portfolio company. The fair value of our investment is based on
the enterprise value at
94
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 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.
Valuation Methodology CDO and CLO Bonds and
Preferred Shares/ Income Notes (CDO/ CLO Assets).
CDO/ CLO Assets are carried at fair value, which is based on
a discounted cash flow model that utilizes 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 bonds and
preferred
95
shares/income notes, when available. We recognize unrealized
appreciation or depreciation on our CDO/ CLO Assets as
comparable yields in the market change and/or based on changes
in estimated cash flows resulting from changes in prepayment or
loss assumptions in the underlying collateral pool. As each bond
ages, the expected amount of losses and the expected timing of
recognition of such losses in the underlying collateral pool is
updated and the revised cash flows are used in determining the
fair value of the bonds. We determine the fair value of our CDO/
CLO Assets on an individual security-by-security basis. If we
were to sell a group of these CDO/ CLO Assets in a pool in one
or more transactions, the total value received for that pool may
be different than the sum of the fair values of the individual
bonds or preferred shares/income notes.
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. The value of loan and debt securities may be
greater than our cost basis if the amount that would be repaid
on the loan or debt security upon the sale of the portfolio
company is greater than our cost basis.
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.
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.
96
MANAGEMENT
Our Board of Directors oversees our management. The
responsibilities of each director include, among other things,
the oversight of our investment activity, the quarterly
valuation of our assets, and oversight of our financing
arrangements. The Board of Directors maintains an Executive
Committee, Audit Committee, Compensation Committee, and
Corporate Governance/Nominating Committee, and may establish
additional committees in the future. All of our directors also
serve as directors of our subsidiaries.
The management of our company and our investment portfolio is
the responsibility of various corporate committees, including
the management committee, the investment committee, and the
portfolio management committee. See Portfolio
Management.
Structure of Board of Directors
Our Board of Directors is classified into three approximately
equal classes with three-year terms, with the term of office of
only one of the three classes expiring each year. Directors
serve until their successors are elected and qualified.
Directors
Our directors have been divided into two
groups interested directors and independent
directors. Interested directors are interested
persons of Allied Capital as defined in the 1940 Act.
Information regarding our Board of Directors is as follows:
|
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|
Director |
|
Expiration |
Name |
|
Age |
|
Position |
|
Since(1) |
|
of Term |
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|
Interested Directors
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|
|
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|
|
|
|
|
|
William L. Walton
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|
56 |
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|
Chairman, Chief Executive Officer and President |
|
|
1986 |
|
|
|
2007 |
|
Joan M. Sweeney
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|
|
46 |
|
|
Chief Operating Officer |
|
|
2004 |
|
|
|
2007 |
|
Robert E. Long
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|
|
75 |
|
|
Director |
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|
1972 |
|
|
|
2007 |
|
Independent Directors
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|
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|
|
|
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Ann Torre Bates
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|
48 |
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Director |
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2003 |
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2009 |
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Brooks H. Browne
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|
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56 |
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Director |
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|
1990 |
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2007 |
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John D. Firestone
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62 |
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Director |
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1993 |
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2008 |
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Anthony T. Garcia
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49 |
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Director |
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1991 |
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2008 |
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Edwin L. Harper
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64 |
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Director |
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2006 |
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2009 |
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Lawrence I. Hebert
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59 |
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Director |
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1989 |
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2008 |
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John I. Leahy
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75 |
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Director |
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1994 |
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2009 |
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Alex J. Pollock
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63 |
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Director |
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2003 |
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2009 |
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Marc F. Racicot
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57 |
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Director |
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2005 |
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2008 |
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Guy T. Steuart II
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74 |
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Director |
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1984 |
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2009 |
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Laura W. van Roijen
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54 |
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Director |
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1992 |
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2008 |
|
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|
(1) |
Includes service as a director of any of the predecessor
companies of Allied Capital. |
Each director has the same address as Allied Capital, 1919
Pennsylvania Avenue, N.W., Washington, D.C. 20006.
97
Executive Officers
Information regarding our executive officers is as follows:
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Name |
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Age |
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Position |
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William L. Walton
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56 |
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Chairman, Chief Executive Officer and President |
Joan M. Sweeney
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46 |
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Chief Operating Officer |
Kelly A. Anderson
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52 |
|
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Executive Vice President and Treasurer |
Scott S. Binder
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51 |
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Chief Valuation Officer |
Michael J. Grisius
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42 |
|
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Managing Director |
Jeri J. Harman
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|
48 |
|
|
Managing Director |
Thomas C. Lauer
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|
39 |
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Managing Director |
Robert D. Long
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49 |
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|
Managing Director |
Justin S. Maccarone
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|
47 |
|
|
Managing Director |
Diane E. Murphy
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|
52 |
|
|
Executive Vice President and Director of Human Resources |
Penni F. Roll
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|
40 |
|
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Chief Financial Officer |
Daniel L. Russell
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|
41 |
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|
Managing Director |
John M. Scheurer
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|
53 |
|
|
Managing Director |
John D. Shulman
|
|
|
43 |
|
|
Managing Director |
Suzanne V. Sparrow
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|
40 |
|
|
Chief Compliance Officer, Executive Vice President and Secretary |
Each executive officer has the same address as Allied Capital,
1919 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
Biographical Information
Directors
Our directors have been divided into two groups
interested directors and independent directors. Interested
directors are interested persons of Allied Capital
as defined in the 1940 Act.
Interested Directors
William L. Walton has been the Chairman, Chief Executive
Officer, and President of Allied Capital since 1997.
Mr. Waltons previous experience includes serving as a
Managing Director of Butler Capital Corporation, a mezzanine
buyout firm, the personal investment advisor to William S.
Paley, founder of CBS, and a Senior Vice President in Lehman
Brothers Kuhn Loebs Merger and Acquisition Group. He also
founded two education service companies Language
Odyssey and SuccessLab. Mr. Walton currently serves on the Board
of Directors for the National Foundation for Teaching
Entrepreneurship and the National Symphony Orchestra. He is a
member of the World Economic Forum and an Advisory Board member
for the Center for Strategic & International Studies. Mr.
Walton also serves on The Kelley School of Business Board of
Advisors at Indiana University.
Joan M. Sweeney is the Chief Operating Officer of Allied
Capital and has been employed by Allied Capital since 1993. Ms.
Sweeney oversees Allied Capitals daily operations. Prior
to joining Allied Capital, Ms. Sweeney was employed by
Ernst & Young,
98
Coopers & Lybrand, and the Division of Enforcement of
the Securities and Exchange Commission.
Robert E. Long has been the Chief Executive Officer and a
director of GLB Group, Inc., an investment management firm,
since 1997 and President of Ariba GLB Group, Inc., the
parent company of GLB Group, Inc., since 2005. He has been the
Chairman of Emerald City Radio Partners, LLC since 1997.
Mr. Long was the President of Business News Network, Inc.
from 1995 to 1998, the Chairman and Chief Executive Officer of
Southern Starr Broadcasting Group, Inc. from 1991 to 1995, and a
director and the President of Potomac Asset Management, Inc.
from 1983 to 1991. Mr. Long is a director of AmBase
Corporation, CSC Scientific, Inc., and Advanced Solutions
International, Inc. Mr. Long is the father of
Robert D. Long, an executive officer of Allied Capital.
Independent Directors
Ann Torre Bates has been a strategic and financial
consultant since 1997. From 1995 to 1997, Ms. Bates served
as Executive Vice President, CFO and Treasurer of NHP, Inc., a
national real estate services firm. From 1991 to 1995,
Ms. Bates was Vice President and Treasurer of
US Airways. She serves on the boards and audit committees
of Franklin Mutual Series and SLM Corporation (Sallie Mae).
Brooks H. Browne has been a private investor since 2002.
Mr. Browne was the President of Environmental Enterprises
Assistance Fund from 1993 to 2002 and served as a director from
1991 to 2005. He currently serves as Vice Chairman of the Board
for Winrock International, a non-profit organization.
John D. Firestone has been a Partner of Secor Group, a
venture capital firm since 1978. Mr. Firestone has also
served as a director of Security Storage Company of Washington,
DC, since 1978. He is currently a director of Cuisine Solutions,
Inc., and four non-profit organizations, including the National
Rehabilitation Hospital, The Washington Ballet and the Tudor
Place Foundation of which he is the past president. From 1997 to
2001 he was a director of The Bryn Mawr Trust Corporation.
Anthony T. Garcia has been a private investor since 2003.
Mr. Garcia was Vice President of Finance of Formity Systems,
Inc., a developer of software products for business management
of data networks, from January 2002 through 2003.
Mr. Garcia was a private investor from 2000 to 2001, the
General Manager of Breen Capital Group, an investor in tax
liens, from 1997 to 2000, and a Senior Vice President of Lehman
Brothers Inc. from 1985 to 1996.
Edwin L. Harper has been an executive for Assurant, Inc.,
a financial services and insurance provider, since 1998. He
currently serves as Senior Vice President, Public Affairs and
Government Relations and previously served as Chief Operating
Officer and Chief Financial Officer for Assurants largest
subsidiary. From 1992 to 1997, Mr. Harper served as
President and Chief Executive Officer of the Association of
American Railroads. He also spent five years with Campbell Soup
Company, serving as Chief Financial Officer from 1986 to 1991.
Earlier in his career, Mr. Harper served on the White House
staffs of both President Reagan and President Nixon.
Mr. Harper currently serves as Director for the Council for
Excellence in Government.
Lawrence I. Hebert is Senior Advisor for PNC Bank, N.A.,
and was a director and President and Chief Executive Officer of
Riggs Bank N.A., a subsidiary of Riggs National
99
Corporation, from 2001 to 2005. Mr. Hebert also served as
Chief Executive Officer of Riggs National Corporation during
2005 and served as a director of Riggs National Corporation from
1988 to 2005. Mr. Hebert served as a director of Riggs
Investment Advisors and Riggs Bank Europe Limited (both indirect
subsidiaries of Riggs National Corporation). Mr. Hebert
previously served as Vice Chairman from 1983 to 1998, President
from 1984 to 1998, and Chairman and Chief Executive Officer from
1998 to 2001 of Allbritton Communications Company.
John I. Leahy has been the President of Management and
Marketing Associates, a management consulting firm, since 1986.
Previously, Mr. Leahy spent 34 years of his career
with Black & Decker Corporation, where he served as
President and CEO of the United States subsidiary from 1979 to
1981 and President and Group Executive Officer of the Western
Hemisphere of Black & Decker Corporation from 1982 to
1985. Mr. Leahy is currently a director of B&L Sales,
Inc. and is Trustee Emeritus of the Sellinger School of
Business, Loyola College, Maryland.
Alex J. Pollock has been a Resident Fellow at the
American Enterprise Institute since 2004. He was President and
Chief Executive Officer of the Federal Home Loan Bank of Chicago
from 1991 to 2004. He serves as a director of the Chicago
Mercantile Exchange, Great Lakes Higher Education Corporation,
the Great Books Foundation, the Illinois Council on Economic
Education and the International Union for Housing Finance.
Allied Capital has contributed $25 thousand to the American
Enterprise Institute.
Marc F. Racicot was named President and Chief
Executive Officer of the American Insurance Association in
August 2005. Prior to that, he was an attorney at the law firm
of Bracewell & Giuliani, LLP from 2001 to 2005. He is a
former Governor (1993 to 2001) and Attorney General (1989 to
1993) of the State of Montana. Mr. Racicot was appointed by
President Bush to serve as the Chairman of the Republican
National Committee (2002 to 2003) and he served as Chairman of
the Bush/Cheney Re-election Committee from 2003 to 2004. He
presently serves on the Board of Directors for Burlington
Northern Santa Fe Corporation, Massachusetts Mutual Life
Insurance Company, Jobs for Americas Graduates, and the
Board of Visitors for the University of Montana School of Law.
Guy T. Steuart II has been a director and President of
Steuart Investment Company, which manages, operates, and leases
real and personal property and holds stock in operating
subsidiaries engaged in various businesses, since 1960 where he
served as President until 2003 and currently serves as Chairman.
Mr. Steuart has served as Trustee Emeritus of Washington
and Lee University since 1992.
Laura W. van Roijen has been a private investor since
1992. Ms. van Roijen was a Vice President at Citicorp from
1982 to 1992.
Executive Officers who are not Directors
Kelly A. Anderson, Executive Vice President and
Treasurer, has been employed by Allied Capital since 1987.
Ms. Anderson is responsible for Allied Capitals
treasury, cash management and infrastructure operations.
Scott S. Binder, Chief Valuation Officer, has been
employed by Allied Capital since 1997. He has served as Chief
Valuation Officer since 2003. He served as a consultant to the
Company from 1991 until 1997. Prior to joining the Company,
Mr. Binder formed and was President of Overland
Communications Group. He also served as a board member and
financial consultant for a public affairs and lobbying firm in
Washington, DC. Mr. Binder
100
founded Lonestar Cablevision in 1986, serving as President until
1991. In the early 1980s, Mr. Binder worked for two firms
specializing in leveraged lease transactions. From 1976 to 1981,
he was employed by Coopers & Lybrand.
Michael J. Grisius, Managing Director, has been employed
by the Company since 1992. Prior to joining Allied Capital,
Mr. Grisius worked in leveraged finance at Chemical Bank
from 1989 to 1992 and held senior accountant and consultant
positions with KPMG LLP from 1985 to 1988.
Jeri J. Harman, Managing Director, has been employed by
the Company since 2004. Prior to joining Allied Capital,
Ms. Harman served as a Managing Director and Principal for
American Capital Strategies, Ltd., a business development
company, from 2000 until 2004. She worked as a Managing Director
and Head of Private Placements for First Security Van Kasper
from 1996 to 2000 and a Managing Director of Coopers &
Lybrand from 1993 to 1996. From 1982 to 1993, Ms. Harman
held various senior level positions in the private placement arm
of The Prudential Insurance Company of America. She has served
on the Board of Directors for the Association of Corporate
Growth since 2000.
Thomas C. Lauer, Managing Director, has been employed by
the Company since 2004. Prior to joining Allied Capital,
Mr. Lauer worked in GE Capitals sponsor finance group
from 2003 to 2004 and in the merchant banking and leveraged
finance groups of Wachovia Securities (previously First Union
Securities) from 1997 to 2003. He also held senior analyst
positions at Intel Corporation and served as a corporate lender
and credit analyst at National City Corporation.
Robert D. Long, Managing Director, has been employed by
the Company since 2002. Prior to joining Allied Capital,
Mr. Long was Managing Director and Head of Investment
Banking at C.E. Unterberg from 2001 to 2002, and Managing
Director at E*OFFERING/Wit SoundView from 2000 to 2001. He also
held management positions at Bank of America (Montgomery
Securities) from 1996 to 2000, and Nomura Securities
International from 1992 to 1996, and prior to that he served as
a Managing Director at CS First Boston.
Justin S. Maccarone, Managing Director, has been employed
by the Company since April 2005. Prior to joining Allied
Capital, Mr. Maccarone served as a partner with UBS Capital
Americas, LLC, a private equity fund focused on middle market
investments from 1993 to 2005. Prior to that, Mr. Maccarone
served as a Senior Vice President at GE Capital specializing in
merchant banking and leveraged finance from 1989 to 1993 and
served as Vice President of the Leveraged Finance Group at HSBC/
Marine Midland Bank from 1981 to 1989.
Diane E. Murphy, Ms. Murphy, Executive Vice
President and Director of Human Resources, has been employed by
the Company since 2000. Prior to joining the Company,
Ms. Murphy was employed by Allfirst Financial from 1982 to
1999 and served in several capacities including head of the
retail banking group in the Greater Washington Metro Region from
1994 to 1996 and served as the senior human resources executive
from 1996 to 1999.
Penni F. Roll, Chief Financial Officer, has been employed
by the Company since 1995. Ms. Roll is responsible for
Allied Capitals financial operations. Prior to joining
Allied Capital, Ms. Roll was employed by KPMG LLP in the
firms audit practice.
101
Daniel L. Russell, Managing Director, has been
employed by the Company since 1998. Prior to joining Allied
Capital, Mr. Russell was employed by KPMG LLP in the firms
financial services group.
John M. Scheurer, Managing Director, has been employed by
the Company since 1991. Earlier in his career, Mr. Scheurer
managed his own commercial real estate company, served as
executive vice president of Hunter Companies, a full service
commercial real estate leasing, investment and management
company, and spent seven years with First American Bank in
Washington DC. Mr. Scheurer is currently a member of the
Board of Governors of the Commercial Mortgage Securities
Association. He has also served as Chairman and as a Vice Chair
of the Capital Markets Committee for the Commercial Real Estate
Finance Committee of the Mortgage Bankers Association.
John D. Shulman, Managing Director, has been employed by
the Company since 2001. Prior to joining Allied Capital, Mr.
Shulman served as the President and CEO of Onyx International,
LLC, a venture capital firm, from 1994 to 2001. Prior to his
involvement with Onyx, Mr. Shulman served as Director of
Development for the Tower Companies, a diversified portfolio of
private equity and real estate investments. He currently serves
as a director of ChemLink Laboratories LLC and as a member of
the investment committees of Taiwan Mezzanine Fund and Greater
China Private Equity Fund.
Suzanne V. Sparrow, Executive Vice President, Chief
Compliance Officer and Corporate Secretary, has been employed by
the Company since 1987. Ms. Sparrow manages Allied
Capitals compliance and corporate governance activities.
Committees of the Board of Directors
Our Board of Directors has established an Executive Committee,
an Audit Committee, a Compensation Committee, and a Corporate
Governance/ Nominating Committee. The Audit Committee,
Compensation Committee, and Corporate Governance/ Nominating
Committee each operate pursuant to a committee charter. The
charter of each Committee is available on our web site at
www.alliedcapital.com in the Investor Resources section and is
also available in print to any stockholder who requests a copy.
The Executive Committee has and may exercise those rights,
powers, and authority that the Board of Directors from time to
time grants to it, except where action by the Board is required
by statute, an order of the Securities and Exchange Commission
(the Commission), or Allied Capitals charter
or bylaws. The Executive Committee has been delegated authority
from the Board to review and approve certain investments. The
Executive Committee met 42 times during 2005. The Executive
Committee members currently are Messrs. Walton, Harper,
Hebert, Leahy, Long, Pollock and Steuart. Messrs. Harper,
Hebert, Leahy, Pollock, and Steuart are independent directors
for purposes of the 1940 Act. Messrs. Walton and Long are
interested persons of the Company, as defined in the 1940 Act.
The Audit Committee operates pursuant to a charter approved by
the Board of Directors. The charter sets forth the
responsibilities of the Audit Committee. The primary function of
the Audit Committee is to serve as an independent and objective
party to assist the Board of Directors in fulfilling its
responsibilities for overseeing and monitoring the quality and
integrity of our financial statements, the adequacy of our
system of internal controls, the review of the independence,
qualifications and performance of our
102
independent registered public accounting firm, and the
performance of our internal audit function. The Audit Committee
met 18 times during 2005. The Audit Committee is presently
composed of four persons, including Messrs. Browne
(Chairman) and Garcia and Mmes. Bates and van Roijen, all of
whom are considered independent under the rules promulgated by
the New York Stock Exchange. Our Board of Directors has
determined that Messrs. Browne and Garcia and
Ms. Bates are audit committee financial experts
as defined under Item 401 of
Regulation S-K of
the Securities Exchange Act of 1934, as each meets the current
independence and experience requirements of Rule 10A-3 of
the Exchange Act and, in addition, are not interested
persons of the Company as defined in Section 2(a)(19)
of the Investment Company Act of 1940.
The Compensation Committee approves managements
recommendations for the compensation of our executive officers
and reviews the amount of salary and bonus for each of the
Companys other officers and employees. In addition, the
Compensation Committee approves stock option grants for our
officers under our Amended Stock Option Plan, determines the
Individual Performance Awards (IPA) and Individual
Performance Bonuses (IPB) for participants and
determines other compensation arrangements for employees. The
Compensation Committee met 11 times during 2005. The
Compensation Committee members currently are Messrs. Leahy
(Chairman), Browne, Firestone, Garcia, and Racicot, each of whom
is not an interested person as defined in
Section 2(a)(19) of the Investment Company Act of 1940.
The Corporate Governance/ Nominating Committee recommends
candidates for election as directors to the Board of Directors
and makes recommendations to the Board as to our corporate
governance policies. The Corporate Governance/ Nominating
Committee met five times during 2005. The Corporate Governance/
Nominating Committee members currently are Messrs. Hebert
(Chairman), Firestone, Pollock, and Racicot, each of whom is not
an interested person as defined in
Section 2(a)(19) of the Investment Company Act of 1940.
PORTFOLIO MANAGEMENT
The management of our company and our investment portfolio is
the responsibility of various corporate committees, including
the management committee, the investment committee, and the
portfolio management committee. In addition, the Executive
Committee of the Board of Directors approves certain investment
decisions.
Our management committee is responsible for, among other things,
business planning and the establishment and review of general
investment criteria. The management committee is chaired by
William Walton, our Chief Executive Officer (CEO), and includes
Joan Sweeney, our Chief Operating Officer (COO), Penni Roll, our
Chief Financial Officer (CFO), Scott Binder, our Chief Valuation
Officer (CVO), and Michael Grisius, Jeri Harman, Thomas Lauer,
Robert D. Long, Justin Maccarone, Daniel Russell, John
Scheurer, and John Shulman, all managing directors.
Our investment committee is responsible for approving new
investments. Our investment committee is chaired by William
Walton, CEO, and includes Joan Sweeney, COO, Penni Roll, CFO,
Scott Binder, CVO (non-voting) and James Fisher, John
Fruehwirth, Michael Grisius, Jeri Harman, Thomas Lauer,
Robert D. Long, Justin Maccarone, Robert Monk, Daniel
Russell, John Scheurer and John Shulman, all managing directors.
103
In addition to approval by the investment committee, each
transaction that represents a commitment equal to or greater
than $20 million, every buyout transaction, and any other
investment that in our judgment demonstrates unusual risk/reward
characteristics also requires the approval of the Executive
Committee of the Board of Directors. Our Executive Committee is
currently comprised of Messrs. Walton, Harper, Hebert,
Leahy, Long, Pollock and Steuart.
Our portfolio management committee oversees the overall
performance of the portfolio, including reviewing the
performance of selected portfolio companies, overseeing
portfolio companies in workout status, reviewing and approving
certain amendments or modifications to existing investments,
reviewing and approving certain portfolio exits, and reviewing
and approving certain actions by portfolio companies whose
voting securities are more than 50% owned by us. From time to
time we will identify investments that require closer monitoring
or become workout assets. We develop a workout strategy for
workout assets and the portfolio management committee gauges our
progress against the strategy. Our portfolio management
committee is chaired by William Walton, CEO, and includes Joan
Sweeney, COO, Penni Roll, CFO, Scott Binder, CVO (non-voting),
and Christina DelDonna, John Fontana, and John Scheurer, and
Paul Tanen, all managing directors.
We are internally managed and our investment professionals
manage the investments in our portfolio. These investment
professionals have extensive experience in managing investments
in private businesses in a variety of industries, and are
familiar with our approach of lending and investing. Because we
are internally managed, we pay no external investment advisory
fees, but instead we pay the operating costs associated with
employing investment professionals.
Biographical Information for Non-Executive Officers
Information regarding the business experience of the additional
investment professionals who are directors or executive officers
is contained under the caption Management
Biographical Information.
Christina L. DelDonna, Managing Director, has been
employed by the Company since 1992. Ms. DelDonna has
previously worked in a number of other managerial roles during
her tenure with the Company. Prior to joining Allied Capital,
Ms. DelDonna held several accounting, audit, and financial
analyst roles within a variety of industries.
James A. Fisher, Managing Director, has been employed by
the Company since January 2006 and manages Allied
Capitals senior loan origination and underwriting
activities. Prior to joining Allied Capital, Mr. Fisher
managed the senior loan origination group at Callidus Capital
Management, a specialized asset management company, from 2004 to
2006. Previously, Mr. Fisher was a Senior Vice President at
JP Morgan Chase in charge of the Middle Market Structured
Finance Division from 2000 to 2003, where he also served as a
member of the Middle Market Banking Groups senior
management team. He began his career in 1981 with the middle
market lending group at JP Morgan Chase and served in
various credit and management positions.
N. John Fontana, Managing Director, has been
employed by the Company since 2004. Prior to joining Allied
Capital, Mr. Fontana was a Principal of Tigris, an
operations consulting firm in the consumer products and
manufacturing industries from 2002 to 2004. From 1999 to 2002,
Mr. Fontana was a turnaround manager working for a series
of private equity and venture capital firms. He participated in
the buyout and served as Chief
104
Operating Officer of Electrolux, LLC from 1998 to 1999. From
1994 to 1998, he served as a Partner with Deloitte & Touche
Consulting Group where he led turnaround and operating
improvement engagements for private equity firms.
John M. Fruehwirth, Managing Director, has been employed
by the Company since 2003. Previously, he worked at Wachovia
(formerly First Union) in several merchant banking groups
including Wachovia Capital Partners, Leveraged Capital and
Middle Market Capital from 1999 to 2003. Prior to that,
Mr. Fruehwirth worked in First Unions Leveraged
Finance Group from 1996 to 1998.
Robert M. Monk, Managing Director, has been employed by
the Company since 1993. Prior to joining Allied Capital,
Mr. Monk worked in the leveraged finance group at First
Union National Bank (currently Wachovia Securities).
Paul R. Tanen, Managing Director, has been employed by
Allied Capital since May 2006, and was also employed by the
Company from 2000 until 2004. From 2004 to 2006, Mr. Tanen
served as a consultant to the Company. Prior to working with
Allied Capital, Mr. Tanen served as a Managing Director at
Ridgefield Partners from 1998 to 2000, and was a Founding Member
of the private equity group at Charter Oak Partners from 1992 to
1998.
Compensation
The compensation for the members of our management committee,
investment committee, and portfolio management committee
includes: (i) base salary; (ii) annual bonus;
(iii) individual performance award and/or individual
performance bonus; and (iv) stock options. Compensation for
the members of our Executive Committee, with the exception of
Mr. Walton, consists of: (i) annual retainer;
(ii) attendance fee per committee meeting; and
(iii) stock options. See Management and
Compensation of Executive Officers and Directors.
Beneficial Ownership
Each member of the Executive Committee, excluding
Messrs. Harper and Pollock, beneficially owns shares of our
common stock with a value of more than $1,000,000, based on the
closing price of $30.21 on June 6, 2006, on the New York
Stock Exchange. Messrs. Harper and Pollock beneficially own
shares of our common stock with a value of $100,000 to $500,000
and with a value of $500,000 to $1,000,000, respectively, based
on the closing price of $30.21 on June 6, 2006, on the
New York Stock Exchange. Each member of the management
committee, the investment committee and the portfolio management
committee beneficially owns shares of our common stock with a
value of more than $1,000,000, based on the closing price of
$30.21 on June 6, 2006, on the New York Stock Exchange.
Conflicts of Interest
Because each of the members of the Executive Committee, the
management committee, the investment committee, and the
portfolio management committee provide portfolio management
services of this type only to us, there are no conflicts of
interest with respect to their management of other accounts or
investment vehicles.
105
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
Under SEC rules applicable to business development companies, we
are required to set forth certain information regarding the
compensation of certain executive officers and directors. The
following table sets forth compensation earned during the year
ended December 31, 2005, by all of our directors and our
three highest paid executive officers (collectively, the
Compensated Persons) in each capacity in which each
Compensated Person served. Certain of the Compensated Persons
served as both officers and directors.
Our directors have been divided into two groups
interested directors and independent directors. Interested
directors are interested persons as defined in the
Investment Company Act of 1940.
Compensation Table
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|
Pension or |
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|
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|
|
Retirement |
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|
|
|
Benefits |
|
|
|
|
Aggregate |
|
Securities |
|
Accrued as |
|
Directors |
|
|
Compensation |
|
Underlying |
|
Part of |
|
Fees Paid |
|
|
from the |
|
Options/ |
|
Company |
|
by the |
Name |
|
Company (1,2) |
|
SARs (3) |
|
Expenses (1) |
|
Company (4) |
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|
|
Interested Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William L. Walton, Chairman & CEO
|
|
$ |
7,381,605 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Joan M. Sweeney, Chief Operating Officer
|
|
|
4,119,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E. Long, Director
|
|
|
84,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
84,000 |
|
Independent Directors:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ann Torre Bates, Director
|
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88,500 |
|
|
|
5,000 |
|
|
|
|
|
|
|
88,500 |
|
Brooks H. Browne, Director
|
|
|
113,500 |
|
|
|
5,000 |
|
|
|
|
|
|
|
113,500 |
|
John D. Firestone, Director
|
|
|
66,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
66,000 |
|
Anthony T. Garcia, Director
|
|
|
107,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
107,000 |
|
Lawrence I. Hebert, Director
|
|
|
101,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
101,000 |
|
John I. Leahy, Director
|
|
|
112,500 |
|
|
|
5,000 |
|
|
|
|
|
|
|
112,500 |
|
Alex J. Pollock, Director
|
|
|
73,500 |
|
|
|
5,000 |
|
|
|
|
|
|
|
73,500 |
|
Marc F. Racicot, Director
|
|
|
50,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
50,000 |
|
Guy T. Steuart II, Director
|
|
|
83,500 |
|
|
|
5,000 |
|
|
|
|
|
|
|
83,500 |
|
Laura W. van Roijen, Director
|
|
|
92,000 |
|
|
|
5,000 |
|
|
|
|
|
|
|
92,000 |
|
Executive Officers:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Scheurer, Managing Director
|
|
|
4,167,568 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
The following table provides detail as to aggregate compensation
paid for 2005 to our three highest paid executive officers,
including the Chief Executive Officer: |
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Salary |
|
Bonus (5) |
|
IPA |
|
IPB |
|
Benefits |
|
|
|
|
|
|
|
|
|
|
|
Mr. Walton
|
|
$ |
1,528,846 |
|
|
$ |
2,750,000 |
|
|
$ |
1,475,000 |
|
|
$ |
1,475,000 |
|
|
$ |
152,759 |
|
Ms. Sweeney
|
|
|
1,019,231 |
|
|
|
1,500,000 |
|
|
|
750,000 |
|
|
|
750,000 |
|
|
|
100,356 |
|
Mr. Scheurer
|
|
|
611,538 |
|
|
|
2,350,000 |
|
|
|
550,000 |
|
|
|
550,000 |
|
|
|
106,030 |
|
|
|
|
For 2005, the Company established individual performance awards
(IPA) and individual performance bonuses (IPB). See also
Individual Performance Award and Individual
Performance Bonus. Included for each executive officer in
Other Benefits is, among other things, an employer
contribution to the 401(k) Plan, a contribution to the Deferred
Compensation Plan I, amounts attributed to travel of
non-employee family members when they have accompanied a
Compensated Person on a business trip, and health and dental
insurance. See also Employment Agreements. |
|
|
(2) |
Messrs. Walton, Pollock and Scheurer and Ms. Sweeney
deferred $1.6 million, $28 thousand,
$0.6 million, and $0.8 million, respectively, of the
compensation earned during the year ended December 31, 2005. |
|
|
(3) |
See Stock Option Awards for terms of
options granted in 2005. |
|
|
(4) |
Consists only of directors fees paid by Allied Capital for
2005. Such fees are also included in the column titled
Aggregate Compensation from the Company. |
|
|
(5) |
Mr. Scheurers 2005 bonus included two one-time lump
sum bonuses totaling $1,500,000. See Retention
Agreements for further discussion. |
106
Compensation of Non-Officer Directors
Each non-officer director receives an annual retainer of
$40,000. In addition, committee chairs receive an annual
retainer of $5,000. For each committee meeting attended,
Executive Committee members receive $1,500 per meeting; Audit
Committee members receive $3,000 per meeting; and members of the
Compensation and Corporate Governance/Nominating Committees
receive $2,000 per meeting.
Directors may choose to defer such fees through our Deferred
Compensation Plan, and may choose to have invested such deferred
income in shares of our common stock through a trust.
Non-officer directors are eligible for stock option awards under
our Amended Stock Option Plan pursuant to an exemptive order
from the Commission. The terms of the order, which was granted
in September 1999, provided for a one-time grant of 10,000
options to each non-officer director on the date that the order
was issued, or on the date that any new director is elected by
stockholders to the Board of Directors. Thereafter, each
non-officer director will receive 5,000 options each year on the
date of the Annual Meeting of Stockholders at the fair market
value on the date of grant. See Amended Stock Option
Plan.
Stock Option Awards
The following table sets forth the details relating to option
grants in 2005 to Compensated Persons under our Amended Stock
Option Plan, and the potential realizable value of each grant,
as prescribed to be calculated by the SEC. See Amended
Stock Option Plan.
107
Options Granted During 2005
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Potential Realizable |
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Value at Assumed |
|
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|
Annual Rates |
|
|
Number of |
|
|
|
|
|
|
|
|
|
of Stock Price |
|
|
Securities |
|
Percent of |
|
|
|
|
|
|
|
Appreciation |
|
|
Underlying |
|
Total Options |
|
Exercise |
|
|
|
|
|
Over 10-Year Term (2) |
|
|
Options |
|
Granted in |
|
Price Per |
|
Market |
|
Expiration |
|
|
Name |
|
Granted |
|
2005 (1) |
|
Share |
|
Value |
|
Date |
|
5% |
|
10% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interested Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
William L.
Walton(3)
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Joan M.
Sweeney(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E.
Long(4)
|
|
|
5,000 |
|
|
|
0.07 |
% |
|
$ |
26.80 |
|
|
$ |
26.80 |
|
|
|
5/17/2015 |
|
|
$ |
84,272 |
|
|
$ |
213,561 |
|
Independent Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ann Torre
Bates(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
Brooks H.
Browne(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
John D.
Firestone(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
Anthony T.
Garcia(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
Lawrence I.
Hebert(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
John I.
Leahy(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
Alex J.
Pollock(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
Marc F.
Racicot(4)
|
|
|
10,000 |
|
|
|
0.15 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
168,544 |
|
|
|
427,123 |
|
Guy T. Steuart,
II(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
Laura W. van
Roijen(4)
|
|
|
5,000 |
|
|
|
0.07 |
|
|
|
26.80 |
|
|
|
26.80 |
|
|
|
5/17/2015 |
|
|
|
84,272 |
|
|
|
213,561 |
|
Executive Officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M.
Scheurer(5)
|
|
|
50,000 |
|
|
|
0.73 |
|
|
|
27.51 |
|
|
|
27.51 |
|
|
|
8/3/2015 |
|
|
|
865,045 |
|
|
|
2,192,193 |
|
|
|
(1) |
In 2005, we granted stock options to purchase a total of
6,815,000 shares. |
|
(2) |
Potential realizable value is calculated on 2005 stock options
granted, and is net of the option exercise price but before any
tax liabilities that may be incurred. These amounts represent
certain assumed rates of appreciation, as mandated by the
Commission. Actual gains, if any, on stock option exercises are
dependent on the future performance of the shares, overall
market conditions, and the continued employment by Allied
Capital of the option holder. The potential realizable value
will not necessarily be realized. |
|
(3) |
In 2005, the Compensation Committee accepted
Mr. Waltons and Ms. Sweeneys voluntary
waiver to receive stock option grants so that there would be
sufficient stock option reserves to make market competitive
stock option grants to other officers. |
|
(4) |
The options granted vest immediately. |
|
(5) |
The options granted vest ratably over a three-year period. In
the event of a change of control, all outstanding options will
become fully vested and exercisable as of the change of control. |
108
The following table sets forth the details of option exercises
by Compensated Persons during 2005 and the values of those
unexercised options at December 31, 2005.
Option Exercises and Year-End Option Values
|
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|
|
Number of Securities |
|
Value of Unexercised In-the- |
|
|
|
|
|
|
Underlying Unexercised |
|
Money Options as of |
|
|
Shares |
|
|
|
Options as of 12/31/05 |
|
12/31/05 (3) |
|
|
Acquired on |
|
Value |
|
|
|
|
Name |
|
Exercise |
|
Realized (1) |
|
Exercisable |
|
Unexercisable |
|
Exercisable |
|
Unexercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interested Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William L.
Walton(2)
|
|
|
16,821 |
|
|
$ |
139,255 |
|
|
|
2,623,280 |
|
|
|
200,000 |
|
|
$ |
23,264,055 |
|
|
$ |
78,000 |
|
Joan M. Sweeney
|
|
|
0 |
|
|
|
0 |
|
|
|
1,478,220 |
|
|
|
150,000 |
|
|
|
12,304,665 |
|
|
|
58,500 |
|
Robert E. Long
|
|
|
5,000 |
|
|
|
48,650 |
|
|
|
35,000 |
|
|
|
0 |
|
|
|
199,270 |
|
|
|
0 |
|
Independent Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ann Torre Bates
|
|
|
0 |
|
|
|
0 |
|
|
|
20,000 |
|
|
|
0 |
|
|
|
115,000 |
|
|
|
0 |
|
Brooks H. Browne
|
|
|
0 |
|
|
|
0 |
|
|
|
40,000 |
|
|
|
0 |
|
|
|
258,620 |
|
|
|
0 |
|
John D. Firestone
|
|
|
0 |
|
|
|
0 |
|
|
|
40,000 |
|
|
|
0 |
|
|
|
258,620 |
|
|
|
0 |
|
Anthony T. Garcia
|
|
|
0 |
|
|
|
0 |
|
|
|
40,000 |
|
|
|
0 |
|
|
|
258,620 |
|
|
|
0 |
|
Lawrence I. Hebert
|
|
|
0 |
|
|
|
0 |
|
|
|
40,000 |
|
|
|
0 |
|
|
|
258,620 |
|
|
|
0 |
|
John I Leahy
|
|
|
2,500 |
|
|
|
25,125 |
|
|
|
37,500 |
|
|
|
0 |
|
|
|
228,945 |
|
|
|
0 |
|
Alex J. Pollock
|
|
|
1,000 |
|
|
|
4,380 |
|
|
|
9,000 |
|
|
|
0 |
|
|
|
32,570 |
|
|
|
0 |
|
Marc F. Racicot
|
|
|
0 |
|
|
|
0 |
|
|
|
10,000 |
|
|
|
0 |
|
|
|
25,700 |
|
|
|
0 |
|
Guy T. Steuart II
|
|
|
0 |
|
|
|
0 |
|
|
|
40,000 |
|
|
|
0 |
|
|
|
258,620 |
|
|
|
0 |
|
Laura W. van Roijen
|
|
|
0 |
|
|
|
0 |
|
|
|
40,000 |
|
|
|
0 |
|
|
|
258,620 |
|
|
|
0 |
|
Executive Officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Scheurer
|
|
|
109,393 |
|
|
|
1,152,293 |
|
|
|
923,670 |
|
|
|
125,000 |
|
|
|
6,890,617 |
|
|
|
122,250 |
|
|
|
(1) |
Value realized is calculated as the closing market price on the
preceding date prior to the date of exercise, net of option
exercise price, but before any tax liabilities or transaction
costs. This is the deemed market value, which may actually be
realized only if the shares are sold at that price. |
|
(2) |
Mr. Walton did not sell any of the shares he received upon
the exercise of stock options. |
|
(3) |
Value of unexercised options is calculated as the closing market
price on December 30, 2005, ($29.37), net of the option
exercise price, but before any tax liabilities or transaction
costs. In-the-Money Options are options with an
exercise price that is less than the market price as of
December 30, 2005. |
Employment Agreements
We entered into employment agreements in 2004 with William L.
Walton, our Chairman and CEO, and Joan M. Sweeney, our
Chief Operating Officer, each of whom is a Compensated Person.
We also entered into an employment agreement in 2004 with
Penni F. Roll, our Chief Financial Officer. Each of the
agreements provides for a three-year term that extends one day
at the end of every day during its length, unless either party
provides written notice of termination of such extension. In
that case, the agreement would terminate three years from such
notification.
Each agreement specifies each executives base salary
compensation during the term of the agreement. The Compensation
Committee has the right to increase the base salary during the
term of the employment agreement. In addition, each employment
agreement states that the Compensation Committee may provide, at
their sole discretion, an annual cash bonus. This bonus is to be
determined with reference to each executives performance
in accordance with performance criteria to be determined by the
Compensation Committee in its sole discretion. Under each
agreement, each executive is also entitled to participate
109
in our Amended Stock Option Plan, and to receive all other
awards and benefits previously granted to each executive
including, life insurance premiums.
The executive has the right to voluntarily terminate employment
at any time with 30 days notice, and in such case,
the employee will not receive any severance pay. Among other
things, the employment agreements prohibit the solicitation of
our employees in the event of an executives departure for
a period of two years.
If employment is terminated with cause, the employee will not
receive any severance pay. If employment is terminated without
cause during the term of the agreement, or within 24 months
after a change in control, the executive shall be entitled to
severance pay for a period not to exceed 36 months.
Severance pay shall include three times the average base salary
for the preceding three years, plus three times the average
bonus compensation for the preceding three years, plus a lump
sum amount equal to $3,178,000 for Mr. Walton and
$2,831,000 for Ms. Sweeney. In the event of a change in
control, Mr. Walton and Ms. Sweeney would be entitled
to a tax equalization payment calculated in accordance with
Section 280G of the Code on distributions to which the employee
is entitled upon termination, and we would also provide
compensation to offset any applicable excise tax penalties
imposed on the executive under Section 4999 of the Code.
Such severance pay shall be paid in two installments: 75% of
such pay shall be paid at the time of separation, and 25% shall
be paid on the second anniversary of such separation. Stock
options would cease to vest during the severance period.
Under the employment agreements, a Change of Control
currently follows the definition of change of control prior to
the enactment of the Jobs Creation Act of 2004. The Jobs
Creation Act of 2004 mandates the definition of a Change
of Control. See The 2005 Deferred Compensation
Plan I. While we have not amended the employment
agreements with our executives to reflect this, the executives
have acknowledged that payments will only be made pursuant to
the Change of Control provision if such Change of Control meets
the definition mandated by the Jobs Creation Act of 2004.
Retention Agreements
On October 27, 2005, we entered into a recission of the
retention agreement with John M. Scheurer, one of our managing
directors. Pursuant to the terms of such agreement, we agreed to
terminate a retention agreement we had entered into with
Mr. Scheurer in March 2005. We entered into the retention
agreement with Mr. Scheurer in connection with our
consideration of strategic alternatives for our commercial real
estate investment portfolio. In May 2005, we announced the
completion of a transaction regarding our CMBS and CDO
portfolio. As a result, Mr. Scheurer received a one-time
lump sum bonus of $500,000 in accordance with the terms of the
retention agreement.
Mr. Scheurers retention agreement also provided that
he would receive a payment of $1.8 million if the acquirer
of our CMBS and CDO portfolio did not offer to employ
Mr. Scheurer at a base salary of at least $750,000 and he
did not accept employment with the acquirer on other terms.
However, because we determined to retain Mr. Scheurer as a
managing director, we entered into the recission of the
retention agreement with Mr. Scheurer to provide that we
will only be obligated to pay Mr. Scheurer the
$1.8 million payment due under the retention agreement if
his employment with us is terminated prior to July 1, 2006,
for any reason other than his voluntary resignation, his death
or his termination by Allied Capital for cause.
110
In addition, we awarded a one-time lump sum transition services
bonus of $1,000,000 to Mr. Scheurer in connection with the
sale of our CMBS and CDO portfolio.
Indemnification Agreements
We have entered into indemnification agreements with our
directors and certain senior officers. The indemnification
agreements are intended to provide these directors and senior
officers the maximum indemnification permitted under Maryland
law and the Investment Company Act of 1940. Each indemnification
agreement provides that Allied Capital shall indemnify the
director or senior officer who is a party to the agreement
(an Indemnitee), including the advancement of
legal expenses, if, by reason of his or her corporate status,
the Indemnitee is, or is threatened to be, made a party to or a
witness in any threatened, pending, or completed proceeding,
other than a proceeding by or in the right of Allied Capital.
Compensation Plans
Amended Stock Option Plan
Our Amended Stock Option Plan is intended to encourage stock
ownership in Allied Capital by officers and directors, thus
giving them a proprietary interest in our performance. The
Amended Stock Option Plan was most recently approved by
stockholders on May 12, 2004. At March 31, 2006, there
were 32.2 million shares authorized under the Stock Option
Plan and the number of shares available to be granted was
2.8 million.
The Compensation Committees principal objective in
awarding stock options to our eligible officers and directors is
to align each optionees interests with our success and the
financial interests of our stockholders by linking a portion of
such optionees compensation with the performance of our
stock and the value delivered to stockholders.
Stock options are granted under the Amended Stock Option Plan at
a price not less than the prevailing market value at the time of
the grant and will have realizable value only if our stock price
increases. The Compensation Committee determines the amount, if
any, and features of the stock options to be awarded to
optionees. The Compensation Committee evaluates a number of
criteria, including the past service of each such optionee to
Allied Capital, the present and potential contributions of such
optionee to the success of Allied Capital, and such other
factors as the Compensation Committee shall deem relevant in
connection with accomplishing the purposes of the Amended Stock
Option Plan, including the recipients current stock
holdings, years of service, position with Allied Capital, and
other factors. The Compensation Committee does not apply a
formula assigning specific weights to any of these factors when
making its determination. The Compensation Committee awards
stock options on a subjective basis and such awards depend in
each case on the performance of the officer under consideration,
and in the case of new hires, their potential performance.
The Amended Stock Option Plan is designed to satisfy the
conditions of Section 422 of the Code so that options
granted under the Amended Stock Option Plan may qualify as
incentive stock options. To qualify as
incentive stock options, options may not become
exercisable for the first time in any year if the number of
incentive options first exercisable in that year multiplied by
the exercise price exceeds $100,000.
111
We have received approval from the SEC to grant non-qualified
options under the Amended Stock Option Plan to non-officer
directors. Pursuant to the SEC order, non-officer directors
receive options to purchase 10,000 shares upon election by
stockholders to the Board of Directors, and options to purchase
5,000 shares each year thereafter, on the date of the Annual
Meeting of Stockholders.
Stock Ownership Initiative
In connection with our 2006 Annual Meeting of Stockholders, the
stockholders approved the issuance of up to 2,500,000 shares of
our common stock in exchange for the cancellation of vested
in-the-money stock options granted to certain
officers and directors under the Amended Stock Option Plan.
Under the initiative, which has been reviewed and approved by
our Board of Directors, all optionees who hold vested stock
options with exercise prices below the market value of the stock
(or in-the-money options), would be offered the
opportunity to receive cash and common stock in exchange for
their voluntary cancellation of their vested stock options. The
sum of the cash and common stock to be received by each optionee
would equal the in-the-money value of the stock
option cancelled. As part of this initiative, the Board of
Directors is also considering the adoption of a target ownership
structure that would establish minimum ownership levels for our
senior officers and continue to further align the interests of
our officers with those of our stockholders.
401(k) Plan
We maintain a 401(k) plan (the 401(k) Plan). All full-time
employees who are at least 21 years of age have the
opportunity to contribute
pre-tax salary
deferrals into the 401(k) Plan up to $15,000 annually for the
2006 plan year, and to direct the investment of these
contributions. Plan participants who are age 50 or older during
the 2006 plan year are eligible to defer an additional $5,000
during 2006. The 401(k) Plan allows eligible participants to
invest in shares of an Allied Capital Common Stock Fund,
consisting of Allied Capital common stock and cash, among other
investment options. In addition, during the 2006 plan year, we
expect to contribute up to 5% of each participants
eligible compensation for the year, up to a maximum compensation
of $220,000, to each participants plan account on the
participants behalf, which fully vests at the time of the
contribution. The contribution with respect to compensation in
excess of $220,000 will be made to The 2005 Allied Capital
Corporation Non-Qualified Deferred Compensation Plan. See
The 2005 Deferred Compensation Plan I. On
June 6, 2006, the 401(k) Plan held less than 1% of our
outstanding shares.
Individual Performance Award
The Compensation Committee has established a long-term incentive
compensation program whereby the Compensation Committee of the
Board of Directors determines an Individual Performance Award
(IPA) for certain officers annually, generally at the beginning
of each year. In determining the award for any one officer, the
Compensation Committee considers individual performance factors,
as well as the individuals contribution to the returns
generated for stockholders, among other factors. The IPA for
2006 has been determined to be approximately $8.1 million,
however, the Compensation Committee may adjust the IPA as
needed. The IPAs are deposited in a trust in approximately equal
cash installments, on a quarterly basis, and the cash is used to
purchase shares of our common stock in the market. See The
2005 Deferred Compensation Plan II.
112
The following table presents the IPAs that have been awarded by
the Compensation Committee for 2006 to the Compensated Persons
as well as for all other participants as a group:
|
|
|
|
|
|
|
|
2006 |
|
|
Individual |
Name and Position |
|
Performance Award(1) |
|
|
|
William L. Walton, Chief Executive Officer
|
|
$ |
1,475,000 |
|
Joan M. Sweeney, Chief Operating Officer
|
|
|
750,000 |
|
John M. Scheurer, Managing Director
|
|
|
550,000 |
|
All Executive Officers as a Group (excluding the Compensated
Persons)
|
|
|
2,690,500 |
|
All Non-Executive Officers as a Group
|
|
|
2,617,500 |
|
|
|
|
|
|
|
Total
|
|
$ |
8,083,000 |
|
|
|
|
|
|
|
|
(1) |
Represents IPAs expected to be expensed for financial reporting
purposes for 2006 for these officers, assuming each participant
remains employed by us throughout the year. These amounts are
subject to change if there is a change in the composition of the
pool of award recipients during the year, or if the Compensation
Committee determines that a change to an individual award is
needed. |
Individual Performance Bonus
As a result of changes in regulation imposed by the Jobs
Creation Act of 2004 associated with deferred compensation
arrangements, as well as an increase in the competitive market
for recruiting and retaining top performers in private equity
firms, the Compensation Committee recommended to the Board and
the Board has approved that a portion of the IPA should be paid
as an Individual Performance Bonus (IPB) for 2006, consistent
with the practice for paying the IPB in 2005. The IPB for 2006
has been determined to be approximately $8.1 million,
however, the Compensation Committee may adjust the IPB as
needed. The IPB will be distributed in cash to award recipients
in equal bi-weekly installments as long as each recipient
remains employed by us. If a recipient terminates employment
during the year, any remaining cash payments under the IPB would
be forfeited. The following table presents the IPBs that have
been awarded for 2006 for the Compensated Persons, as well as
for all other recipients as a group:
|
|
|
|
|
|
|
|
2006 |
|
|
Individual |
Name and Position |
|
Performance Bonus(1) |
|
|
|
William L. Walton, Chief Executive Officer
|
|
$ |
1,475,000 |
|
Joan M. Sweeney, Chief Operating Officer
|
|
|
750,000 |
|
John M. Scheurer, Managing Director
|
|
|
550,000 |
|
All Executive Officers as a Group (excluding the Compensated
Persons)
|
|
|
2,690,500 |
|
All Non-Executive Officers as a Group
|
|
|
2,617,500 |
|
|
|
|
|
|
|
Total
|
|
$ |
8,083,000 |
|
|
|
|
|
|
|
|
(1) |
Represents IPBs expected to be expensed for financial reporting
purposes for 2006 for these officers, assuming each recipient
remains employed by us throughout the year. These amounts are
subject to change if there is a change in the composition of the
pool of award recipients during the year or if the Compensation
Committee determines that a change to an individual award is
needed. |
The 2005 Deferred Compensation Plan I
Pursuant to changes in regulation imposed by the Jobs Creation
Act of 2004 associated with deferred compensation arrangements,
in 2005, we restated and replaced our existing deferred
compensation plan DCP I with The 2005 Allied Capital Corporation
113
Non-Qualified Deferred Compensation Plan (2005 DCP I). The 2005
DCP I is an unfunded plan, as defined by the Code, that provides
for the deferral of compensation by our directors, employees,
and consultants. Any director, senior officer, or consultant is
eligible to participate in the 2005 DCP I at such time and for
such period as designated by the Board of Directors. The 2005
DCP I is administered through a trust, and we fund this plan
through cash contributions. Directors may choose to defer
directors fees through the 2005 DCP I, and may choose to
have invested such deferred income in shares of our common stock
through a trust. On June 6, 2006, the trust related to the
2005 DCP I held 2,548 shares of our common stock.
We continue to maintain DCP I and all deferrals made to the DCP
I (through December 31, 2004) shall be distributed pursuant
to the terms of that plan. In the event of termination of
employment, the participants deferral account in DCP I
will be immediately distributed, either in lump sum or annual
installments, as previously elected by the participant. On
June 6, 2006, the trust related to the DCP I held
1,517 shares of our common stock.
In the event of a change of control, all amounts in a
participants deferral account in DCP I will be immediately
distributed to the participant. For purposes of DCP I,
Change of Control prior to the Jobs Creation Act of
2004 (Pre-JCA) was defined as (i) the sale or
other disposition of all or substantially all of our assets; or
(ii) the acquisition, whether directly, indirectly,
beneficially (within the meaning of
Rule 13d-3 of the
Securities Exchange Act of 1934), or of record, as a result of a
merger, consolidation or otherwise, of our securities
representing fifteen percent (15%) or more of the aggregate
voting power of our then outstanding common stock by any person
(within the meaning of Section 13(d) and 14(d) of the 1934
Act), including, but not limited to, any corporation or group of
persons acting in concert, other than (A) Allied Capital or
its subsidiaries and/or (B) any employee pension benefit
plan (within the meaning of Section 3(2) of the Employee
Retirement Income Security Act of 1974) of ours or our
subsidiaries, including a trust established pursuant to any such
plan; or (iii) the individuals who were members of the
Board of Directors as of the Effective Date (the Incumbent
Board) cease to constitute at least two-thirds (2/3) of the
Board; provided, however, that any director appointed by at
least two-thirds (2/3) of the then Incumbent Board or nominated
by at least two-thirds (2/3) of the Corporate Governance/
Nominating Committee of the Board of Directors (a majority of
the members of the Corporate Governance/ Nominating Committee
shall be members of the then Incumbent Board or appointees
thereof), other than any director appointed or nominated in
connection with, or as a result of, a threatened or actual proxy
or control contest, shall be deemed to constitute a member of
the Incumbent Board.
For 2005, all deferrals were made to the 2005 DCP I and shall be
distributed pursuant to the terms of this plan in compliance
with the Jobs Creation Act of 2004. In the event of termination
of employment, the participants deferral account in 2005
DCP I will be distributed either in lump sum or annual
installments, as previously elected by the participant, however,
in no event will the first payment be made earlier than six
months after the date of employment termination.
In the event of a change of control, all amounts in a
participants deferral account in 2005 DCP I will be
immediately distributed to the participant. For purposes of 2005
DCP I, Change of Control following the Jobs Creation
Act of 2004 (Post-JCA) is defined as (i) the sale or other
disposition of at least forty percent (40%) of our assets; or
(ii) the acquisition, whether directly, indirectly,
beneficially (within the meaning of
Rule 13d-3 of the
1934 Act), or of record, as a result of a merger, consolidation
or otherwise, of our
114
securities representing fifty percent (50%) or more of the
aggregate voting power of our then outstanding common stock by
any person (within the meaning of Section 13(d) and 14(d)
of the 1934 Act), including, but not limited to, any corporation
or group of persons acting in concert, other than
(A) Allied Capital or its subsidiaries and/or (B) any
employee pension benefit plan (within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974) of
ours or our subsidiaries, including a trust established
pursuant to any such plan; or (iii) the individuals who
were members of the Board of Directors as of the Effective Date
(the Incumbent Board) cease to constitute at least
two-thirds (2/3) of the Board of Directors; provided, however,
that any director appointed by at least two-thirds (2/3) of the
then Incumbent Board or nominated by at least two-thirds (2/3)
of the Corporate Governance/ Nominating Committee of the Board
(if a majority of the members of the Corporate Governance/
Nominating Committee are members of the then Incumbent Board or
appointees thereof), other than any director appointed or
nominated in connection with, or as a result of, a threatened or
actual proxy or control contest, shall be deemed to constitute a
member of the Incumbent Board.
The Compensation Committee of our Board of Directors administers
DCP I and 2005 DCP I. The Board of Directors reserves the right
to amend, terminate, or discontinue DCP I and 2005 DCP I,
provided that no such action will adversely affect a
participants rights under the plans with respect to the
amounts paid to his or her deferral accounts.
The 2005 Deferred Compensation Plan II
In conjunction with the IPA, we established a non-qualified
deferred compensation plan (DCP II) in 2004, which is
administered through a trust by an independent third-party
trustee. In 2005 and pursuant to recent changes in regulation
imposed by the Jobs Creation Act of 2004 associated with
deferred compensation arrangements, we restated and replaced DCP
II with The 2005 Allied Capital Corporation Non-Qualified
Deferred Compensation Plan II (2005 DCP II). The 2005 DCP
II is an unfunded plan, as defined by the Code, that provides
for the deferral of compensation by our officers. All IPA
contributions made for 2005 were made into the 2005 DCP II.
The IPAs are generally deposited in the trust in equal
installments, on a quarterly basis, in the form of cash. The
Compensation Committee designed both DCP II and 2005 DCP II to
require the trustee to use the cash to purchase shares of our
common stock in the market on the New York Stock Exchange. A
participant only vests in the award as it is deposited into the
trust. The Compensation Committee, in its sole discretion, shall
designate the senior officers who will receive IPAs and
participate in 2005 DCP II. During any period of time in which a
participant has an account in either DCP II or 2005 DCP II, any
dividends declared and paid on shares of common stock allocated
to the participants accounts shall be reinvested by the
trustee as soon as practicable in shares of our common stock
purchased in the open market.
We continue to maintain DCP II and all contributions made to DCP
II (through December 31, 2004) shall be distributed
pursuant to the terms of that plan. In the event of termination
of employment, one-third of the participants deferral
account in DCP II will be immediately distributed, one half of
the then current remaining balance will be distributed within
30 days of the first anniversary of his or her employment
termination date, and the remainder of the account balance will
be distributed within 30 days of the second anniversary of
the employment termination date. In the event of a change of
115
control (following the Pre-JCA definition for Change in
Control), all amounts in a participants deferral
account in DCP II will be immediately distributed to the
participant.
Contributions made to the 2005 DCP II shall be distributed
pursuant to the terms of this plan in compliance with the Jobs
Creation Act of 2004. In the event of termination of employment,
one-third of the participants deferral account in 2005 DCP
II will be distributed six months after the date of employment
termination, one half of the then current remaining balance will
be distributed within 30 days of the first anniversary of
his or her employment termination date, and the remainder of the
account balance will be distributed within 30 days of the
second anniversary of the employment termination date. In the
event of a change of control, (following the Post-JCA definition
for Change of Control), all amounts in a
participants deferral account in 2005 DCP II will be
immediately distributed to the participant.
A participant who violates certain non-solicitation covenants
contained in the DCP II and 2005 DCP II during the two years
after the termination of his or her employment will forfeit back
to us the remaining value of his or her deferral accounts.
The aggregate maximum number of shares of our common stock that
the trustee is authorized to purchase in the open market for the
purpose of investing the cash from IPAs in DCP II and 2005 DCP
II is 3,500,000 shares, subject to appropriate adjustments in
the event of a stock dividend, stock split, or similar change in
capitalization affecting our common stock. On June 6, 2006,
the trust related to the DCP II held 492,016 shares of our
common stock and the trust related to the 2005 DCP II held
303,081 shares of our common stock.
The Compensation Committee of our Board of Directors administers
DCP II and 2005 DCP II. The Board of Directors reserves the
right to amend, terminate, or discontinue DCP II and 2005 DCP
II, provided that no such action will adversely affect a
participants rights under the plans with respect to the
amounts paid to his or her deferral accounts.
116
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of June 6, 2006, there were no persons that owned 25% or
more of our outstanding voting securities, and no person would
be deemed to control us, as such term is defined in the 1940 Act.
The following table sets forth, as of June 6, 2006, each
stockholder who owned more than 5% of our outstanding shares of
common stock, each director, the chief executive officer, our
executive officers and our directors and executive officers as a
group. Unless otherwise indicated, we believe that each
beneficial owner set forth in the table has sole voting and
investment power.
Our directors have been divided into two groups
interested directors and independent directors. Interested
directors are interested persons as defined in the
Investment Company Act of 1940.
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|
Dollar Range of |
|
|
Number of |
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|
|
Equity Securities |
Name of |
|
Shares Owned |
|
Percentage |
|
Beneficially Owned |
Beneficial Owner |
|
Beneficially(1) |
|
of Class(2) |
|
by Directors(3) |
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|
|
Capital Research and Management Company
|
|
|
7,646,020 |
(4) |
|
|
5.1 |
% |
|
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|
333 South Hope Street, 55th Floor
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Los Angeles, CA 90071-1447
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|
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Interested Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
William L. Walton
|
|
|
3,590,569 |
(5,6,7) |
|
|
2.5 |
% |
|
|
over $100,000 |
|
Joan M. Sweeney
|
|
|
1,964,504 |
(5) |
|
|
1.4 |
% |
|
|
over $100,000 |
|
Robert E. Long
|
|
|
56,111 |
(8) |
|
|
* |
|
|
|
over $100,000 |
|
Independent Directors:
|
|
|
|
|
|
|
|
|
|
|
|
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Ann Torre Bates
|
|
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29,250 |
(7,8) |
|
|
* |
|
|
|
over $100,000 |
|
Brooks H. Browne
|
|
|
88,713 |
(7,8) |
|
|
* |
|
|
|
over $100,000 |
|
John D. Firestone
|
|
|
77,426 |
(7,8) |
|
|
* |
|
|
|
over $100,000 |
|
Anthony T. Garcia
|
|
|
103,512 |
(8) |
|
|
* |
|
|
|
over $100,000 |
|
Edwin L. Harper
|
|
|
10,400 |
(8,15) |
|
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* |
|
|
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over $100,000 |
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Lawrence I. Hebert
|
|
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57,800 |
(8,14) |
|
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* |
|
|
|
over $100,000 |
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John I. Leahy
|
|
|
62,318 |
(8) |
|
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* |
|
|
|
over $100,000 |
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Alex J. Pollock
|
|
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32,265 |
(7,8,9) |
|
|
* |
|
|
|
over $100,000 |
|
Marc F. Racicot
|
|
|
15,000 |
(8) |
|
|
* |
|
|
|
over $100,000 |
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Guy T. Steuart II
|
|
|
369,144 |
(8,10) |
|
|
* |
|
|
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over $100,000 |
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Laura W. van Roijen
|
|
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78,925 |
(7,8) |
|
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* |
|
|
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over $100,000 |
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117
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Dollar Range of |
|
|
Number of |
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|
|
Equity Securities |
Name of |
|
Shares Owned |
|
Percentage |
|
Beneficially Owned |
Beneficial Owner |
|
Beneficially(1) |
|
of Class(2) |
|
by Directors(3) |
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Executive Officers:
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|
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|
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Kelly A. Anderson
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339,362 |
(5) |
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* |
|
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Scott S. Binder
|
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781,975 |
(5,7,11) |
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* |
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Michael J. Grisius
|
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781,994 |
(5,7) |
|
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* |
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Jeri J. Harman
|
|
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301,861 |
(5) |
|
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* |
|
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Thomas C. Lauer
|
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158,880 |
(5,7) |
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* |
|
|
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Robert D. Long
|
|
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985,860 |
(5,7,12) |
|
|
* |
|
|
|
|
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Justin S. Maccarone
|
|
|
281,154 |
(5) |
|
|
* |
|
|
|
|
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Diane E. Murphy
|
|
|
349,049 |
(5) |
|
|
* |
|
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Penni F. Roll
|
|
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813,669 |
(5) |
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* |
|
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Daniel L. Russell
|
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435,872 |
(5) |
|
|
* |
|
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John M. Scheurer
|
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1,356,265 |
(5) |
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* |
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|
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John D. Shulman
|
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998,195 |
(5) |
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* |
|
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Suzanne V. Sparrow
|
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535,904 |
(5,6) |
|
|
* |
|
|
|
|
|
All directors and executive officers as a group (27 in
number)
|
|
|
14,343,294 |
(13) |
|
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9.5 |
% |
|
|
|
|
* Less than 1%
|
|
|
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(1) |
Beneficial ownership has been determined in accordance with
Rule 13d-3 of the
Securities Exchange Act of 1934. |
|
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(2) |
Based on a total of 139,984,212 shares of our common stock
issued and outstanding on June 6, 2006, and the number of
shares of our common stock issuable upon the exercise of stock
options exercisable within 60 days held by each executive
officer and non-officer director, which totals 11,414,605 in the
aggregate. |
|
|
(3) |
Beneficial ownership has been determined in accordance with
Rule 16a-1(a)(2)
of the Securities Exchange Act of 1934. |
|
|
(4) |
Information regarding share ownership was obtained from the
Schedule 13F-HR that Capital Research and Management
Company filed with the SEC on May 12, 2006. |
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(5) |
Share ownership for the following directors and executive
officers includes: |
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Owned |
|
|
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Through |
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Options |
|
|
|
|
|
|
Deferred |
|
Exercisable |
|
|
|
|
Owned |
|
Compensation |
|
Within 60 Days |
|
Allocated to |
|
|
Directly |
|
Plans(16) |
|
of June 6, 2006 |
|
401(k) Plan |
|
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|
Interested Directors:
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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William L. Walton
|
|
|
467,264 |
|
|
|
191,568 |
|
|
|
2,718,634 |
|
|
|
7,662 |
|
Joan M. Sweeney
|
|
|
298,966 |
|
|
|
95,789 |
|
|
|
1,553,220 |
|
|
|
16,529 |
|
Executive Officers:
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Kelly A. Anderson
|
|
|
112,182 |
|
|
|
9,204 |
|
|
|
211,706 |
|
|
|
6,270 |
|
Scott S. Binder
|
|
|
91,260 |
|
|
|
45,975 |
|
|
|
642,717 |
|
|
|
2,023 |
|
Michael J. Grisius
|
|
|
68,938 |
|
|
|
35,525 |
|
|
|
658,387 |
|
|
|
19,144 |
|
Jeri J. Harman
|
|
|
|
|
|
|
10,194 |
|
|
|
291,667 |
|
|
|
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|
Thomas C. Lauer
|
|
|
4,421 |
|
|
|
3,558 |
|
|
|
150,246 |
|
|
|
655 |
|
Robert D. Long
|
|
|
21,000 |
|
|
|
38,328 |
|
|
|
922,354 |
|
|
|
4,178 |
|
Justin S. Maccarone
|
|
|
8,400 |
|
|
|
6,087 |
|
|
|
266,667 |
|
|
|
|
|
Diane E. Murphy
|
|
|
6,244 |
|
|
|
18,520 |
|
|
|
324,272 |
|
|
|
13 |
|
Penni F. Roll
|
|
|
96,472 |
|
|
|
31,297 |
|
|
|
674,751 |
|
|
|
11,149 |
|
Daniel L. Russell
|
|
|
1,060 |
|
|
|
18,966 |
|
|
|
415,846 |
|
|
|
|
|
John M. Scheurer
|
|
|
266,497 |
|
|
|
72,312 |
|
|
|
977,837 |
|
|
|
39,619 |
|
John D. Shulman
|
|
|
4,799 |
|
|
|
36,294 |
|
|
|
957,102 |
|
|
|
|
|
Suzanne V. Sparrow
|
|
|
80,963 |
|
|
|
9,139 |
|
|
|
232,699 |
|
|
|
27,087 |
|
118
|
|
|
|
(6) |
Includes 213,103 shares held by the 401(k) Plan, of which
Mr. Walton and Ms. Sparrow are sub-trustees of the
fund holding our shares. The sub-trustees disclaim beneficial
ownership of such shares. |
|
|
(7) |
Includes certain shares held in IRA or Keogh accounts:
Walton 12,015 shares; Bates 4,250
shares; Browne 12,280 shares; Firestone
3,415 shares; Pollock 1,000 shares; van
Roijen 8,469 shares; Binder 273 shares;
Grisius 1,171 shares; Lauer 500 shares;
and R.D. Long 17,000 shares. |
|
|
(8) |
Beneficial ownership for these non-officer directors includes
exercisable options to purchase 45,000 shares, except with
respect to Ms. Bates who has exercisable options to
purchase 25,000 shares, Mr. Leahy who has exercisable
options to purchase 42,500 shares, Mr. Pollock who has
exercisable options to purchase 14,000 shares, Mr. Racicot
who has exercisable options to purchase 15,000 shares and
Mr. Harper who has exercisable options to purchase 10,000
shares. |
|
|
(9) |
Includes 4,065 shares held in the Deferred Compensation Plans
for Mr. Pollock. |
|
|
(10) |
Includes 276,691 shares held by a corporation for which
Mr. Steuart serves as an executive officer. |
|
(11) |
Includes 20,000 shares held in a charitable remainder trust. |
|
(12) |
Includes 4,000 shares held by a trust for the benefit of
Mr. Longs children. |
|
(13) |
Includes a total of 11,414,605 shares underlying stock options
exercisable within 60 days of June 6, 2006, which are
assumed to be outstanding for the purpose of calculating the
groups percentage ownership, and 213,103 shares held by
the 401(k) Plan. |
|
(14) |
Includes 9,000 shares held in a revocable trust. |
|
(15) |
Includes 400 shares held in a revocable trust. |
|
(16) |
See Individual Performance Award and The 2005
Deferred Compensation Award II for a discussion of shares
owned through the deferred compensation plans. |
119
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information, as of
June 6, 2006, regarding indebtedness to Allied Capital in
excess of $60,000 of any person serving as a director or
executive officer of Allied Capital at any time since
January 1, 2005. All of such indebtedness results from
loans we made to enable the exercise of stock options. The loans
are required to be fully collateralized and are full recourse
against the borrower and have varying terms not exceeding ten
years. The interest rates charged generally reflect the
applicable federal rate on the date of the loan. As of
December 31, 2005, the total loans outstanding to such
executive officers of Allied Capital was $3.9 million or
0.1% of Allied Capitals total assets at December 31,
2005.
As a business development company under the Investment Company
Act of 1940, we are entitled to provide and have provided loans
to our officers in connection with the exercise of options.
However, as a result of provisions of the Sarbanes-Oxley Act of
2002, we have been prohibited from making new loans to our
executive officers since July 30, 2002.
|
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|
|
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|
|
|
|
|
|
|
|
|
Range of |
|
|
|
|
Highest Amount |
|
Interest Rates |
|
Amount |
|
|
Outstanding |
|
|
|
Outstanding at |
Name and Position with Company |
|
During 2005 |
|
High |
|
|
|
Low |
|
June 6, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Executive Officers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelly A. Anderson, Executive Vice President and Treasurer
|
|
$ |
496,225 |
|
|
|
5.96% |
|
|
|
|
|
3.91% |
|
|
$ |
496,225 |
|
Michael J. Grisius, Managing Director
|
|
|
230,727 |
|
|
|
4.68% |
|
|
|
|
|
3.91% |
|
|
|
224,728 |
|
Penni F. Roll, Chief Financial Officer
|
|
|
1,224,833 |
|
|
|
6.24% |
|
|
|
|
|
4.45% |
|
|
|
531,525 |
|
John M. Scheurer, Managing Director
|
|
|
167,453 |
|
|
|
4.73% |
|
|
|
|
|
4.73% |
|
|
|
|
|
John D. Shulman, Managing Director
|
|
|
99,991 |
|
|
|
2.85% |
|
|
|
|
|
2.85% |
|
|
|
|
|
Suzanne V. Sparrow, Executive Vice President and Secretary
|
|
|
626,309 |
|
|
|
6.18% |
|
|
|
|
|
4.45% |
|
|
|
409,328 |
|
Joan M. Sweeney, Chief Operating Officer and
Director(1)
|
|
|
399,962 |
|
|
|
4.45% |
|
|
|
|
|
4.45% |
|
|
|
399,962 |
|
|
|
(1) |
Ms. Sweeney is an interested director. Interested directors are
interested persons as defined by the Investment
Company Act of 1940. |
120
TAX STATUS
The following discussion is a general summary of the material
United States federal income tax considerations applicable to us
and to an investment in the debt securities. The discussion is
based upon the Code, Treasury Regulations, and administrative
and judicial interpretations, each as of the date of this
prospectus and all of which are subject to change. You should
consult your own tax advisor with respect to tax considerations
that pertain to your purchase of the debt securities.
Taxation of us as a Regulated Investment Company
We intend to be treated for tax purposes as a regulated
investment company under Subchapter M of Chapter 1 of
the Code. If we (i) qualify as a regulated investment
company and (ii) distribute to stockholders in a timely
manner at least 90% of our investment company taxable
income, as defined in the Code (i.e., net ordinary
investment income, including accrued original issue discount,
and net realized short-term capital gain in excess of net
realized long-term capital loss) (the 90% Distribution
Requirement) each year, we generally will not be subject
to federal income tax on the portion of our investment company
taxable income and net capital gain (i.e., net realized
long-term capital gain in excess of net realized short-term
capital loss) we distribute (or treat as deemed
distributed) to stockholders. (We will, however, be
subject to such tax to the extent that, prior to
February 2, 2013, BLX sells property held by BLX, Inc. on
the date of its corporate reorganization, but only to the extent
(i) such property had a built-in gain (that is, value in
excess of tax basis) on such date and (ii) such built-in
gain is recognized on such sale.) In addition, we are generally
required to distribute in a timely manner an amount at least
equal to the sum of (i) 98% of our ordinary income for each
calendar year, (ii) 98% of our capital gain net income for
the one-year period ending December 31 of that calendar
year, and (iii) any income realized, but not taxed or
distributed in prior years, in order to avoid the 4%
nondeductible federal excise tax on certain undistributed income
of regulated investment companies (the Excise Tax
Avoidance Requirements). If we do not satisfy the Excise
Tax Avoidance Requirements for any year, we will be required to
pay this 4% excise tax on the amount by which 98% of the current
years taxable income exceeds the distribution for the
year. The ordinary income or net capital gain income on which
the excise tax is paid is generally distributed to shareholders
in the next tax year. Depending on the level of ordinary income
or net capital gain income for a tax year, we may choose to
carry over the portion of such income in excess of our current
year distributions into the next tax year and pay the 4% excise
tax, as required. We will be subject to federal income tax at
the regular corporate rate on any amounts of investment company
taxable income or net capital gain not distributed (or deemed
distributed) to our stockholders.
In order to qualify as a regulated investment company for
federal income tax purposes, we must, among other things:
(a) continue to qualify as a business development company
under the 1940 Act; (b) derive in each taxable year at
least 90% of our gross income from (i) dividends, interest,
payments with respect to securities loans, gains from the sale
of stock or other securities, or other income derived with
respect to our business of investing in such stock or securities
or (ii) net income derived from an interest in a
qualified publicly traded partnership (the 90%
Income Test); and (c) diversify our holdings so that
at the end of each quarter of the taxable year (i) at least
50% of the value of our assets consists of cash, cash items,
U.S. government securities, securities of other regulated
investment companies, and other securities if such other
securities of any
121
one issuer do not represent more than 5% of our assets or more
than 10% of the outstanding voting securities of the issuer, and
(ii) no more than 25% of the value of our assets is
invested in the securities of any one issuer (other than U.S.
government securities or securities of other regulated
investment companies), the securities of two or more issuers
that are controlled (as determined under applicable Code rules)
by us and are engaged in the same or similar or related trades
or businesses, or the securities of one or more qualified
publicly traded partnerships.
If we fail to satisfy the 90% Distribution Requirement or fail
to qualify as a regulated investment company in any taxable
year, we will be subject to tax in that year on all of our
taxable income, regardless of whether we make any distributions
to our stockholders. In that case, all of our income will be
subject to corporate-level tax, reducing the amount available
for debt service and distribution to stockholders.
Taxation of Debt Holders
We intend to describe in a prospectus supplement the United
States federal income tax considerations applicable to the debt
securities that will be sold by us pursuant to that supplement,
including the taxation of any debt securities that will be sold
at an original issue discount or acquired with market discount
or amortizable bond premium and the tax treatment of sales,
exchanges or retirements of our debt securities. In addition, we
may describe in the applicable prospectus supplement the United
States federal income tax considerations applicable to holders
of our debt securities that are not U.S. persons.
CERTAIN GOVERNMENT REGULATIONS
We operate in a highly regulated environment. The following
discussion generally summarizes certain government regulations.
Business Development Company. A business
development company is defined and regulated by the 1940 Act. A
business development company must be organized in the United
States for the purpose of investing in or lending to primarily
private companies and making managerial assistance available to
them. A business development company may use capital provided by
public shareholders and from other sources to invest in
long-term, private investments in businesses. A business
development company provides shareholders the ability to retain
the liquidity of a publicly traded stock, while sharing in the
possible benefits, if any, of investing in primarily privately
owned companies.
As a business development company, we may not acquire any asset
other than qualifying assets unless, at the time we
make the acquisition, the value of our qualifying assets
represent at least 70% of the value of our total assets. The
principal categories of qualifying assets relevant to our
business are:
|
|
|
|
|
Securities purchased in transactions not involving any public
offering, the issuer of which is an eligible portfolio company; |
|
|
|
Securities received in exchange for or distributed with respect
to securities described in the bullet above or pursuant to the
exercise of options, warrants or rights relating to such
securities; and |
|
|
|
Cash, cash items, government securities or high quality debt
securities (within the meaning of the 1940 Act), maturing in one
year or less from the time of investment. |
122
An eligible portfolio company is generally a domestic company
that is not an investment company (other than a small business
investment company wholly owned by a business development
company) and that:
|
|
|
|
|
does not have a class of securities with respect to which a
broker may extend margin credit at the time the acquisition is
made; |
|
|
|
is actively controlled by the business development company and
has an affiliate of a business development company on its board
of directors; or |
|
|
|
meets such other criteria as may be established by the SEC. |
Control, as defined by the 1940 Act, is presumed to exist
where a business development company beneficially owns more than
25% of the outstanding voting securities of the portfolio
company.
To include certain securities described above as qualifying
assets for the purpose of the 70% test, a business development
company must make available to the issuer of those securities
significant managerial assistance such as providing significant
guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company. We
offer to provide significant managerial assistance to our
portfolio companies. See Risk Factors
Our ability to invest in private companies may be limited
in certain circumstances.
As a business development company, we are entitled to issue
senior securities in the form of stock or senior securities
representing indebtedness, including debt securities and
preferred stock, as long as each class of senior security has an
asset coverage of at least 200% immediately after each such
issuance. In addition, while any senior securities remain
outstanding, we must make provisions to prohibit any
distribution to our shareholders unless we meet the applicable
asset coverage ratio at the time of the distribution. This
limitation is not applicable to borrowings by our small business
investment company subsidiary, and therefore any borrowings by
this subsidiary are not included in this asset coverage test
pursuant to exemptive relief. See Small
Business Administration Regulations.
We may also be prohibited under the 1940 Act from knowingly
participating in certain transactions with our affiliates
without the prior approval of the members of our Board of
Directors who are not interested persons and, in some cases,
prior approval by the SEC. We have been granted an exemptive
order by the SEC permitting us to engage in certain transactions
that would be permitted if we and our subsidiaries were one
company and permitting certain transactions among our
subsidiaries, subject to certain conditions and limitations.
We have designated a chief compliance officer and established a
compliance program pursuant to the requirements of the
1940 Act. We are periodically examined by the SEC for
compliance with the 1940 Act.
As with other companies regulated by the 1940 Act, a business
development company must adhere to certain substantive
regulatory requirements. A majority of our directors must be
persons who are not interested persons, as that term is defined
in the 1940 Act. Additionally, we are required to provide and
maintain a bond issued by a reputable fidelity insurance company
to protect us against larceny and embezzlement. Furthermore, as
a business development company, we are prohibited from
protecting any director or officer against any liability to us
or our shareholders arising from willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of such persons office.
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We maintain a code of ethics that establishes procedures for
personal investment and restricts certain transactions by our
personnel. Our code of ethics does not permit investment by our
employees in securities that have been or are contemplated to be
purchased or held by us. Our code of ethics is also posted on
our website at www.alliedcapital.com. The code of ethics is also
filed as an exhibit to our registration statement which is on
file with the SEC. You may read and copy the code of ethics at
the SECs Public Reference Room in Washington, D.C.
You may obtain information on operations of the Public Reference
Room by calling the SEC at
1-800-SEC-0330. In
addition, the code of ethics is available on the EDGAR database
on the SEC Internet site at http://www.sec.gov. You may obtain
copies of the code of ethics, after paying a duplicating fee, by
electronic request at the following email address:
publicinfo@sec.gov, or by writing to the SECs Public
Reference Section, 100 F Street, NE, Washington, D.C.
20549.
As a business development company under the 1940 Act, we are
entitled to provide and have provided loans to our officers in
connection with the exercise of options. However, as a result of
provisions of the Sarbanes-Oxley Act of 2002, we have been
prohibited from making new loans to our executive officers since
July 2002.
We may not change the nature of our business so as to cease to
be, or withdraw our election as, a business development company
unless authorized by vote of a majority of the outstanding
voting securities, as defined in the 1940 Act. A majority
of the outstanding voting securities of a company is defined
under the 1940 Act as the lesser of: (i) 67% or more of
such companys shares present at a meeting if more than 50%
of the outstanding shares of such company are present and
represented by proxy or (ii) more than 50% of the
outstanding shares of such company.
Small Business Administration Regulations. Allied
Investments, a wholly owned subsidiary of Allied Capital, is
licensed by the Small Business Administration (SBA) as a small
business investment company under Section 301(c) of the
Small Business Investment Act of 1958.
Small business investment companies are designed to stimulate
the flow of private equity capital to eligible small businesses.
Under present SBA regulations, eligible small businesses include
businesses that have a tangible net worth not exceeding
$18 million and have average annual net income after
federal income taxes not exceeding $6 million for the two
most recent fiscal years. In addition, a small business
investment company must devote 20% of its investment activity to
smaller concerns as defined by the SBA. A smaller
concern is one that has a tangible net worth not exceeding
$6 million and has average annual net income after federal
income taxes not exceeding $2 million for the two most
recent fiscal years. SBA regulations also provide alternative
size standard criteria to determine eligibility, which depend on
the industry in which the business is engaged and are based on
such factors as the number of employees and gross sales.
According to SBA regulations, small business investment
companies may make loans to small businesses, invest in the
equity securities of such businesses, and provide them with
consulting and advisory services. Allied Investments provides
long-term loans to qualifying small businesses; equity
investments and consulting and other services are typically
provided only in connection with such loans.
Allied Investments is periodically examined and audited by the
SBAs staff to determine its compliance with small business
investment company regulations.
We, through Allied Investments, have debentures payable to the
SBA with contractual maturities of ten years. The notes require
payment of interest only semi-
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annually, and all principal is due upon maturity. Under the
small business investment company program, we may borrow up to
$124.4 million from the Small Business Administration. At
March 31, 2006, we had $16.5 million outstanding.
Regulated Investment Company Status. We have
elected to be taxed as a regulated investment company under
Subchapter M of the Code. 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 the Company 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 (and 100% of any previously
undistributed and untaxed income) to avoid paying an excise tax.
If this requirement is not met, the Code imposes a nondeductible
excise tax equal to 4% of the amount by which 98% of the current
years taxable income (and 100% of any previously
undistributed and untaxed 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 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, as required.
In order to maintain our status as a regulated investment
company and obtain the tax benefits of such status, 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 Code; and
(4) timely distribute to shareholders at least 90% of
our annual investment company taxable income as defined in the
Code. We intend to take all steps necessary to continue to
qualify as a regulated investment company. However, there can be
no assurance that we will continue to qualify for such treatment
in future years.
Compliance with the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 (the
Sarbanes-Oxley Act) imposes a wide variety of
regulatory requirements on publicly held companies and their
insiders. Many of these requirements apply to us, including:
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Our Chief Executive Officer and Chief Financial Officer certify
the financial statements contained in our periodic reports
through the filing of Section 302 certifications; |
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Our periodic reports disclose our conclusions about the
effectiveness of our disclosure controls and procedures; |
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Our annual report on
Form 10-K contains
a report from our management on internal control over financial
reporting, including a statement that our management is
responsible for establishing and maintaining adequate internal
control over financial reporting as well as our
managements assessment of the effectiveness of our
internal control over financial reporting, which must be audited
by our independent registered public accounting firm; |
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Our periodic reports disclose whether there were significant
changes in our internal control over financial reporting or in
other factors that could significantly affect our internal
control over financial reporting subsequent to the date of their
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses; and |
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We may not make any loan to any director or executive officer
and we may not materially modify any existing loans. |
We have adopted procedures to comply with the Sarbanes-Oxley Act
and the regulations promulgated thereunder. We will continue to
monitor our compliance with all future regulations that are
adopted under the Sarbanes-Oxley Act and will take actions
necessary to ensure that we are in compliance therewith.
Proxy Voting Policies and Procedures
We vote proxies relating to our portfolio securities in the best
interest of our shareholders. We review on a case-by-case basis
each proposal submitted to a shareholder vote to determine its
impact on the portfolio securities held by us. Although we
generally vote against proposals that may have a negative impact
on our portfolio securities, we may vote for such a proposal if
there exists compelling long-term reasons to do so.
Our proxy voting decisions are made by the senior officers who
are responsible for monitoring each of our investments. To
ensure that our vote is not the product of a conflict of
interest, we require that: (i) anyone involved in the
decision making process disclose to our Chief Compliance Officer
any potential conflict that he or she is aware of and any
contact that he or she has had with any interested party
regarding a proxy vote; and (ii) employees involved in the
decision making process or vote administration are prohibited
from revealing how we intend to vote on a proposal in order to
reduce any attempted influence from interested parties.
Shareholders may obtain information regarding how we voted
proxies with respect to our portfolio securities without charge
by making a written request for proxy voting information to:
Corporate Secretary, Allied Capital Corporation, 1919
Pennsylvania Avenue, N.W., Washington, D.C. 20006 or by
telephone at
(202) 721-6100.
10b5-1 STOCK TRADING PLAN
Our Board of Directors has established a policy to permit our
officers and directors to enter into trading plans to sell
shares of our common stock in accordance with
Rule 10b5-1 of the
Securities Act of 1934. The policy allows our participating
officers and directors to adopt a pre-arranged stock trading
plan to buy or sell pre-determined amounts of our shares of
common stock over a period of time. Our Board of Directors
established the policy in recognition of the liquidity and
diversification objectives of our officers and directors,
including the desire of certain of our officers and directors to
sell certain shares of our common stock (such as formula award
shares that they had acquired in connection
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with the 1997 merger of the five Allied Capital affiliated
companies and shares of our common stock they acquired upon
exercise of stock options).
Our Board of Directors has also established a retained stock
ownership policy for our officers and directors who enter into
any trading plans pursuant to Rule 10b5-1. The policy aligns the
interests of our officers and directors with the interests of
shareholders and further promotes our commitment to sound
corporate governance. The policy requires that our officers and
directors who choose to sell pursuant to Rule 10b5-1 not sell in
any one year more than 10% of their owned shares of our common
stock or more than 10% of their shares of our common stock
issuable upon the exercise of vested stock options.
DIVIDEND REINVESTMENT PLAN
We currently maintain a dividend reinvestment plan that provides
for reinvestment of our distributions on behalf of our
shareholders by our transfer agent. The dividend reinvestment
plan is an opt in plan, which means that if our
Board of Directors declares a cash dividend then our
shareholders that have not opted in to our dividend
reinvestment plan will receive cash dividends, rather than
reinvesting dividends in additional shares of common stock.
To enroll in the dividend reinvestment plan, each shareholder
must complete an enrollment status form and return it to the
plan agent. The plan agent shall then automatically reinvest any
dividend in additional shares of common stock. Shareholders may
change their status in the dividend reinvestment plan at any
time by contacting our transfer agent and plan administrator in
writing.
A shareholders ability to participate in a dividend
reinvestment plan may be limited according to how the shares of
common stock are held. A nominee may preclude beneficial owners
holding shares in street name from participating in the dividend
reinvestment plan. Shareholders who wish to participate in a
dividend reinvestment plan may need to hold their shares of
common stock in their own name. Shareholders who hold shares in
the name of a nominee should contact the nominee for details.
All distributions to investors who do not participate (or whose
nominee elects not to participate) in the dividend reinvestment
plan will be paid directly, or through the nominee, to the
record holder by or under the discretion of the plan agent. The
plan agent is American Stock Transfer and Trust Company, 59
Maiden Lane, New York, New York 10038. Their telephone number is
(800) 937-5449.
Under the dividend reinvestment plan, we may issue new shares
unless the market price of the outstanding shares of common
stock is less than 110% of the last reported net asset value.
Alternatively, the plan agent may buy shares of common stock in
the market. We value newly issued shares of common stock for the
dividend reinvestment plan at the average of the reported last
sale prices of the outstanding shares of common stock on the
last five trading days prior to the payment date of the
distribution, but not less than 95% of the opening bid price on
such date. The price in the case of shares bought in the market
will be the average actual cost of such shares of common stock,
including any brokerage commissions. There are no other fees
charged to shareholders in connection with the dividend
reinvestment plan. Any distributions reinvested under the plan
will nevertheless remain taxable to the shareholders.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 200,000,000 shares,
$0.0001 par value per share, all of which has been initially
designated as common stock. Our Board of Directors may classify
and reclassify any unissued shares of our capital stock by
setting or changing in one or more respects the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, terms or conditions
or redemption or other rights of such shares of capital stock.
Common Stock
At June 6, 2006, there were 139,984,212 shares of
common stock outstanding and 25,130,184 shares of common
stock reserved for issuance under our amended stock option plan.
The following are the outstanding classes of securities of
Allied Capital as of June 6, 2006:
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Allied Capital Corporation
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Common Stock |
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200,000,000 |
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139,984,212 |
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All shares of common stock have equal rights as to earnings,
assets, dividends and voting and all outstanding shares of
common stock are fully paid and non-assessable. Distributions
may be paid to the holders of common stock if and when declared
by our Board of Directors out of funds legally available
therefor. Our common stock has no preemptive, exchange,
conversion, or redemption rights and is freely transferable,
except where their transfer is restricted by federal and state
securities law or by contract. In the event of liquidation,
dissolution or winding-up of Allied Capital, each share of
common stock is entitled to share ratably in all of our assets
that are legally available for distributions after payment of
all debts and liabilities and subject to any prior rights of
holders of preferred stock, if any, then outstanding. Each share
of common stock is entitled to one vote on all matters submitted
to a vote of shareholders, including the election of directors.
Except as provided with respect to any other class or series of
capital stock, the holders of our common stock will possess
exclusive voting power. There is no cumulative voting in the
election of directors, which means that holders of a majority of
the shares, if they so choose, could elect all of the directors,
and holders of less than a majority of the shares would, in that
case, be unable to elect any director. All shares of common
stock offered hereby will be, when issued and paid for, fully
paid and non-assessable.
Preferred Stock
Our charter authorizes our Board of Directors to classify and
reclassify any unissued shares of stock into other classes or
series of stock, including preferred stock. Prior to issuance of
shares of each class or series, the Board of Directors is
required by Maryland law and by our charter to set the terms,
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of
redemption for each class or series. Thus, the Board of
Directors could authorize the issuance of shares of preferred
stock with terms and conditions which
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could have the effect of delaying, deferring or preventing a
transaction or a change in control that might involve a premium
price for holders of our common stock or otherwise be in their
best interest.
In addition, any issuance of preferred stock must comply with
the requirements of the 1940 Act. The 1940 Act requires, among
other things, that (1) immediately after issuance and
before any dividend or other distribution is made with respect
to our common stock, we maintain a coverage ratio of total
assets to total senior securities, which include all of our
borrowings and our preferred stock we may issue in the future,
of at least 200%, and (2) the holders of shares of
preferred stock, if any are issued, must be entitled as a class
to elect two directors at all times and to elect a majority of
the directors if dividends on such preferred stock are in
arrears by two years or more. The features of preferred stock
will be further limited by the requirements applicable to
regulated investment companies under the Code.
DESCRIPTION OF NOTES
As required by U.S. federal law for all bonds and notes of
companies that are publicly offered, our debt securities will be
governed by a document called an indenture, a contract entered
into between us and The Bank of New York, as trustee, dated
June 16, 2006. The following discussion sets forth the
general terms and provisions relating to the indenture and,
therefore, the debt securities. This discussion, however, may
not include a discussion of all of the terms and provisions that
may be important to you. You should carefully read the indenture
accompanying this prospectus and any prospectus supplement and
pricing supplement, if any, for all of the terms and provisions
that are applicable to any debt securities that we may offer in
a particular offering.
The trustee has two main roles:
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First, the trustee can enforce your rights against us if we
default. There are, however, some limitations on the extent to
which the trustee acts on your behalf, described later under
Events of Default Remedies if an
Event of Default Occurs. |
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Second, the trustee performs administrative duties for us, such
as sending you interest and principal payments, transferring
your securities to new buyers and sending you notices. |
We may, in our discretion, issue several distinct series of debt
securities, including notes, debentures, medium-term notes,
commercial paper, retail notes or similar obligations evidencing
indebtedness, under the indenture. Each series may be reopened
and more securities of such series may be issued under the
indenture, or under one or more supplements to the indenture.
This section summarizes terms of the debt securities that are
common to all series and some other terms that may be
applicable. Most of the financial terms of each specific series
of debt securities will be described in any prospectus
supplement and pricing supplement, if any, accompanying this
prospectus. Those terms may vary from the terms described here
and may contain some or all of the following:
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the title and series of the debt securities; |
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any limit on the aggregate principal amount of the debt
securities, and whether or not such series may be reopened for
additional securities of that series and on what terms; |
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the purchase price of the debt securities, expressed as a
percentage of the principal amount; |
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the person to whom any interest on the debt security shall be
payable, if other than to the registered holder at the close of
business on the regular record date, and the extent to which, or
the manner in which, any interest will be paid on a temporary
global security; |
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the date or dates on which the principal of, and any premium, if
any, on the debt securities will be payable or the method for
determining the date or dates of maturity; |
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if the debt securities will bear interest, the interest rate or
rates or the method by which the rate or rates will be
determined, as well as the date or dates from which any interest
will accrue, or the method by which such date or dates shall be
determined, the interest payment dates, the record dates for
those interest payments and the basis upon which interest shall
be calculated or the method by which such date or dates shall be
determined; |
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if the debt securities will be issued at a discount, the amount
of original issue discount, the method by which the accreted
value of the securities will be determined and the dates from
and to which original issue discount will accrue; |
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if other than the location specified in this prospectus, the
place or places where payments on the debt securities will be
made and where the debt securities may be surrendered for
registration of transfer or exchange; |
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if we have the option to redeem all or any portion of the debt
securities before their final maturity, the terms and conditions
upon which the debt securities may be redeemed; |
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our obligation, if any, to redeem, repay or purchase any
securities pursuant to any sinking fund or analogous provisions,
or at the holders option, and the period or periods within
which or the date or dates on which, the price or prices at
which, the currency or currencies in which, and the terms and
conditions upon which any securities shall be redeemed, repaid
or purchased, in whole or in part, pursuant to such obligation; |
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the currency or currencies in which the debt securities are
denominated and payable if other than U.S. dollars and the
manner for determining the equivalent thereof; |
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whether the amount of any payments on the debt securities may be
determined with reference to an index, a financial or economic
measure or pursuant to a formula and the manner in which such
amounts are to be determined; |
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if a payment on the securities is due, at either our or the
holders election, in a currency other than the currency in
which the securities are denominated, the currency in which the
payment shall be made, the periods within which and the terms
and conditions upon which such election is to be made and the
amount so payable (or the manner in which such amount shall be
determined), and the time and manner of determining the exchange
rate between the currency in which such securities are
denominated and the currency in which such securities are to be
paid; |
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if other than the entire principal amount, the portion of the
principal amount of any securities that shall be payable upon
declaration of acceleration of the maturity thereof or the
method by which such portion shall be determined; |
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if the principal amount payable at maturity of any debt
securities will not be determinable as of any date prior to
maturity, the amount that will be deemed to be the principal
amount of the debt securities as of any such date for any
purpose under the indenture, including the principal amount that
will be due and payable upon any maturity date or that will be
deemed outstanding as of any date prior to maturity; |
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whether the debt securities are to be issued in a form other
than global form and any provisions relating thereto; |
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the identity of the security registrar and paying agent for the
debt securities if other than the trustee; |
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any deletions from, modifications of or additions to the events
of default, covenants or other provisions in the indenture; |
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the applicability of the defeasance and covenant defeasance
provisions of the indenture; and |
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any other terms of the debt securities that do not conflict with
the provisions of the indenture that cannot otherwise be changed
or be inconsistent with the requirements of the Trust Indenture
Act of 1939, as amended. |
The prospectus supplement and pricing supplement, if any,
accompanying this prospectus will describe special federal
income tax consequences of the debt securities, including any
special U.S. federal income tax, accounting and other
considerations.
This section summarizes, and any prospectus supplement and
pricing supplement, if any, accompanying this prospectus will
summarize, all of the material terms of the indenture and your
debt securities. They do not, however, describe every aspect of
the indenture and your debt securities. The indenture and its
associated documents, including your debt securities, contain
the full text of the matters described in this section and any
prospectus supplement and pricing supplement, if any,
accompanying this prospectus.
General
The debt securities will be our direct unsecured obligations.
The indenture permits us to issue debt securities from time to
time and debt securities issued under the indenture will be
issued as part of a series that has been established by us under
such indenture. The debt securities will be unsecured and will
rank equally with our other outstanding unsecured indebtedness
as described under Ranking Compared to Other
Creditors.
Form, Exchange and Transfer
Unless otherwise specified in a prospectus supplement or pricing
supplement, if any, accompanying this prospectus, the securities
will be issued:
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only in registered form without coupons; and |
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in denominations that are even multiples of $1,000. |
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You may have your securities broken into more securities of
smaller denominations or combined into fewer securities of
larger denominations, as long as the denomination is authorized
and the total principal amount is not changed. Any of these
events is called an exchange. Whenever any
securities are surrendered for exchange, we and the trustee will
execute, authenticate and deliver the securities that you are
entitled to receive.
You may exchange or transfer your securities at the office of
the registrar, which may also be the trustee. The registrar acts
as our agent for registering securities in the names of holders
and for transferring and exchanging securities, as well as
maintaining the list of registered holders.
We can designate additional registrars or paying agents and they
would be named in the prospectus supplement or the pricing
supplement, if any, accompanying this prospectus. We may cancel
the designation of any particular registrar or paying agent. We
may also approve a change in the office through which any
registrar or paying agent acts. The trustee may act as the
registrar, the paying agent or both.
Under the indenture, there is no charge for exchanges and
transfers; however, brokerage charges may apply. You will not be
required to pay a service charge to transfer or exchange
securities, but you may be required to pay for any tax or other
governmental charge associated with the exchange or transfer.
The transfer or exchange will only be made if the registrar is
satisfied with your proof of ownership.
At certain times, you may not be able to transfer or exchange
your securities. If we redeem any series of securities, or any
part of any series, then we may prevent you from transferring or
exchanging these securities. We may do this during the period
beginning 15 calendar days before the day we mail the
notice of redemption and ending on the day of that mailing, in
order to freeze the list of holders so we can prepare the
mailing. We may also refuse to register transfers or exchanges
of securities selected for redemption, except that we will
continue to permit transfers and exchanges of the unredeemed
portion of any security being partially redeemed.
We will initially issue all debt securities in global form,
which form shall include master notes evidencing medium-term
notes, commercial paper or retail notes.
Replacing Your Lost, Mutilated, or Destroyed Certificates
If you bring a mutilated certificate or coupon to the trustee,
we will issue a new certificate or coupon to you in exchange for
the mutilated one. Please note that the trustee may have
additional requirements that you must meet in order to do this.
If you claim that a certificate has been lost, completely
destroyed, or wrongfully taken from you, then the trustee will
give you a replacement certificate if you meet the
trustees requirements. Also, we may require you to provide
reasonable security or indemnity to protect us from any loss we
may incur from replacing your certificates. We may also charge
you for our expenses in doing this.
Payment and Paying Agents
We will pay interest to you if you are a direct holder listed in
the registrars records at the close of business on a
particular day in advance of each due date for interest, even if
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you no longer own the security on the interest due date. That
particular day, usually about two weeks in advance of the
interest due date, is called the record date and
will be stated in the prospectus supplement and pricing
supplement, if any, accompanying this prospectus. Holders buying
and selling securities must work out between themselves how to
compensate for the fact that we will pay all the interest for an
interest period to the one who is the registered holder on the
record date. The most common manner is to adjust the sales price
of the securities to prorate interest fairly between buyer and
seller. This prorated interest amount is called accrued
interest.
We will pay interest, principal and any other money due on the
securities at the corporate trust office of the trustee in New
York City. We may also choose to pay interest by mailing checks.
We will provide additional information and specifics regarding
the payment of interest, principal and any other sums due in the
applicable prospectus supplement, or pricing supplement, if any,
accompanying this prospectus.
We may also arrange for additional payment offices, and may
cancel or change these offices, including our use of the
trustees corporate trust office. These offices are called
paying agents. We may also choose to act as our own
paying agent.
Notices
We and the trustee will send notices regarding the securities
only to direct holders, using their physical or e-mail addresses
as listed in the trustees records.
Regardless of who acts as paying agent, all money we forward to
a paying agent that remains unclaimed will, at our request, be
repaid to the trustee at the end of two years after the amount
was due to the direct holder. After that two-year period, you
may look only to the trustee for payment and not to us or any
other paying agent.
Special Situations
The following provisions apply to all series of debt securities
issued under the indenture, except as set forth in the
applicable prospectus supplement and pricing supplement, if any:
Mergers and Similar Transactions. We are generally
permitted to consolidate or merge with another company. We are
also permitted to sell substantially all of our assets to
another company or to buy substantially all of the assets of
another company. However, we may not consolidate or merge with
another company or convey, transfer or lease our properties or
assets substantially as an entirety or permit another company to
consolidate or merge with us unless all the following conditions
are met:
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if we do not survive such transaction or we convey, transfer or
lease our properties and assets substantially as an entirety,
the acquiring company must be a corporation, limited liability
company, partnership or trust, or other corporate form,
organized under the laws the United States of America, any
country comprising the European Union, the United Kingdom or
Japan and such company must agree to be legally responsible for
our debt securities, and, if not already subject to the
jurisdiction of the United States of America, the new company
must submit to such jurisdiction for all purposes with respect
to this offering and appoint an agent for service of process; |
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alternatively, we must be the surviving company; |
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immediately after the transaction no event of default will
exist; and |
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we have delivered to the trustee a certificate of an officer and
an opinion of counsel, each stating that the transaction
complies with the indenture and that all conditions precedent to
the transaction set forth in the indenture have been satisfied. |
Modification and Waiver of Your Contractual Rights. Under
certain circumstances, we can make changes to the indenture and
the securities. Some types of changes require the approval of
each security holder affected thereby, some require approval by
a majority vote with respect to each affected series of
securities and some changes do not require any approval at all.
Changes Requiring Your Specific Approval. First, there
are changes that cannot be made to your securities without your
specific approval. The following is a list of those types of
changes:
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change the due date of the principal of, or any installment of
interest on, any security; |
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reduce the principal amount of, or rate of interest on, any
security, including the amount payable upon acceleration of the
maturity of that security; |
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change the place or currency of any payment on any security; |
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impair the right to institute suit for enforcement of any
payment on or with respect to any security; |
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reduce the percentage of outstanding securities that must
consent to a modification or amendment of the indenture; |
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reduce the percentage of outstanding securities that must
consent to a waiver of compliance with certain provisions of the
indenture, including provisions relating to quorum or voting or
for waiver of certain defaults; |
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make any change to this list of changes that requires your
specific approval. |
Changes Requiring a Majority Vote of the Holders of a Series
of Securities. The second type of change to the indenture
and the securities is the kind that requires a vote in favor of
such change by security holders owning a majority of the
principal amount of the particular series affected. The changes
falling in this category are not expressly stated and include
those changes that do not require your specific approval, as
well as changes that do not fall into the category of changes
that do not require any approval.
Changes Not Requiring Your Approval. The third type of
change does not require any vote by the holders any of
securities. These changes include, among others, changes to
reflect the succession of another entity to us and the
assumption by that entity of our obligations and to clarify
ambiguous contract terms and other changes that would not
adversely affect holders of the securities in any material
respect.
Securities will not be considered outstanding, and therefore not
eligible to vote, if we have deposited or set aside in trust for
you money for their payment or redemption. A security does not
cease to be outstanding because we or an affiliate of us is
holding the security, but will be deemed not outstanding in
determining whether the holders of the requisite amount of
securities have acted under the indenture.
We will generally be entitled to set any day as a record date
for the purpose of determining the holders of outstanding
securities that are entitled to vote or take other action under
the indenture. However, the indenture does not oblige us to fix
any record date at all. If we set a record date for a vote or
other action to be taken by holders of a particular series, that
vote or action may be taken only by persons who are holders of
outstanding securities of that series on the record date,
whether or not such persons remain
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holders after such record date, and must be taken within 180
days following the record date.
Defeasance and Covenant Defeasance. When we establish a
series of debt securities, we may provide that the series be
subject to the defeasance and discharge provisions of the
indenture. If those provisions are made applicable, we may elect
either:
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to defease and be discharged from, subject to some limitations,
all of our obligations with respect to those debt securities; or |
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to be released from our obligations to comply with certain
covenants relating to those debt securities. |
To effect the defeasance or covenant defeasance, we must
irrevocably deposit in trust with the relevant trustee an amount
in any combination of funds or government obligations, which,
through the payment of principal and interest in accordance with
their terms, will provide money sufficient to make payments on
those debt securities and any mandatory sinking fund or
analogous payments on those debt securities.
On such a defeasance, we will not be released from obligations:
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to indemnify the trustee; |
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to pay additional amounts, if any, upon the occurrence of some
events; |
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to register the transfer or exchange of those debt securities; |
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to replace some of those debt securities; |
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to maintain an office or agency relating to those debt
securities; or |
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to hold moneys for payment in trust. |
To establish such a trust we must, among other things, deliver
to the relevant trustee an opinion of counsel to the effect that
the holders of those debt securities:
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will not recognize income, gain or loss for U.S. federal income
tax purposes as a result of the defeasance or covenant
defeasance; and |
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will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the
case if the defeasance or covenant defeasance had not occurred.
In the case of defeasance, the opinion of counsel must be based
upon a ruling of the IRS or a change in applicable U.S. federal
income tax law occurring after the date of the applicable
indenture. |
If we effect covenant defeasance with respect to any debt
securities, the amount on deposit with the relevant trustee will
be sufficient to pay amounts due on the debt securities at the
time of their stated maturity. However, those debt securities
may become due and payable prior to their stated maturity if
there is an event of default with respect to a covenant from
which we have not been released. If that happens, the amount on
deposit may not be sufficient to pay all amounts due on the debt
securities at the time of the acceleration.
The prospectus supplement and pricing supplement, if any, may
further describe the provisions, if any, permitting defeasance
or covenant defeasance, including any modifications to the
provisions described above.
Redemption. The indenture under which your debt
securities are issued may permit us to redeem your securities.
If so, we may be able to pay off your securities before their
scheduled maturity. If we have this right with respect to your
specific securities, the right will be outlined in the
prospectus supplement and/or the applicable pricing supplement.
It
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will also specify when we can exercise this right and how much
we will have to pay in order to redeem your debt securities.
If we choose to redeem your debt securities, we or the trustee
will mail written notice to you not less than 20 days and
not more than 50 days, unless otherwise specified in the
applicable prospectus supplement and pricing supplement, if any,
prior to redemption. Also, you may be prevented from exchanging
or transferring your securities when they are subject to
redemption, as described under Form, Exchange
and Transfer above. In case any securities are to be
redeemed in part only, the notice will provide that, upon
surrender of such security, you will receive, without a charge,
a new security or securities of authorized denominations
representing the principal amount of your remaining unredeemed
securities.
Ranking Compared to Other Creditors
The securities are not secured by any of our property or assets.
Accordingly, your ownership of debt securities means you are one
of our unsecured creditors.
Unsecured debt securities will be issued under the indenture.
Your securities will rank equally in right of payment with one
another, with all our other outstanding unsecured indebtedness,
and with our future unsecured indebtedness.
Events of Default
You will have special rights if an event of default occurs and
is not cured, as described later in this subsection.
What Is an Event of Default? The following constitute
events of default under the indenture, unless otherwise
specified in the applicable prospectus supplement, and pricing
supplement, if any:
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we fail to make any interest payment on a security when it is
due, and we do not cure this default within 30 days; |
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we fail to make any payment of principal when it is due at the
maturity of any security, and we do not cure this default within
5 days; |
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we fail to deposit a sinking fund payment when due, and we do
not cure this default within 5 days; |
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we fail to comply with the indenture, and after we have been
notified of the default by the trustee or holders of 25% in
principal amount of the series, we do not cure the default
within 60 days; |
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we file for bankruptcy, or other events in bankruptcy,
insolvency or reorganization occur and remain undischarged or
unstayed for a period of 60 days; |
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on the last business day of each of twenty-four consecutive
calendar months, we have an asset coverage of less than 100 per
centum, or |
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any other event of default described as being applicable to any
particular series of debt securities. |
Remedies if an Event of Default Occurs. You will have the
following remedies if an event of default occurs:
Acceleration. If an event of default other than an event
of default relating to events in bankruptcy, insolvency or
reorganization has occurred and has not been cured or waived,
then the trustee or the holders of not less than
662/3
% in principal amount of the securities
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of the affected series may declare the entire principal amount
of and any and all accrued and unpaid interest on all the
securities of that series to be due and immediately payable. An
acceleration of maturity may be cancelled by the holders of at
least a majority in principal amount of the securities of the
affected series, if all events of default have been cured or
waived and certain other conditions are satisfied.
If an event of default relating to events in bankruptcy,
insolvency or reorganization has occurred, all unpaid principal
and accrued and unpaid interest, and liquidated damages, if any,
become immediately due and payable without any declaration or
other act of the trustee or any holder.
Special Duties of Trustee. If an event of default occurs,
the trustee will have some special duties. In that situation,
the trustee will be obligated to use those rights and powers
under the indenture granted to it, and to use the same degree of
care and skill in doing so, that a prudent person would use in
that situation in conducting his or her own affairs.
Majority Holders May Direct the Trustee to Take Actions to
Protect Their Interests. The trustee is not required to take
any action under the indenture at the request of any holders
unless the holders offer the trustee reasonable protection from
expenses and liability. This is called an indemnity.
If the trustee is provided with an indemnity reasonably
satisfactory to it, the holders of a majority in principal
amount of the relevant series of debt securities may direct the
time, method and place of conducting any lawsuit or other formal
legal action seeking any remedy available to the trustee. These
majority holders may also direct the trustee in performing any
other action under the indenture.
Individual Actions You May Take if the Trustee Fails to Act.
Before you bypass the trustee and bring your own lawsuit or
other formal legal action or take other steps to enforce your
rights or protect your interests relating to the debt
securities, the following must occur:
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you must give the trustee written notice that an event of
default has occurred and remains uncured; |
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the holders of 25% in principal amount of all outstanding
securities must make a written request that the trustee take
action because of the default, and must offer reasonable
indemnity to the trustee against the costs, expenses and other
liabilities of taking that action; |
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the trustee must not have taken action for 60 days after
receipt of the above notice and offer of indemnity; and |
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during the 60-day period, the holders of a majority in principal
amount of the securities of that series do not give the trustee
a direction inconsistent with the request. |
However, you are entitled at any time to bring an individual
lawsuit for the payment of the money due on your security on or
after its due date.
Waiver of Default. The holders of a majority in principal
amount of the relevant series of debt securities may waive a
default for all the relevant series of debt securities. If this
happens, the default will be treated as if it has not occurred.
No one can waive a payment default on your debt security,
however, without your individual approval.
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We Will Give the Trustee Information About Defaults
Periodically
At the end of each fiscal year we will give to the trustee a
written statement of one of our officers certifying that to the
best of his or her knowledge we are in compliance with the
indenture and the debt securities, or else specifying any
default. The trustee may withhold from you notice of any uncured
default, except for payment defaults, if it determines that
withholding notice is in your best interest.
Certain Covenants
The indenture under which your debt securities are issued will
require us to, unless otherwise specified in the applicable
prospectus supplement and pricing supplement, if any:
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duly and punctually pay the principal of and any premium and
interest on the debt securities of each series in accordance
with the terms of the debt securities and the indenture; |
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maintain an office or agency where your debt securities may be
presented or surrendered for payment, registration of transfer
or exchange, and where notices and demands to or upon us
regarding the securities and the indenture may be served. We
will give prompt written notice to the trustee of the location,
and any change in the location, of such office or agency; |
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if we act as our own paying agent at any time, segregate and
hold in trust, for the benefit of the holders, an amount of
money, in the currency in which the securities are payable,
sufficient to pay the principal and any premium or interest due
on the securities of any series on or before the due date for
such payment; |
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do all things necessary to preserve and keep in full force and
effect our existence, rights (charter and statutory) and
franchises unless failure to do so would not disadvantage the
Holders in any material respect; |
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deliver an officers certificate to the trustee, within
120 calendar days after the end of each fiscal year,
stating whether or not, to the best knowledge of the persons
signing the officers certificate, we are in default in the
performance and observance of any of the terms, provisions and
conditions of the indenture and, if we are, specifying all such
defaults and the nature and status thereof of which we may have
knowledge; |
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maintain, preserve, and keep our material properties that are
used in the conduct of our business in good repair, condition
and working order, ordinary wear and tear excepted; and |
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pay or discharge when due all taxes, assessments and
governmental charges levied or imposed upon us or our income,
profits or property, as well as all lawful claims for labor,
materials and supplies that, if unpaid, might by law become a
lien upon our property, except those contested in good faith or
that would not have a material adverse effect on us. |
Original Issue Discount Securities
The debt securities of any series may be issued as original
issue discount securities, which means they will be offered and
sold at a substantial discount from their principal
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amount. Only a discounted amount will be due and payable when
the trustee declares the acceleration of the maturity of these
debt securities after an event of default has occurred and
continues, as described under Events of
Default Remedies if an Event of Default Occurs
above.
Governing Law
The indenture and the debt securities will be governed by, and
construed in accordance with, the laws of the State of New York.
Book-Entry Debt Securities
DTC will act as securities depository for the debt securities.
The debt securities will be issued as fully-registered
securities registered in the name of Cede & Co. (DTCs
partnership nominee) or such other name as may be requested by
an authorized representative of DTC. One fully-registered
certificate will be issued for the debt securities, in the
aggregate principal amount of such issue, and will be deposited
with DTC.
DTC is a limited-purpose trust company organized under the New
York Banking Law, a banking organization within the
meaning of the New York Banking Law, a member of the Federal
Reserve System, a clearing corporation within the
meaning of the New York Uniform Commercial Code, and a
clearing agency registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of
1934. DTC holds and provides asset servicing for over
2.2 million issues of U.S. and non-U.S. equity, corporate
and municipal debt issues, and money market instruments from
over 100 countries that DTCs participants (Direct
Participants) deposit with DTC. DTC also facilitates the
post-trade settlement among Direct Participants of sales and
other securities transactions in deposited securities through
electronic computerized book-entry transfers and pledges between
Direct Participants accounts. This eliminates the need for
physical movement of securities certificates. Direct
Participants include both U.S. and non-U.S. securities brokers
and dealers, banks, trust companies, clearing corporations, and
certain other organizations. DTC is a wholly-owned subsidiary of
The Depository Trust & Clearing Corporation
(DTCC).
DTCC, in turn, is owned by a number of Direct Participants of
DTC and Members of the National Securities Clearing Corporation,
Fixed Income Clearing Corporation, and Emerging Markets Clearing
Corporation (NSCC, FICC, and EMCC, also subsidiaries of DTCC),
as well as by the New York Stock Exchange, Inc., the American
Stock Exchange LLC, and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to
others such as both U.S. and non-U.S. securities brokers and
dealers, banks, trust companies, and clearing corporations that
clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly (Indirect
Participants). DTC has Standard & Poors highest
rating: AAA. The DTC Rules applicable to its Participants are on
file with the Securities and Exchange Commission. More
information about DTC can be found at www.dtcc.com and
www.dtc.org.
Purchases of debt securities under the DTC system must be made
by or through Direct Participants, which will receive a credit
for the debt securities on DTCs records. The ownership
interest of each actual purchaser of each security
(Beneficial Owner) is in turn to be recorded on the
Direct and Indirect Participants records. Beneficial
Owners will not receive written confirmation from DTC of their
purchase. Beneficial Owners are, however, expected to receive
written confirmations providing details of the transaction, as
well as periodic statements of their holdings, from the Direct
or Indirect Participant
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through which the Beneficial Owner entered into the transaction.
Transfers of ownership interests in the debt securities are to
be accomplished by entries made on the books of Direct and
Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing
their ownership interests in debt securities, except in the
event that use of the book-entry system for the debt securities
is discontinued.
To facilitate subsequent transfers, all debt securities
deposited by Direct Participants with DTC are registered in the
name of DTCs partnership nominee, Cede & Co. or such
other name as may be requested by an authorized representative
of DTC. The deposit of debt securities with DTC and their
registration in the name of Cede & Co. or such other nominee
do not effect any change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the debt
securities; DTCs records reflect only the identity of the
Direct Participants to whose accounts such debt securities are
credited, which may or may not be the Beneficial Owners. The
Direct and Indirect Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants,
and by Direct Participants and Indirect Participants to
Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in
effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the
debt securities within an issue are being redeemed, DTCs
practice is to determine by lot the amount of the interest of
each Direct Participant in such issue to be redeemed.
Neither DTC nor Cede & Co. (nor such other DTC nominee) will
consent or vote with respect to the debt securities unless
authorized by a Direct Participant in accordance with DTCs
Procedures. Under its usual procedures, DTC mails an Omnibus
Proxy to us as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.s consenting or voting
rights to those Direct Participants to whose accounts the debt
securities are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
Redemption proceeds, distributions, and dividend payments on the
debt securities will be made to Cede & Co., or such other
nominee as may be requested by an authorized representative of
DTC. DTCs practice is to credit Direct Participants
accounts, upon DTCs receipt of funds and corresponding
detail information from us or the trustee on the payment date in
accordance with their respective holdings shown on DTCs
records. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in
bearer form or registered in street name, and will
be the responsibility of such Participant and not of DTC nor its
nominee, the trustee, or us, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Payment of redemption proceeds, distributions, and dividend
payments to Cede & Co. (or such other nominee as may be
requested by an authorized representative of DTC) is the
responsibility of the trustee, but disbursement of such payments
to Direct Participants will be the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners will be
the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities
depository with respect to the debt securities at any time by
giving reasonable notice to us or to the trustee. Under such
circumstances, in the event that a successor securities
depository is not obtained,
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certificates are required to be printed and delivered. We may
decide to discontinue use of the system of book-entry-only
transfers through DTC (or a successor securities depository). In
that event, certificates will be printed and delivered to DTC.
The information in this section concerning DTC and DTCs
book-entry system has been obtained from sources that we believe
to be reliable, but we take no responsibility for the accuracy
thereof.
SPECIAL CONSIDERATIONS UNDER OUR CHARTER AND BYLAWS AND UNDER
MARYLAND LAW
We have adopted provisions in our charter limiting the liability
of our directors and officers for monetary damages. The effect
of these provisions in the charter is to eliminate the rights of
Allied Capital and its shareholders (through shareholders
derivative suits on our behalf) to recover monetary damages
against a director or officer for breach of the fiduciary duty
of care as a director or officer (including breaches resulting
from negligent behavior) except for liability resulting from
(i) actual receipt of an improper benefit or profit in
money, property or services or (ii) active and deliberate
dishonesty established by a final judgment as being material to
the cause of action. These provisions do not limit or eliminate
the rights of Allied Capital or any shareholder to seek
non-monetary relief such as an injunction or rescission in the
event of a breach of a directors or officers duty of
care. These provisions will not alter the liability of directors
or officers under federal securities laws.
Our charter and bylaws authorize us, to the maximum extent
permitted by Maryland law and subject to the requirements of the
1940 Act, to indemnify any present or former director or officer
or any individual who, while a director and at our request,
serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan
or other enterprise as a director, officer, partner or trustee,
from and against any claim or liability to which that person may
become subject or which that person may incur by reason of his
or her status as a present or former director or officer and to
pay or reimburse their reasonable expenses in advance of final
disposition of a proceeding. The charter and bylaws also permit
us to indemnify and advance expenses to any person who served a
predecessor of us in any of the capacities described above and
any of our employees or agents or any employees or agents of our
predecessor. In accordance with the 1940 Act, we will not
indemnify any person for any liability to which such person
would be subject by reason of such persons willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Maryland law requires a corporation (unless its charter provides
otherwise, which our charter does not) to indemnify a director
or officer who has been successful, on the merits or otherwise,
in the defense of any proceeding to which he or she is made a
party by reason of his or her service in that capacity. Maryland
law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they
may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving
rise to the proceeding and (1) was committed in bad faith
or (2) was the result of active and deliberate dishonesty,
(b) the director or officer actually received an improper
personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had
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reasonable cause to believe that the act or omission was
unlawful. However, under Maryland law, a Maryland corporation
may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the
basis that a personal benefit was improperly received, unless in
either case a court orders indemnification, and then only for
expenses. In addition, Maryland law permits a corporation to
advance reasonable expenses to a director or officer upon the
corporations receipt of (a) a written affirmation by
the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for
indemnification by the corporation and (b) a written
undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately
determined that the standard of conduct was not met.
We have entered into indemnification agreements with our
directors and certain of our senior officers. The
indemnification agreements provide these directors and senior
officers the maximum indemnification permitted under Maryland
law and the 1940 Act.
Certain Anti-Takeover Provisions
Our charter and bylaws and certain statutory and regulatory
requirements contain certain provisions that could make more
difficult the acquisition of Allied Capital by means of a tender
offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons
seeking to acquire control of us to negotiate first with the
Board of Directors. We believe that the benefits of these
provisions outweigh the potential disadvantages of discouraging
such proposals because, among other things, negotiation of such
proposals might result in an improvement of their terms. The
description set forth below is intended only to be a summary of
certain of our anti-takeover provisions and is qualified in its
entirety by reference to our charter and the bylaws.
Classified Board of Directors
Our bylaws provide for our Board of Directors to be divided into
three classes of directors serving staggered three-year terms,
with each class to consist as nearly as possible of one-third of
the directors then elected to the board. A classified board may
render more difficult a change in control of Allied Capital or
removal of incumbent management. We believe, however, that the
longer time required to elect a majority of a classified Board
of Directors helps to ensure continuity and stability of our
management and policies.
Issuance of Preferred Stock
Our Board of Directors, without shareholder approval, has the
authority to reclassify authorized but unissued common stock as
preferred stock and to issue preferred stock. Such stock could
be issued with voting, conversion or other rights designed to
have an anti-takeover effect.
Number of Directors; Vacancies; Removal
Our charter provides that the number of directors will be set
only by the Board of Directors in accordance with our bylaws.
Our bylaws provide that a majority of our entire Board of
Directors may at any time increase or decrease the number of
directors. However, unless our bylaws are amended, the number of
directors may never be less than
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three nor more than fifteen. Except as may be provided by the
Board of Directors in setting the terms of any class or series
of preferred stock, any and all vacancies on the Board of
Directors may be filled only by the affirmative vote of a
majority of the remaining directors in office, even if the
remaining directors do not constitute a quorum, and any director
elected to fill a vacancy will serve for the remainder of the
full term of the directorship in which the vacancy occurred and
until a successor is elected and qualified.
Our bylaws provides that a director may be removed by
shareholders only with cause and then only by the
affirmative vote of at least a majority of the votes entitled to
be cast in the election of directors.
Action by Shareholders
Under the Maryland General Corporation Law, shareholder action
can be taken only at an annual or special meeting of
shareholders or by unanimous written consent in lieu of a
meeting. These provisions, combined with the requirements of our
bylaws regarding the calling of a shareholder-requested special
meeting of shareholders discussed below, may have the effect of
delaying consideration of a shareholder proposal until the next
annual meeting.
Advance Notice Provisions for Shareholder Nominations and
Shareholder Proposals
Our bylaws provide that with respect to an annual meeting of
shareholders, nominations of persons for election to the Board
of Directors and the proposal of business to be considered by
shareholders may be made only (1) pursuant to our notice of
the meeting, (2) by the Board of Directors or (3) by a
shareholder who is entitled to vote at the meeting and who has
complied with the advance notice procedures of the bylaws. With
respect to special meetings of shareholders, only the business
specified in our notice of the meeting may be brought before the
meeting. Nominations of persons for election to the Board of
Directors at a special meeting may be made only
(1) pursuant to our notice of the meeting, (2) by the
Board of Directors or (3) provided that the Board of
Directors has determined that directors will be elected at the
meeting, by a shareholder who is entitled to vote at the meeting
and who has complied with the advance notice provisions of the
bylaws.
The purpose of requiring shareholders to give us advance notice
of nominations and other business is to afford our Board of
Directors a meaningful opportunity to consider the
qualifications of the proposed nominees and the advisability of
any other proposed business and, to the extent deemed necessary
or desirable by our Board of Directors, to inform shareholders
and make recommendations about such qualifications or business,
as well as to provide a more orderly procedure for conducting
meetings of shareholders. Although our bylaws do not give our
Board of Directors any power to disapprove shareholder
nominations for the election of directors or proposals
recommending certain action, they may have the effect of
precluding a contest for the election of directors or the
consideration of shareholder proposals if proper procedures are
not followed and of discouraging or deterring a third party from
conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal without regard to
whether consideration of such nominees or proposals might be
harmful or beneficial to us and our shareholders.
143
Calling of Special Meetings of Shareholders
Our bylaws provide that special meetings of shareholders may be
called by our Board of Directors and certain of our officers.
Additionally, our bylaws provide that, subject to the
satisfaction of certain procedural and informational
requirements by the shareholders requesting the meeting, a
special meeting of shareholders will be called by our Corporate
Secretary upon the written request of shareholders entitled to
cast not less than a majority of all the votes entitled to be
cast at such meeting.
Amendments; Supermajority Vote Requirements
Our bylaws impose supermajority vote requirements in connection
with the amendment of provisions of our bylaws, including those
provisions relating to the classified Board of Directors, the
ability of shareholders to call special meetings and the advance
notice provisions for shareholder meetings.
Maryland General Corporation Law
Maryland General Corporation Law provides for the Business
Combination Statute and the Control Share Acquisition Statute,
as defined below. The partial summary of the foregoing statutes
contained in this prospectus is not intended to be complete and
reference is made to the full text of such statutes for their
entire terms.
Business Combination Statute. Certain provisions
of the Maryland General Corporation Law establish special
requirements with respect to business combinations
between Maryland corporations and interested
shareholders unless exemptions are applicable (the
Business Combination Statute). Among other things,
the Business Combination Statute prohibits for a period of five
years a merger or other specified transactions between a company
and an interested shareholder and requires a supermajority vote
for such transactions after the end of such five-year period.
Interested shareholders are all persons owning
beneficially, directly or indirectly, 10% or more of the
outstanding voting stock of a Maryland corporation.
Business combinations include certain mergers or
similar transactions subject to a statutory vote and additional
transactions involving transfer of assets or securities in
specified amounts to interested shareholders or their affiliates.
Unless an exemption is available, a business
combination may not be consummated between a Maryland
corporation and an interested shareholder or its affiliates for
a period of five years after the date on which the shareholder
first became an interested shareholder and thereafter may not be
consummated unless recommended by the board of directors of the
Maryland corporation and approved by the affirmative vote of at
least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and
662/3
% of the votes entitled to be cast by all holders of
outstanding shares of voting stock other than the interested
shareholder or its affiliates or associates, unless, among other
things, the corporations shareholders receive a minimum
price (as defined in the Business Combination Statute) for their
shares and the consideration is received in cash or in the same
form as previously paid by the interested shareholder for its
shares.
A business combination with an interested shareholder which is
approved by the board of directors of a Maryland corporation at
any time before an interested shareholder first becomes an
interested shareholder is not subject to the five-year
moratorium or special voting requirements. An amendment to a
Maryland corporations charter electing not to be
144
subject to the foregoing requirements must be approved by the
affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and
662/3
% of the votes entitled to be cast by holders of
outstanding shares of voting stock who are not interested
shareholders. Any such amendment is not effective until
18 months after the vote of shareholders and does not apply
to any business combination of a corporation with a shareholder
who became an interested shareholder on or prior to the date of
such vote.
Control Share Acquisition Statute. The Maryland
General Corporation Law imposes limitations on the voting rights
of shares acquired in a control share acquisition.
The control share statute defines a control share
acquisition to mean the acquisition, directly or
indirectly, of control shares subject to certain
exceptions. Control shares of a Maryland corporation
are defined to be voting shares of stock which, if aggregated
with all other shares of stock previously acquired by the
acquiror, would entitle the acquiror to exercise voting power in
electing directors with one of the following ranges of voting
power:
|
|
|
|
(1) |
one-tenth or more but less than one-third; |
|
|
(2) |
one-third or more but less than a majority; or |
|
|
(3) |
a majority of all voting power. |
The requisite shareholder approval must be obtained each time an
acquiror crosses one of the thresholds of voting power set forth
above. Control shares do not include shares which the acquiring
person is entitled to vote as a result of having previously
obtained shareholder approval. Control shares of a Maryland
corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast by shareholders in
the election of directors, excluding shares of stock as to which
the acquiring person, officers of the corporation and directors
of the corporation who are employees of the corporation are
entitled to exercise or direct the exercise of the voting power
of the shares in the election of the directors.
The control share statute also requires Maryland corporations to
hold a special meeting at the request of an actual or proposed
control share acquiror generally within 50 days after a
request is made with the submission of an acquiring person
statement, but only if the acquiring person:
|
|
|
|
(1) |
gives a written undertaking and, if required by the directors of
the issuing corporation, posts a bond for the cost of the
meeting; and |
|
|
(2) |
submits definitive financing agreements for the acquisition of
the control shares to the extent that financing is not provided
by the acquiring person. |
In addition, unless the issuing corporations charter or
bylaws provide otherwise, the control share statute provides
that the issuing corporation, within certain time limitations,
shall have the right to redeem control shares (except those for
which voting rights have previously been approved) for
fair value as determined pursuant to the control
share statute in the event:
|
|
|
|
(1) |
there is a shareholder vote and the grant of voting rights is
not approved; or |
|
|
(2) |
an acquiring person statement is not delivered to
the target within 10 days following a control share
acquisition. |
145
Moreover, unless the issuing corporations charter or
bylaws provide otherwise, the control share statute provides
that if, before a control share acquisition occurs, voting
rights are accorded to control shares which result in the
acquiring person having majority voting power, then all
shareholders other than the acquiring person have appraisal
rights as provided under the Maryland General Corporation Law.
An acquisition of shares may be exempted from the control share
statute provided that a charter or bylaw provision is adopted
for such purpose prior to the control share acquisition by any
person with respect to Allied Capital. The control share
acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange to which the corporation
is a party.
Our Board of Directors has opted out of the Control Share
Acquisition Statute through an amendment to our bylaws.
Regulatory Restrictions
Allied Investments L.P., our wholly owned subsidiary, is a small
business investment company. The Small Business Administration
prohibits, without prior Small Business Administration approval,
a change of control or transfers which would result
in any person (or group of persons acting in concert) owning 10%
or more of any class of capital stock of a small business
investment company. A change of control is any event
which would result in a transfer of the power, direct or
indirect, to direct the management and policies of a small
business investment company, whether through ownership,
contractual arrangements or otherwise.
PLAN OF DISTRIBUTION
We may offer, from time to time, up to $1,000,000,000 in
aggregate principal amount of our debt securities. We may sell
the debt securities through underwriters or dealers, directly to
one or more purchasers, through agents or through a combination
of any such methods of sale. Any underwriter or agent involved
in the offer and sale of the debt securities will be named in
the prospectus supplement or pricing supplement, if any,
accompanying this prospectus.
The distribution of the debt securities may be effected from
time to time in one or more transactions at a fixed price equal
to 100% of the principal amount thereof or such other price
specified in the prospectus supplement or pricing supplement, if
any, accompanying this prospectus, or at varying prices relating
to prevailing market prices at the time of the offering.
In connection with the sale of the debt securities, underwriters
or agents may receive compensation from us or from purchasers of
our debt securities, for whom they may act as agents, in the
form of discounts, concessions or commissions. Underwriters may
sell debt securities to or through dealers and such dealers may
receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters,
dealers and agents that participate in the distribution of debt
securities may be deemed to be underwriters under the Securities
Act, and any discounts and commissions they receive from us and
any profit realized by them on the resale of debt securities may
be deemed to be underwriting discounts and commissions under the
Securities Act. Any such underwriter or agent will be identified
and any such compensation received from us will be described in
the prospectus supplement or pricing supplement, if any,
accompanying this prospectus.
146
Any debt securities sold pursuant to a prospectus supplement or
pricing supplement, if any, accompanying this prospectus may be
quoted on the New York Stock Exchange, or another exchange on
which the debt securities are traded.
Under agreements into which we may enter, underwriters, dealers
and agents who participate in the distribution of debt
securities may be entitled to indemnification by us against
certain liabilities, including liabilities under the Securities
Act. Underwriters, dealers and agents may engage in transactions
with, or perform services for, us in the ordinary course of
business.
If so indicated in the prospectus supplement or pricing
supplement, if any, accompanying this prospectus, we will
authorize underwriters or other persons acting as our agents to
solicit offers by certain institutions to purchase debt
securities from us pursuant to contracts providing for payment
and delivery on a future date. Institutions with which such
contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all
cases such institutions must be approved by us. The obligations
of any purchaser under any such contract will be subject to the
condition that the purchase of debt securities shall not at the
time of delivery be prohibited under the laws of the
jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such
contracts. Such contracts will be subject only to those
conditions set forth in the prospectus supplement or pricing
supplement, if any, accompanying this prospectus, and such
supplements will set forth the commission payable for
solicitation of such contracts.
The maximum commission or discount to be received by any member
of the National Association of Securities Dealers, Inc. or
independent broker-dealer will not be greater than 10% for the
sale of any securities being registered and 0.5% for due
diligence.
In order to comply with the securities laws of certain states,
if applicable, debt securities offered hereby will be sold in
such jurisdictions only through registered or licensed brokers
or dealers.
LEGAL MATTERS
The validity and enforceability of the debt securities offered
hereby will be passed upon for us by Sutherland
Asbill & Brennan LLP, Washington, D.C. Certain
legal matters will be passed upon for underwriters, if any, by
the counsel named in the prospectus supplement or pricing
supplement, if any, accompanying this prospectus.
CUSTODIANS, TRANSFER AND PAYING AGENT AND REGISTRAR
Certain of our securities are held in safekeeping by PNC Bank,
N.A., 808 17th Street, N.W., Washington, D.C. 20006. Other
securities are held in custody at Chevy Chase Bank,
7501 Wisconsin Avenue, 14th Floor, Bethesda, Maryland
20814 and Bank of America, 8300 Greensboro Drive, Suite
620 , McLean, Virginia 22102. The Bank of New York,
101 Barclay St., New York, New York acts as our registrar,
paying agent and transfer agent for the debt securities.
147
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since we generally acquire and dispose of our investments in
privately negotiated transactions, we rarely use brokers in the
normal course of business. In those cases where we do use a
broker, we do not execute transactions through any particular
broker or dealer, but will seek to obtain the best net results
for Allied Capital, taking into account such factors as price
(including the applicable brokerage commission or dealer
spread), size of order, difficulty of execution, and operational
facilities of the firm and the firms risk and skill in
positioning blocks of securities. While we generally seek
reasonably competitive execution costs, we may not necessarily
pay the lowest spread or commission available. Subject to
applicable legal requirements, we may select a broker based
partly upon brokerage or research services provided to us. In
return for such services, we may pay a higher commission than
other brokers would charge if we determine in good faith that
such commission is reasonable in relation to the services
provided.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The consolidated financial statements as of December 31,
2005 and 2004, and for each of the years in the three-year
period ended December 31, 2005, and the related financial
statement schedule as of December 31, 2005, have been
included herein in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, located at 2001 M
Street, NW, Washington, DC 20036, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and
auditing.
With respect to the unaudited interim financial information as
of March 31, 2006 and for the three-month periods ended
March 31, 2006 and 2005, included herein, KPMG LLP has
reported that they applied limited procedures in accordance with
professional standards for a review of such information.
However, their separate report included herein states that they
did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on
their report on such information should be restricted in light
of the limited nature of the review procedures applied. The
accountants are not subject to the liability provisions of
Section 11 of the Securities Act of 1933 for their report on the
unaudited interim financial information because that report is
not a report or a part of the
registration statement prepared or certified by the accountants
within the meaning of Sections 7 and 11 of the Securities Act of
1933.
NOTICE REGARDING ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act provides that if any
part of a registration statement at the time it becomes
effective contains an untrue statement of a material fact or an
omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, any
person acquiring a security pursuant to such registration
statement, unless it is proved that at the time of such
acquisition such person knew of such untruth or omission, may
sue, among others, every accountant who has consented to be
named as having prepared or certified any part of the
registration statement or as having prepared or certified any
report or valuation which is used in connection with the
registration statement with respect to the statement in such
registration statement, report or valuation which purports to
have been prepared or certified by the accountant. Certain
condensed consolidated financial data as of December 31,
2001, and for the year then ended, which is included in this
prospectus, was audited by our former independent auditor,
Arthur Andersen LLP.
148
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page |
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2 |
|
Consolidated Balance Sheet December 31, 2005
and 2004
|
|
|
F-3 |
|
Consolidated Statement of Operations For the Years
Ended December 31, 2005, 2004, and 2003
|
|
|
F-4 |
|
Consolidated Statement of Changes in Net Assets For
the Years Ended December 31, 2005, 2004, and 2003
|
|
|
F-5 |
|
Consolidated Statement of Cash Flows For the Years
Ended December 31, 2005, 2004, and 2003
|
|
|
F-6 |
|
Consolidated Statement of Investments
December 31, 2005
|
|
|
F-7 |
|
Notes to Consolidated Financial Statements
|
|
|
F-17 |
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-52 |
|
Schedule 12-14 Investments in and Advances to
Affiliates for the Year Ended December 31, 2005
|
|
|
F-53 |
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-57 |
|
Consolidated Balance Sheet as of March 31, 2006 (unaudited)
and
December 31, 2005
|
|
|
F-58 |
|
Consolidated Statement of Operations (unaudited) For
the Three Months Ended March 31, 2006 and 2005
|
|
|
F-59 |
|
Consolidated Statement of Changes in Net Assets
(unaudited) For the Three Months Ended
March 31, 2006 and 2005
|
|
|
F-60 |
|
Consolidated Statement of Cash Flows (unaudited) For
the Three Months Ended March 31, 2006 and 2005
|
|
|
F-61 |
|
Consolidated Statement of Investments as of March 31, 2006
(unaudited)
|
|
|
F-62 |
|
Notes to Consolidated Financial Statements
|
|
|
F-72 |
|
Schedule 12-14 Investments in and Advances to
Affiliates for the Three Months Ended March 31, 2006
|
|
|
F-97 |
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Allied Capital Corporation:
We have audited the accompanying consolidated balance sheet of
Allied Capital Corporation and subsidiaries as of
December 31, 2005 and 2004, including the consolidated
statement of investments as of December 31, 2005, and the
related consolidated statements of operations, changes in net
assets and cash flows, and the financial highlights (included in
Note 14), for each of the years in the three-year period
ended December 31, 2005. These consolidated financial
statements and financial highlights are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our
procedures included physical counts of securities owned as of
December 31, 2005 and 2004. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and
financial highlights referred to above present fairly, in all
material respects, the financial position of Allied Capital
Corporation and subsidiaries as of December 31, 2005 and
2004, and the results of their operations, their cash flows,
changes in their net assets, and financial highlights for each
of the years in the three-year period ended December 31, 2005,
in conformity with U.S. generally accepted accounting principles.
Washington, D.C.
March 9, 2006
F-2
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
(in thousands, except per share amounts) |
|
|
|
|
ASSETS |
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned (cost: 2005-$1,489,782;
2004-$1,389,342)
|
|
$ |
1,887,651 |
|
|
$ |
1,359,641 |
|
|
|
Companies 5% to 25% owned (cost: 2005-$168,373; 2004-$194,750)
|
|
|
158,806 |
|
|
|
188,902 |
|
|
|
Companies less than 5% owned (cost: 2005-$1,448,268;
2004-$800,828)
|
|
|
1,432,833 |
|
|
|
753,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private finance (cost: 2005-$3,106,423; 2004-$2,384,920)
|
|
|
3,479,290 |
|
|
|
2,302,086 |
|
|
Commercial real estate finance (cost: 2005-$131,695;
2004-$722,612)
|
|
|
127,065 |
|
|
|
711,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio at value (cost: 2005-$3,238,118; 2004-$3,107,532)
|
|
|
3,606,355 |
|
|
|
3,013,411 |
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
|
100,305 |
|
|
|
|
|
Investments in money market securities
|
|
|
121,967 |
|
|
|
|
|
Deposits of proceeds from sales of borrowed Treasury securities
|
|
|
17,666 |
|
|
|
38,226 |
|
Accrued interest and dividends receivable
|
|
|
60,366 |
|
|
|
79,489 |
|
Other assets
|
|
|
87,858 |
|
|
|
72,712 |
|
Cash
|
|
|
31,363 |
|
|
|
57,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
4,025,880 |
|
|
$ |
3,260,998 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures (maturing within one year:
2005-$175,000; 2004-$169,000)
|
|
$ |
1,193,040 |
|
|
$ |
1,064,568 |
|
|
Revolving line of credit
|
|
|
91,750 |
|
|
|
112,000 |
|
|
Obligations to replenish borrowed Treasury securities
|
|
|
17,666 |
|
|
|
38,226 |
|
|
Accounts payable and other liabilities
|
|
|
102,878 |
|
|
|
66,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,405,334 |
|
|
|
1,281,220 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 200,000 shares authorized;
136,697 and 133,099 shares issued and outstanding at
December 31, 2005 and 2004, respectively
|
|
|
14 |
|
|
|
13 |
|
|
Additional paid-in capital
|
|
|
2,177,283 |
|
|
|
2,094,421 |
|
|
Common stock held in deferred compensation trust
|
|
|
(19,460 |
) |
|
|
(13,503 |
) |
|
Notes receivable from sale of common stock
|
|
|
(3,868 |
) |
|
|
(5,470 |
) |
|
Net unrealized appreciation (depreciation) on portfolio
|
|
|
354,325 |
|
|
|
(107,767 |
) |
|
Undistributed (distributions in excess of) earnings
|
|
|
112,252 |
|
|
|
12,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,620,546 |
|
|
|
1,979,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
4,025,880 |
|
|
$ |
3,260,998 |
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$ |
19.17 |
|
|
$ |
14.87 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
Interest and Related Portfolio Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
122,450 |
|
|
$ |
91,710 |
|
|
$ |
62,563 |
|
|
|
Companies 5% to 25% owned
|
|
|
21,924 |
|
|
|
25,702 |
|
|
|
25,727 |
|
|
|
Companies less than 5% owned
|
|
|
172,779 |
|
|
|
202,230 |
|
|
|
202,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
|
317,153 |
|
|
|
319,642 |
|
|
|
290,719 |
|
|
Loan prepayment premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
692 |
|
|
|
|
|
|
|
141 |
|
|
|
Companies 5% to 25% owned
|
|
|
|
|
|
|
765 |
|
|
|
685 |
|
|
|
Companies less than 5% owned
|
|
|
5,558 |
|
|
|
4,737 |
|
|
|
7,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan prepayment premiums
|
|
|
6,250 |
|
|
|
5,502 |
|
|
|
8,172 |
|
|
Fees and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
26,673 |
|
|
|
29,774 |
|
|
|
18,862 |
|
|
|
Companies 5% to 25% owned
|
|
|
124 |
|
|
|
1,618 |
|
|
|
629 |
|
|
|
Companies less than 5% owned
|
|
|
23,952 |
|
|
|
10,554 |
|
|
|
10,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
|
50,749 |
|
|
|
41,946 |
|
|
|
30,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
374,152 |
|
|
|
367,090 |
|
|
|
329,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
76,798 |
|
|
|
75,650 |
|
|
|
77,233 |
|
|
Employee
|
|
|
78,300 |
|
|
|
53,739 |
|
|
|
36,945 |
|
|
Administrative
|
|
|
70,267 |
|
|
|
34,686 |
|
|
|
22,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
225,365 |
|
|
|
164,075 |
|
|
|
136,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
148,787 |
|
|
|
203,015 |
|
|
|
192,664 |
|
Income tax expense (benefit), including excise tax
|
|
|
11,561 |
|
|
|
2,057 |
|
|
|
(2,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
137,226 |
|
|
|
200,958 |
|
|
|
195,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
33,237 |
|
|
|
86,812 |
|
|
|
1,302 |
|
|
|
Companies 5% to 25% owned
|
|
|
5,285 |
|
|
|
43,818 |
|
|
|
19,975 |
|
|
|
Companies less than 5% owned
|
|
|
234,974 |
|
|
|
(13,390 |
) |
|
|
54,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains
|
|
|
273,496 |
|
|
|
117,240 |
|
|
|
75,347 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
462,092 |
|
|
|
(68,712 |
) |
|
|
(78,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses)
|
|
|
735,588 |
|
|
|
48,528 |
|
|
|
(3,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
872,814 |
|
|
$ |
249,486 |
|
|
$ |
192,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
6.48 |
|
|
$ |
1.92 |
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
6.36 |
|
|
$ |
1.88 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
134,700 |
|
|
|
129,828 |
|
|
|
116,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
137,274 |
|
|
|
132,458 |
|
|
|
118,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
137,226 |
|
|
$ |
200,958 |
|
|
$ |
195,130 |
|
|
Net realized gains
|
|
|
273,496 |
|
|
|
117,240 |
|
|
|
75,347 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
462,092 |
|
|
|
(68,712 |
) |
|
|
(78,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
872,814 |
|
|
|
249,486 |
|
|
|
192,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
|
(314,509 |
) |
|
|
(299,326 |
) |
|
|
(267,838 |
) |
|
Preferred stock dividends
|
|
|
(10 |
) |
|
|
(62 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from shareholder
distributions
|
|
|
(314,519 |
) |
|
|
(299,388 |
) |
|
|
(268,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
|
|
|
|
70,251 |
|
|
|
422,005 |
|
|
Issuance of common stock for portfolio investments
|
|
|
7,200 |
|
|
|
3,227 |
|
|
|
884 |
|
|
Issuance of common stock upon the exercise of stock options
|
|
|
66,688 |
|
|
|
32,274 |
|
|
|
8,571 |
|
|
Issuance of common stock in lieu of cash distributions
|
|
|
9,257 |
|
|
|
5,836 |
|
|
|
6,598 |
|
|
Net decrease in notes receivable from sale of common stock
|
|
|
1,602 |
|
|
|
13,162 |
|
|
|
6,072 |
|
|
Purchase of common stock held in deferred compensation trust
|
|
|
(7,968 |
) |
|
|
(13,687 |
) |
|
|
|
|
|
Distribution of common stock held in deferred compensation trust
|
|
|
2,011 |
|
|
|
184 |
|
|
|
|
|
|
Other
|
|
|
3,683 |
|
|
|
3,856 |
|
|
|
413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from capital share
transactions
|
|
|
82,473 |
|
|
|
115,103 |
|
|
|
444,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net increase in net assets
|
|
|
640,768 |
|
|
|
65,201 |
|
|
|
368,506 |
|
Net assets at beginning of year
|
|
|
1,979,778 |
|
|
|
1,914,577 |
|
|
|
1,546,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of year
|
|
$ |
2,620,546 |
|
|
$ |
1,979,778 |
|
|
$ |
1,914,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$ |
19.17 |
|
|
$ |
14.87 |
|
|
$ |
14.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of year
|
|
|
136,697 |
|
|
|
133,099 |
|
|
|
128,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
(in thousands) |
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
872,814 |
|
|
$ |
249,486 |
|
|
$ |
192,011 |
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio investments
|
|
|
(1,668,113 |
) |
|
|
(1,472,396 |
) |
|
|
(930,566 |
) |
|
|
Principal collections related to investment repayments or sales
|
|
|
1,503,388 |
|
|
|
909,189 |
|
|
|
788,328 |
|
|
|
Change in accrued or reinvested interest and dividends
|
|
|
(6,594 |
) |
|
|
(52,193 |
) |
|
|
(44,952 |
) |
|
|
Amortization of discounts and fees
|
|
|
(1,564 |
) |
|
|
(5,235 |
) |
|
|
(12,514 |
) |
|
|
Change in U.S. Treasury bills
|
|
|
(100,000 |
) |
|
|
|
|
|
|
|
|
|
|
Change in investments in money market securities
|
|
|
(121,967 |
) |
|
|
|
|
|
|
|
|
|
|
Changes in other assets and liabilities
|
|
|
33,023 |
|
|
|
18,716 |
|
|
|
(9,352 |
) |
|
|
Depreciation and amortization
|
|
|
1,820 |
|
|
|
1,433 |
|
|
|
1,638 |
|
|
|
Realized gains from the receipt of notes and other securities as
consideration from sale of investments, net of collections
|
|
|
(4,293 |
) |
|
|
(47,497 |
) |
|
|
(1,668 |
) |
|
|
Realized losses
|
|
|
69,565 |
|
|
|
150,462 |
|
|
|
18,958 |
|
|
|
Net change in unrealized (appreciation) or depreciation
|
|
|
(462,092 |
) |
|
|
68,712 |
|
|
|
78,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
115,987 |
|
|
|
(179,323 |
) |
|
|
80,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
|
|
|
|
70,251 |
|
|
|
422,005 |
|
|
Sale of common stock upon the exercise of stock options
|
|
|
66,688 |
|
|
|
32,274 |
|
|
|
8,571 |
|
|
Collections of notes receivable from sale of common stock
|
|
|
1,602 |
|
|
|
13,162 |
|
|
|
6,072 |
|
|
Borrowings under notes payable and debentures
|
|
|
350,000 |
|
|
|
340,212 |
|
|
|
300,000 |
|
|
Repayments on notes payable and debentures
|
|
|
(219,700 |
) |
|
|
(231,000 |
) |
|
|
(140,000 |
) |
|
Net borrowings under (repayments on) revolving line of credit
|
|
|
(20,250 |
) |
|
|
112,000 |
|
|
|
(204,250 |
) |
|
Redemption of preferred stock
|
|
|
|
|
|
|
(7,000 |
) |
|
|
|
|
|
Purchase of common stock held in deferred compensation trust
|
|
|
(7,968 |
) |
|
|
(13,687 |
) |
|
|
|
|
|
Other financing activities
|
|
|
(8,333 |
) |
|
|
(3,004 |
) |
|
|
(5,137 |
) |
|
Common stock dividends and distributions paid
|
|
|
(303,813 |
) |
|
|
(290,830 |
) |
|
|
(264,419 |
) |
|
Preferred stock dividends paid
|
|
|
(10 |
) |
|
|
(62 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(141,784 |
) |
|
|
22,316 |
|
|
|
122,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(25,797 |
) |
|
|
(157,007 |
) |
|
|
202,981 |
|
Cash at beginning of year
|
|
|
57,160 |
|
|
|
214,167 |
|
|
|
11,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$ |
31,363 |
|
|
$ |
57,160 |
|
|
$ |
214,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
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)
|
|
Senior Loan (6.0%, Due
12/07)(6) |
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
|
|
|
(Telecommunications)
|
|
Subordinated Debt (10.0%, Due
1/08)(6) |
|
|
881 |
|
|
|
881 |
|
|
|
|
|
|
|
|
Common Stock (23,513 shares) |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
Advantage Sales & Marketing, Inc.
|
|
Subordinated Debt (10.5%, Due 9/09) |
|
|
60,000 |
|
|
|
59,787 |
|
|
|
59,787 |
|
|
(Business Services)
|
|
Subordinated Debt (18.5%, Due 12/09) |
|
|
124,000 |
|
|
|
124,000 |
|
|
|
124,000 |
|
|
|
Common Stock (18,924,976 shares) |
|
|
|
|
|
|
73,932 |
|
|
|
476,578 |
|
|
Alaris Consulting, LLC
|
|
Senior Loan (15.8%, Due 12/05 12/07)
(6) |
|
|
27,055 |
|
|
|
27,050 |
|
|
|
|
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
5,305 |
|
|
|
|
|
|
|
Guaranty ($1,100) |
|
|
|
|
|
|
|
|
|
|
|
|
|
American Healthcare Services, Inc.
|
|
Senior 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) |
|
|
|
|
|
|
658 |
|
|
|
892 |
|
|
(Business Services)
|
|
Common Stock (27,500 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance,
Inc.(7)
|
|
Preferred Stock (1,568 shares) |
|
|
|
|
|
|
2,401 |
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (2,750 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty ($2,401) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Loan Express, LLC
|
|
Subordinated Debt (6.9%, Due 4/06) |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
10,000 |
|
|
(Financial Services)
|
|
Class A Equity Interests |
|
|
60,693 |
|
|
|
60,693 |
|
|
|
60,693 |
|
|
|
|
Class B Equity Interests |
|
|
|
|
|
|
119,436 |
|
|
|
146,910 |
|
|
|
Class C Equity Interests |
|
|
|
|
|
|
109,301 |
|
|
|
139,521 |
|
|
|
Guaranty ($135,437 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letters of Credit
($34,050 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Capital Corporation
|
|
Senior Loan (12.0%, Due 12/06) |
|
|
600 |
|
|
|
600 |
|
|
|
600 |
|
|
(Financial Services)
|
|
Subordinated Debt (18.0%, Due 10/08) |
|
|
4,832 |
|
|
|
4,832 |
|
|
|
4,832 |
|
|
|
Common Stock (10 shares) |
|
|
|
|
|
|
2,049 |
|
|
|
7,968 |
|
|
Diversified Group Administrators, Inc.
|
|
Preferred Stock (1,000,000 shares) |
|
|
|
|
|
|
700 |
|
|
|
728 |
|
|
(Business Services)
|
|
Preferred Stock (1,451,380 shares) |
|
|
|
|
|
|
841 |
|
|
|
841 |
|
|
|
|
Common Stock (1,451,380 shares) |
|
|
|
|
|
|
|
|
|
|
502 |
|
|
Financial Pacific Company
(Financial Services)
|
|
Subordinated Debt (17.4%, Due 2/12 8/12) |
|
|
70,175 |
|
|
|
69,904 |
|
|
|
69,904 |
|
|
|
|
Preferred Stock (10,964 shares) |
|
|
|
|
|
|
10,276 |
|
|
|
13,116 |
|
|
|
|
Common Stock (14,735 shares) |
|
|
|
|
|
|
14,819 |
|
|
|
44,180 |
|
|
ForeSite Towers, LLC
|
|
Equity Interests |
|
|
|
|
|
|
7,620 |
|
|
|
9,750 |
|
|
(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.
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Global Communications, LLC
|
|
Senior Loan (10.7%, Due 9/02 11/07)
(6) |
|
$ |
15,957 |
|
|
$ |
15,957 |
|
|
$ |
15,957 |
|
|
(Business Services)
|
|
Subordinated Debt (17.0%, Due
12/03 9/05)(6) |
|
|
11,201 |
|
|
|
11,198 |
|
|
|
11,198 |
|
|
|
Preferred Equity Interest |
|
|
|
|
|
|
14,067 |
|
|
|
4,303 |
|
|
|
Options |
|
|
|
|
|
|
1,639 |
|
|
|
|
|
|
Gordian Group, Inc.
|
|
Senior Loan (10.0%, Due 6/06 12/08)
(6) |
|
|
11,392 |
|
|
|
11,421 |
|
|
|
4,161 |
|
|
(Business Services)
|
|
Common Stock (1,000 shares) |
|
|
|
|
|
|
6,542 |
|
|
|
|
|
|
Healthy Pet Corp.
|
|
Senior Loan (10.1%, Due 8/10) |
|
|
4,086 |
|
|
|
4,086 |
|
|
|
4,086 |
|
|
(Consumer Services)
|
|
Subordinated Debt (15.0%, Due 8/10) |
|
|
38,716 |
|
|
|
38,535 |
|
|
|
38,535 |
|
|
|
|
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 |
|
|
|
5,343 |
|
|
|
Warrants |
|
|
|
|
|
|
1,155 |
|
|
|
2,057 |
|
|
Impact Innovations Group, LLC
(Business Services)
|
|
Equity Interests in Affiliate |
|
|
|
|
|
|
|
|
|
|
742 |
|
|
Insight Pharmaceuticals Corporation
|
|
Subordinated Debt (16.1%, Due 9/12) |
|
|
58,534 |
|
|
|
58,298 |
|
|
|
58,298 |
|
|
(Consumer Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
25,000 |
|
|
|
26,791 |
|
|
|
Common Stock (6,200 shares) |
|
|
|
|
|
|
6,325 |
|
|
|
236 |
|
|
Jakel, Inc.
|
|
Subordinated Debt (15.5%, Due
3/08)(6) |
|
|
13,742 |
|
|
|
13,742 |
|
|
|
|
|
|
(Industrial Products)
|
|
Preferred Stock (6,460 shares) |
|
|
|
|
|
|
6,460 |
|
|
|
|
|
|
|
|
Common Stock (158,061 shares) |
|
|
|
|
|
|
9,347 |
|
|
|
|
|
|
Legacy Partners Group, LLC
|
|
Senior Loan (14.0%, Due
5/09)(6) |
|
|
7,646 |
|
|
|
7,646 |
|
|
|
5,029 |
|
|
(Financial Services)
|
|
Subordinated Debt (18.0%, Due
5/09)(6) |
|
|
2,952 |
|
|
|
2,952 |
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
4,229 |
|
|
|
|
|
|
Litterer
Beteiligungs-GmbH(4)
|
|
Subordinated Debt (8.0%, Due 3/07) |
|
|
621 |
|
|
|
621 |
|
|
|
621 |
|
|
(Business Services)
|
|
Equity Interest |
|
|
|
|
|
|
1,810 |
|
|
|
2,226 |
|
|
Mercury Air Centers, Inc.
|
|
Senior Loan (10.0%, Due 4/09) |
|
|
31,720 |
|
|
|
31,720 |
|
|
|
31,720 |
|
|
(Business Services)
|
|
Subordinated Debt (16.0%, Due 4/09) |
|
|
46,703 |
|
|
|
46,519 |
|
|
|
46,519 |
|
|
|
|
Common Stock (57,970 shares) |
|
|
|
|
|
|
35,053 |
|
|
|
88,898 |
|
|
|
|
Standby Letters of Credit ($1,397) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MVL Group, Inc.
|
|
Senior Loan (12.1%, Due 7/09) |
|
|
27,519 |
|
|
|
27,218 |
|
|
|
27,218 |
|
|
(Business Services)
|
|
Subordinated Debt (14.4%, Due 7/09) |
|
|
32,905 |
|
|
|
32,417 |
|
|
|
32,417 |
|
|
|
Common Stock (648,661 shares) |
|
|
|
|
|
|
643 |
|
|
|
3,211 |
|
|
Pennsylvania Avenue Investors, L.P.
(5)
|
|
Equity Interests |
|
|
|
|
|
|
2,576 |
|
|
|
1,864 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Powell Plant Farms, Inc.
|
|
Senior Loan (15.0%, Due 12/05 - 12/06) |
|
|
32,640 |
|
|
|
23,792 |
|
|
|
23,792 |
|
|
(Consumer Products)
|
|
Subordinated Debt (20.0%, Due
6/03)(6) |
|
|
19,291 |
|
|
|
19,224 |
|
|
|
7,364 |
|
|
|
Preferred Stock (1,483 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
F-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Redox Brands, Inc.
|
|
Preferred Stock (2,726,444 shares) |
|
|
|
|
|
$ |
7,903 |
|
|
$ |
12,097 |
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
584 |
|
|
|
500 |
|
|
Service Champ, Inc.
|
|
Subordinated Debt (15.5%, Due 4/12) |
|
$ |
27,041 |
|
|
|
26,906 |
|
|
|
26,906 |
|
|
(Business Services)
|
|
Common Stock (63,888 shares) |
|
|
|
|
|
|
13,662 |
|
|
|
13,319 |
|
|
Staffing Partners Holding
|
|
Subordinated Debt (13.5%,
Due 1/07)(6) |
|
|
6,343 |
|
|
|
6,343 |
|
|
|
6,343 |
|
|
Company, Inc. |
|
Preferred Stock (439,600 shares) |
|
|
|
|
|
|
4,968 |
|
|
|
1,812 |
|
|
(Business Services)
|
|
Common Stock (69,773 shares) |
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
Startec Global Communications
|
|
Senior Loan (10.0%, Due 5/07 5/09) |
|
|
25,226 |
|
|
|
25,226 |
|
|
|
21,685 |
|
|
Corporation
|
|
Common Stock (19,180,000 shares) |
|
|
|
|
|
|
37,255 |
|
|
|
|
|
|
(Telecommunications)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STS Operating, Inc.
|
|
Subordinated Debt (15.3%, Due 3/12) |
|
|
6,593 |
|
|
|
6,593 |
|
|
|
6,593 |
|
|
(Industrial Products)
|
|
Common Stock (3,000,000 shares) |
|
|
|
|
|
|
3,522 |
|
|
|
64,963 |
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
560 |
|
|
Triview Investments,
Inc.(8)
|
|
Senior Loan (8.6%, Due 12/06) |
|
|
7,449 |
|
|
|
7,449 |
|
|
|
7,449 |
|
|
(Broadcasting & Cable/ |
|
Subordinated Debt (15.0%, Due 7/12) |
|
|
31,000 |
|
|
|
30,845 |
|
|
|
30,845 |
|
|
Consumer Products) |
|
Subordinated Debt (16.8%, Due 7/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/12)(6) |
|
|
19,600 |
|
|
|
19,520 |
|
|
|
19,520 |
|
|
|
Common Stock (202 shares) |
|
|
|
|
|
|
93,889 |
|
|
|
29,171 |
|
|
|
Guaranty ($800) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letter of Credit ($200) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies more than 25% owned |
|
|
|
|
|
$ |
1,489,782 |
|
|
$ |
1,887,651 |
|
|
Companies 5% to 25% Owned |
|
|
|
|
|
Air Evac Lifeteam
|
|
Subordinated Debt (13.8%, Due 7/10) |
|
$ |
42,414 |
|
|
$ |
42,267 |
|
|
$ |
42,267 |
|
|
(Healthcare Services) |
|
Equity Interests |
|
|
|
|
|
|
3,941 |
|
|
|
4,025 |
|
|
Aspen Pet Products, Inc.
|
|
Subordinated Debt (19.0%, Due 6/08) |
|
|
20,051 |
|
|
|
19,959 |
|
|
|
19,959 |
|
|
(Consumer Products)
|
|
Preferred Stock (2,935 shares) |
|
|
|
|
|
|
2,154 |
|
|
|
1,638 |
|
|
|
Common Stock (1,400 shares) |
|
|
|
|
|
|
140 |
|
|
|
17 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Subordinated Debt (14.5%, Due 8/12) |
|
|
23,639 |
|
|
|
23,543 |
|
|
|
23,543 |
|
|
(Industrial Products)
|
|
Common Stock (5,073 shares) |
|
|
|
|
|
|
5,813 |
|
|
|
2,200 |
|
|
The Debt Exchange Inc.
|
|
Preferred Stock (921,875 shares) |
|
|
|
|
|
|
1,250 |
|
|
|
3,219 |
|
|
(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 $66.5 million and value of
$16.0 million and Triax Holdings, LLC (Consumer Products)
with a cost of $85.2 million and a value of
$71.0 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.
F-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
MedBridge Healthcare, LLC
|
|
Senior Loan (4.0%, Due 8/09) |
|
$ |
7,093 |
|
|
$ |
7,093 |
|
|
$ |
7,093 |
|
|
(Healthcare Services)
|
|
Subordinated Debt (10.0%, Due
8/14)(6) |
|
|
4,809 |
|
|
|
4,809 |
|
|
|
534 |
|
|
|
Convertible Subordinated Debt (2.0%,
Due
8/14)(6) |
|
|
2,970 |
|
|
|
984 |
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
800 |
|
|
|
|
|
|
Nexcel Synthetics, LLC
|
|
Subordinated Debt (14.5%, Due 6/09) |
|
|
10,617 |
|
|
|
10,588 |
|
|
|
10,588 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,708 |
|
|
|
1,367 |
|
|
Pres Air Trol LLC
|
|
Unitranche Debt (12.0%, Due 4/10) |
|
|
6,138 |
|
|
|
5,820 |
|
|
|
5,820 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,356 |
|
|
|
318 |
|
|
Progressive International
|
|
Subordinated Debt (16.0%, Due 12/09) |
|
|
7,401 |
|
|
|
7,376 |
|
|
|
7,376 |
|
|
Corporation
|
|
Preferred Stock (500 shares) |
|
|
|
|
|
|
500 |
|
|
|
884 |
|
|
(Consumer Products)
|
|
Common Stock (197 shares) |
|
|
|
|
|
|
13 |
|
|
|
13 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Soteria Imaging Services, LLC
|
|
Subordinated Debt (11.8%, Due 11/10) |
|
|
14,500 |
|
|
|
13,447 |
|
|
|
13,447 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
2,153 |
|
|
|
2,308 |
|
|
Universal Environmental Services, LLC
|
|
Unitranche Debt (15.5%, Due 2/09) |
|
|
10,900 |
|
|
|
10,862 |
|
|
|
10,862 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
1,797 |
|
|
|
1,328 |
|
|
Total
companies 5% to 25% owned |
|
|
|
|
|
$ |
168,373 |
|
|
$ |
158,806 |
|
|
Companies Less Than 5% Owned |
|
|
|
|
|
Advanced Circuits, Inc.
|
|
Senior Loans (10.1%, Due 9/11 3/12) |
|
$ |
18,732 |
|
|
$ |
18,642 |
|
|
$ |
18,642 |
|
|
(Industrial Products)
|
|
Common Stock (40,000 shares) |
|
|
|
|
|
|
1,000 |
|
|
|
1,000 |
|
|
Anthony, Inc.
(Industrial Products)
|
|
Subordinated Debt (12.9%, Due 9/11 9/12) |
|
|
14,670 |
|
|
|
14,610 |
|
|
|
14,610 |
|
|
Benchmark Medical, Inc.
|
|
Warrants |
|
|
|
|
|
|
18 |
|
|
|
190 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BI Incorporated
|
|
Subordinated Debt (14.0%, due 2/12) |
|
|
16,203 |
|
|
|
16,133 |
|
|
|
16,133 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Border Foods, Inc.
(Consumer Products)
|
|
Subordinated Debt (13.0%, Due
12/10)(6) |
|
|
13,428 |
|
|
|
12,721 |
|
|
|
|
|
|
|
Preferred Stock (140,214 shares) |
|
|
|
|
|
|
2,893 |
|
|
|
|
|
|
|
Common Stock (1,810 shares) |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
910 |
|
|
|
|
|
|
|
|
|
(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.
F-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
C&K Market, Inc.
|
|
Subordinated Debt (13.0%, Due 12/08) |
|
$ |
14,694 |
|
|
$ |
14,638 |
|
|
$ |
14,638 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
Class C Notes (12.9%, Due 12/13) |
|
|
18,800 |
|
|
|
18,973 |
|
|
|
18,973 |
|
|
CDO Fund I,
Ltd.(4)(9)
|
|
Class D Notes (17.0%, Due 12/13) |
|
|
9,400 |
|
|
|
9,487 |
|
|
|
9,487 |
|
|
(Senior Debt Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
Preferred Shares (23,600,000 shares) |
|
|
|
|
|
|
24,233 |
|
|
|
24,233 |
|
|
CLO Fund III, Ltd.
(4)(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Senior Debt Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus MAPS CLO Fund I
LLC(9)
|
|
Class E Notes (9.7%, Due 12/17) |
|
|
17,000 |
|
|
|
17,000 |
|
|
|
17,000 |
|
|
(Senior Debt Fund)
|
|
Income Notes |
|
|
|
|
|
|
48,108 |
|
|
|
48,108 |
|
|
Camden Partners Strategic Fund II,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,142 |
|
|
|
2,726 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catterton Partners V,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,650 |
|
|
|
2,691 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBS Personnel Holdings, Inc.
(Business Services)
|
|
Subordinated Debt (14.5%, Due 12/09) |
|
|
20,617 |
|
|
|
20,541 |
|
|
|
20,541 |
|
|
Community Education
Centers, Inc.
|
|
Subordinated Debt (16.0%, Due 12/10) |
|
|
32,852 |
|
|
|
32,738 |
|
|
|
32,738 |
|
|
(Education Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component Hardware Group, Inc.
|
|
Preferred Stock (18,000 shares) |
|
|
|
|
|
|
2,605 |
|
|
|
2,783 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
700 |
|
|
Cooper Natural Resources, Inc.
|
|
Subordinated Debt (0%, Due 11/07) |
|
|
840 |
|
|
|
840 |
|
|
|
840 |
|
|
(Industrial Products)
|
|
Preferred Stock (6,316 shares) |
|
|
|
|
|
|
1,424 |
|
|
|
20 |
|
|
|
Warrants |
|
|
|
|
|
|
830 |
|
|
|
|
|
|
Coverall North America, Inc.
|
|
Subordinated Debt (14.6%, Due 2/11) |
|
|
27,309 |
|
|
|
27,261 |
|
|
|
27,261 |
|
|
(Business Services)
|
|
Preferred Stock (6,500 shares) |
|
|
|
|
|
|
6,500 |
|
|
|
6,866 |
|
|
|
Warrants |
|
|
|
|
|
|
2,950 |
|
|
|
3,100 |
|
|
|
|
|
(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)
|
|
The fund is managed by Callidus Capital Corporation, a portfolio
company of Allied Capital. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Drilltec Patents & Technologies Company, Inc.
|
|
Subordinated Debt (17.0%, Due
8/06)(6) |
|
$ |
1,500 |
|
|
$ |
1,500 |
|
|
$ |
1,500 |
|
|
(Energy Services)
|
|
Subordinated Debt (10.0%, Due
8/06)(6) |
|
|
10,994 |
|
|
|
10,918 |
|
|
|
9,792 |
|
|
eCentury Capital Partners,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
5,649 |
|
|
|
83 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elexis Beta
GmbH(4)
|
|
Options |
|
|
|
|
|
|
426 |
|
|
|
50 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event Rentals, Inc.
|
|
Senior Loans (9.9%, Due 11/11) |
|
|
18,341 |
|
|
|
18,244 |
|
|
|
18,244 |
|
|
(Consumer Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frozen Specialties, Inc.
|
|
Warrants |
|
|
|
|
|
|
435 |
|
|
|
470 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Ridge Corporation
(Retail)
|
|
Subordinated Debt (7.0%, Due
5/12)(6) |
|
|
22,500 |
|
|
|
22,500 |
|
|
|
22,500 |
|
|
Geotrace Technologies, Inc.
|
|
Subordinated Debt (10.0%, Due 6/09) |
|
|
25,618 |
|
|
|
23,875 |
|
|
|
23,875 |
|
(Energy Services)
|
|
Warrants |
|
|
|
|
|
|
2,350 |
|
|
|
2,500 |
|
|
Ginsey Industries, Inc.
|
|
Subordinated Debt (12.5%, Due 3/07) |
|
|
3,680 |
|
|
|
3,680 |
|
|
|
3,680 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Broadcasting Systems II
|
|
Subordinated Debt (5.0%, Due 6/09) |
|
|
2,756 |
|
|
|
2,756 |
|
|
|
2,756 |
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grotech Partners, VI,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
6,914 |
|
|
|
4,161 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Havco Wood Products LLC
|
|
Unitranche Debt (10.4%, Due 8/11) |
|
|
33,000 |
|
|
|
31,794 |
|
|
|
31,794 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,048 |
|
|
|
1,048 |
|
|
Haven Eldercare of New England,
LLC(10)
|
|
Subordinated Debt (12.0%, Due
8/09)(6) |
|
|
4,320 |
|
|
|
4,320 |
|
|
|
4,320 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Haven Healthcare Management,
LLC(10)
|
|
Subordinated Debt (18.0% Due
4/07)(6) |
|
|
1,319 |
|
|
|
1,319 |
|
|
|
485 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthASPex Services Inc.
|
|
Senior Loans (4.0%, Due 7/08) |
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Hillman Companies,
Inc.(3)
|
|
Subordinated Debt (13.5%, Due 9/11) |
|
|
44,000 |
|
|
|
43,815 |
|
|
|
43,815 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homax Holdings, Inc.
|
|
Subordinated Debt (12.0%, Due 8/11) |
|
|
14,000 |
|
|
|
13,039 |
|
|
|
13,039 |
|
|
(Consumer Products)
|
|
Preferred Stock (89 shares) |
|
|
|
|
|
|
89 |
|
|
|
92 |
|
|
|
|
Common Stock (28 shares) |
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
Warrants |
|
|
|
|
|
|
1,106 |
|
|
|
1,492 |
|
|
Icon International, Inc.
|
|
Common Stock (25,707 shares) |
|
|
|
|
|
|
76 |
|
|
|
16 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Fiber Corporation
|
|
Subordinated Debt (14.0%, Due 6/12) |
|
|
21,546 |
|
|
|
21,460 |
|
|
|
21,460 |
|
|
(Industrial Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
2,500 |
|
|
|
1,900 |
|
|
Line-X, Inc.
|
|
Senior Loan (8.1%, Due 8/11) |
|
|
4,134 |
|
|
|
4,111 |
|
|
|
4,111 |
|
|
(Consumer Products)
|
|
Unitranche Debt (10.0% Due 8/11) |
|
|
51,475 |
|
|
|
51,229 |
|
|
|
51,229 |
|
|
|
|
Standby Letter of Credit ($1,500) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
|
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.
F-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
MedAssets, Inc.
|
|
Preferred Stock (227,865 shares) |
|
|
|
|
|
$ |
2,049 |
|
|
$ |
2,893 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
136 |
|
|
|
180 |
|
|
Meineke Car Care Centers, Inc.
|
|
Senior Loan (8.0%, Due 6/11) |
|
$ |
28,000 |
|
|
|
27,865 |
|
|
|
27,865 |
|
|
(Business Services)
|
|
Subordinated Debt (11.9%, Due 6/12 6/13) |
|
|
72,000 |
|
|
|
71,675 |
|
|
|
71,675 |
|
|
|
|
Common Stock (10,696,308
shares)(11) |
|
|
|
|
|
|
26,985 |
|
|
|
26,629 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
MHF Logistical Solutions, Inc.
|
|
Unitranche Debt (10.0%, Due 5/11) |
|
|
22,281 |
|
|
|
22,177 |
|
|
|
22,177 |
|
|
(Business Services)
|
|
Preferred Stock (431 shares) |
|
|
|
|
|
|
431 |
|
|
|
455 |
|
|
|
|
Common Stock (1,438 shares) |
|
|
|
|
|
|
144 |
|
|
|
211 |
|
|
Mid-Atlantic Venture Fund IV, L.P.
(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
6,600 |
|
|
|
3,339 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mogas Energy, LLC
|
|
Subordinated Debt (9.5%, Due 3/12 4/12) |
|
|
16,855 |
|
|
|
15,472 |
|
|
|
15,472 |
|
|
(Energy Services)
|
|
Warrants |
|
|
|
|
|
|
1,774 |
|
|
|
3,550 |
|
|
Network Hardware Resale, Inc.
|
|
Unitranche Debt (10.5%, Due 12/11) |
|
|
38,500 |
|
|
|
38,743 |
|
|
|
38,743 |
|
|
(Business Services)
|
|
Convertible Subordinated Debt (9.8%, Due 12/15) |
|
|
12,000 |
|
|
|
12,076 |
|
|
|
12,076 |
|
|
N.E.W. Customer Service Companies, Inc.
|
|
Subordinated Debt (11.0%, Due 7/12) |
|
|
40,000 |
|
|
|
40,016 |
|
|
|
40,016 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nobel Learning Communities,
|
|
Preferred Stock (1,214,356 shares) |
|
|
|
|
|
|
2,764 |
|
|
|
2,343 |
|
|
Inc.(3)
|
|
Warrants |
|
|
|
|
|
|
575 |
|
|
|
1,296 |
|
|
(Education)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norwesco, Inc.
(Industrial Products)
|
|
Subordinated Debt (12.6%, Due 1/12 7/12) |
|
|
82,061 |
|
|
|
81,683 |
|
|
|
81,683 |
|
|
|
|
Common Stock (559,603
shares)(11) |
|
|
|
|
|
|
38,313 |
|
|
|
38,313 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Novak Biddle Venture Partners III,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,669 |
|
|
|
1,809 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oahu Waste Services, Inc.
|
|
Stock Appreciation Rights |
|
|
|
|
|
|
239 |
|
|
|
1,000 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opinion Research
Corporation(3)
|
|
Warrants |
|
|
|
|
|
|
996 |
|
|
|
45 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Trading Company, Inc.
|
|
Common Stock (13,820 shares) |
|
|
|
|
|
|
|
|
|
|
5,200 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palm Coast Data, LLC
|
|
Senior Loan (7.6%, Due 8/10) |
|
|
16,100 |
|
|
|
16,024 |
|
|
|
16,024 |
|
|
(Business Services)
|
|
Subordinated Debt (15.5%, Due 8/12 8/15) |
|
|
29,600 |
|
|
|
29,461 |
|
|
|
29,461 |
|
|
|
|
Common Stock (21,743
shares)(11) |
|
|
|
|
|
|
21,743 |
|
|
|
21,743 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Performant Financial Corporation
|
|
Common Stock (478,816 shares) |
|
|
|
|
|
|
734 |
|
|
|
2,500 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Mach, Inc.
|
|
Subordinated Debt (13.8%, Due 6/12) |
|
|
19,275 |
|
|
|
19,193 |
|
|
|
19,193 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,500 |
|
|
|
1,200 |
|
|
|
|
|
|
|
|
(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. |
|
(11) |
|
|
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.
F-13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Promo Works, LLC
|
|
Senior Loan (8.5%, Due 12/11) |
|
$ |
900 |
|
|
$ |
851 |
|
|
$ |
851 |
|
|
(Business Services)
|
|
Unitranche Debt (10.3%, Due 12/11) |
|
|
31,000 |
|
|
|
30,728 |
|
|
|
30,728 |
|
|
|
|
Guaranty ($1,650) |
|
|
|
|
|
|
|
|
|
|
|
|
|
RadioVisa Corporation
|
|
Unitranche Debt (15.5%, Due 12/08) |
|
|
27,093 |
|
|
|
26,993 |
|
|
|
26,993 |
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Red Hawk Industries, LLC
|
|
Unitranche Debt (11.0%, Due 4/11) |
|
|
56,343 |
|
|
|
56,063 |
|
|
|
56,063 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.B. Restaurant Company
(Retail)
|
|
Subordinated Debt (14.6%, Due 11/08 12/09) |
|
|
29,085 |
|
|
|
28,615 |
|
|
|
28,615 |
|
|
|
|
Preferred Stock (54,125 shares) |
|
|
|
|
|
|
135 |
|
|
|
135 |
|
|
|
Warrants |
|
|
|
|
|
|
619 |
|
|
|
700 |
|
|
SBBUT, LLC
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soff-Cut Holdings, Inc.
|
|
Preferred Stock (300 shares) |
|
|
|
|
|
|
300 |
|
|
|
300 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
37 |
|
|
SPP Mezzanine Fund,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
3,007 |
|
|
|
2,969 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradesmen International, Inc.
|
|
Subordinated Debt (12.0%, Due 12/09) |
|
|
15,000 |
|
|
|
14,323 |
|
|
|
14,323 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
710 |
|
|
|
1,700 |
|
|
TransAmerican Auto Parts, LLC
|
|
Subordinated Debt (14.0%, Due 11/12) |
|
|
10,000 |
|
|
|
9,951 |
|
|
|
9,951 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
889 |
|
|
|
889 |
|
|
United Site Services, Inc.
|
|
Subordinated Debt (12.4%, Due 8/11) |
|
|
49,712 |
|
|
|
49,503 |
|
|
|
49,503 |
|
|
(Business Services)
|
|
Common Stock (160,588 shares) |
|
|
|
|
|
|
1,000 |
|
|
|
1,200 |
|
|
Universal Air Filter Company
|
|
Senior Loans (7.9%, Due 11/11) |
|
|
400 |
|
|
|
390 |
|
|
|
390 |
|
|
(Industrial Products)
|
|
Unitranche Debt (11.0%, Due 11/11) |
|
|
19,867 |
|
|
|
19,768 |
|
|
|
19,768 |
|
|
Universal Tax Systems, Inc.
|
|
Subordinated Debt (14.5%, Due 7/11) |
|
|
19,068 |
|
|
|
18,995 |
|
|
|
18,995 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Updata Venture Partners II,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
4,977 |
|
|
|
4,686 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venturehouse-Cibernet Investors, LLC
|
|
Equity Interest |
|
|
|
|
|
|
42 |
|
|
|
42 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venturehouse Group,
LLC(5)
|
|
Equity Interest |
|
|
|
|
|
|
598 |
|
|
|
397 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VICORP Restaurants,
Inc.(3)
|
|
Warrants |
|
|
|
|
|
|
33 |
|
|
|
691 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walker Investment Fund II,
LLLP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,330 |
|
|
|
676 |
|
|
(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. |
|
(11) |
|
|
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.
F-14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
|
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Wear Me Apparel Corporation
|
|
Subordinated Debt (15.0%, Due 12/10) |
|
$ |
40,000 |
|
|
$ |
38,992 |
|
|
$ |
38,992 |
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
1,219 |
|
|
|
2,000 |
|
|
Wilshire Restaurant Group, Inc.
(Retail)
|
|
Subordinated Debt (20.0%, Due
6/07)(6) |
|
|
22,471 |
|
|
|
21,930 |
|
|
|
21,930 |
|
|
|
|
Warrants |
|
|
|
|
|
|
735 |
|
|
|
538 |
|
|
Wilton Industries, Inc.
|
|
Subordinated Debt (19.3%, Due 6/08) |
|
|
4,800 |
|
|
|
4,800 |
|
|
|
4,800 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Woodstream Corporation
(Consumer Products)
|
|
Subordinated Debt (13.2%, Due 11/12 5/13) |
|
|
52,397 |
|
|
|
52,251 |
|
|
|
52,251 |
|
|
|
|
Common Stock (180 shares) |
|
|
|
|
|
|
673 |
|
|
|
3,336 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
2,365 |
|
|
Other companies
|
|
Other debt investments |
|
|
382 |
|
|
|
382 |
|
|
|
382 |
|
|
|
Other debt
investments(6) |
|
|
470 |
|
|
|
470 |
|
|
|
348 |
|
|
|
Other equity investments |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
Guaranty ($135) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies less than 5% owned |
|
|
|
|
|
$ |
1,448,268 |
|
|
$ |
1,432,833 |
|
|
Total
private finance (118 portfolio companies) |
|
|
|
|
|
$ |
3,106,423 |
|
|
$ |
3,479,290 |
|
|
|
|
|
(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.
F-15
|
|
|
|
|
|
|
|
|
Commercial Real Estate Finance
|
|
|
|
|
|
|
|
|
(in thousands, except number of loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
Interest |
|
Number of |
|
|
|
|
Rate Ranges |
|
Loans |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Commercial Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to 6.99% |
|
|
|
5 |
|
|
$ |
23,121 |
|
|
$ |
21,844 |
|
|
|
|
7.00%8.99% |
|
|
|
24 |
|
|
|
48,156 |
|
|
|
48,156 |
|
|
|
|
9.00%10.99% |
|
|
|
5 |
|
|
|
25,999 |
|
|
|
25,967 |
|
|
|
|
11.00%12.99% |
|
|
|
1 |
|
|
|
338 |
|
|
|
338 |
|
|
|
|
13.00%14.99% |
|
|
|
1 |
|
|
|
2,294 |
|
|
|
2,294 |
|
|
|
15.00% and above |
|
|
2 |
|
|
|
3,970 |
|
|
|
3,970 |
|
|
|
Total commercial mortgage
loans(12)
|
|
|
|
|
|
|
38 |
|
|
$ |
103,878 |
|
|
$ |
102,569 |
|
|
Real Estate Owned
|
|
|
|
|
|
|
|
|
|
$ |
14,240 |
|
|
$ |
13,932 |
|
|
Equity
Interests(2)
Companies more than 25% owned
(Guarantees $7,054) |
|
|
|
|
|
$ |
13,577 |
|
|
$ |
10,564 |
|
|
|
Total commercial real estate finance
|
|
|
|
|
|
|
|
|
|
$ |
131,695 |
|
|
$ |
127,065 |
|
|
Total portfolio
|
|
|
|
|
|
|
|
|
|
$ |
3,238,118 |
|
|
$ |
3,606,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield |
|
Cost |
|
Value |
|
|
|
|
|
|
|
Liquidity Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills (Due June 2006)
|
|
|
4.25% |
|
|
$ |
100,000 |
|
|
$ |
100,305 |
|
|
SEI Daily Income Tr Prime Obligation
Fund(13)
|
|
|
4.11% |
|
|
|
100,000 |
|
|
|
100,000 |
|
|
|
|
Total liquidity portfolio
|
|
|
|
|
|
$ |
200,000 |
|
|
$ |
200,305 |
|
|
Other Investments in Money Market
Securities(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PNC Bank Corporate Money Market Deposit Account
|
|
|
4.15% |
|
|
$ |
21,967 |
|
|
$ |
21,967 |
|
|
|
|
|
(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. |
(12) |
|
Commercial mortgage loans totaling $20.8 million at value
were on non-accrual status and therefore were considered
non-income producing. |
(13) |
|
Included in investments in money market securities on the
accompanying Consolidated Balance Sheet. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-16
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 that are single member limited liability companies
established primarily to hold real estate properties. ACC also
has a subsidiary, A.C. Corporation (AC Corp), that
generally provides diligence and structuring services, 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 and 2003 balances
to conform with the 2005 financial statement presentation.
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.
F-17
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
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 may be subject to certain
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 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 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,
F-18
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
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 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),
Collateralized Debt Obligations (CDO) and
Collateralized Loan Obligations (CLO) |
On May 3, 2005, the Company completed the sale of its
portfolio of CMBS bonds and real estate related CDO bonds and
preferred shares. See Note 3.
CMBS bonds and CDO and CLO bonds and preferred shares/income
notes (CMBS/CDO/CLO Assets) are carried at fair
value, which is based on a discounted cash flow model that
utilizes 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 bonds and preferred shares/income notes, when
available. The Company recognizes unrealized appreciation or
depreciation on its CMBS/CDO/CLO Assets as comparable yields in
the market change and/or
F-19
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
based on changes in estimated cash flows resulting from changes
in prepayment or loss assumptions in the underlying collateral
pool. The Company determines the fair value of its CMBS/CDO/CLO
Assets on an individual security-by-security basis.
The Company recognizes 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 are revised when there are changes in actual and
estimated prepayment speeds or actual and estimated credit
losses. Changes in estimated yield are recognized as an
adjustment to the estimated yield over the remaining life of the
CMBS/CDO/CLO Assets 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.
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. See
Note 5.
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
using a method that approximates the effective interest method.
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.
F-20
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
|
|
|
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 Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee
compensation for the years ended December 31, 2005, 2004,
and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
Net increase in net assets resulting from operations as reported
|
|
$ |
872,814 |
|
|
$ |
249,486 |
|
|
$ |
192,011 |
|
Less total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
|
|
|
(12,717 |
) |
|
|
(16,908 |
) |
|
|
(12,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net increase in net assets resulting from operations
|
|
|
860,097 |
|
|
|
232,578 |
|
|
|
179,717 |
|
Less preferred stock dividends
|
|
|
(10 |
) |
|
|
(62 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available to common shareholders
|
|
$ |
860,087 |
|
|
$ |
232,516 |
|
|
$ |
179,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
6.48 |
|
|
$ |
1.92 |
|
|
$ |
1.64 |
|
|
Pro forma
|
|
$ |
6.39 |
|
|
$ |
1.79 |
|
|
$ |
1.54 |
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
6.36 |
|
|
$ |
1.88 |
|
|
$ |
1.62 |
|
|
Pro forma
|
|
$ |
6.27 |
|
|
$ |
1.76 |
|
|
$ |
1.52 |
|
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 years ended
December 31, 2005, 2004, and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
4.1 |
% |
|
|
2.9 |
% |
|
|
2.8 |
% |
Expected life
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Expected volatility
|
|
|
35.1 |
% |
|
|
37.0 |
% |
|
|
38.4 |
% |
Dividend yield
|
|
|
9.0 |
% |
|
|
8.8 |
% |
|
|
8.9 |
% |
Weighted average fair value per option
|
|
$ |
3.94 |
|
|
$ |
4.17 |
|
|
$ |
3.47 |
|
F-21
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
|
|
|
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 (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. Income taxes for AC Corp are accounted for under
the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases as well as operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled.
If the Company does not distribute at least 98% of its annual
taxable income in the year earned, the Company will generally be
required to pay an excise tax equal to 4% of the amount by which
98% of the Companys annual taxable income exceeds the
distributions for the 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 $3.6 billion and $3.0 billion
at December 31, 2005 and 2004, respectively. At
December 31, 2005 and 2004, 90% 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.
F-22
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
|
|
|
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, 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 will adopt the Statement effective January 1,
2006, and it will apply to the options granted by the Company.
These options are typically granted with ratable vesting
provisions, and the Company intends to amortize the compensation
cost over the service period. The Company will use the
modified prospective method upon adoption. Under the
modified prospective method, previously awarded but unvested
options are accounted for in accordance with FASB Statement
No. 123 except that amounts must be recognized in the
statement of operations beginning January 1, 2006, instead
of only being disclosed. Awards granted on or after
January 1, 2006, will be recognized in the statement of
operations. Upon adoption, the Company estimates that the stock
based compensation expense related to options granted prior to
January 1, 2006, will be approximately $13 million,
$10 million, and $3 million for the years ended
December 31, 2006, 2007, and 2008, respectively, for
stock-based compensation that has not historically been recorded
in the Companys statement of operations. This does not
include any expense related to stock options granted on or after
January 1, 2006, as the fair value of those stock options
will be determined at the time of grant.
F-23
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio
At December 31, 2005 and 2004, the private finance
portfolio consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Cost |
|
Value |
|
Yield(1) |
|
Cost |
|
Value |
|
Yield(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
284,680 |
|
|
$ |
239,838 |
|
|
|
9.5 |
% |
|
$ |
260,342 |
|
|
$ |
234,628 |
|
|
|
8.5 |
% |
|
Unitranche
debt(2)
|
|
|
294,201 |
|
|
|
294,201 |
|
|
|
11.4 |
% |
|
|
43,900 |
|
|
|
43,900 |
|
|
|
14.8 |
% |
|
Subordinated debt
|
|
|
1,610,228 |
|
|
|
1,560,851 |
|
|
|
13.8 |
% |
|
|
1,375,613 |
|
|
|
1,324,341 |
|
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt
securities(3)
|
|
|
2,189,109 |
|
|
|
2,094,890 |
|
|
|
13.0 |
% |
|
|
1,679,855 |
|
|
|
1,602,869 |
|
|
|
13.9 |
% |
Equity securities
|
|
|
917,314 |
|
|
|
1,384,400 |
|
|
|
|
|
|
|
705,065 |
|
|
|
699,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,106,423 |
|
|
$ |
3,479,290 |
|
|
|
|
|
|
$ |
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
December 31, 2005 and 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) |
Unitranche debt is a single debt investment that is a blend of
senior and subordinated debt. |
|
(3) |
The total principal balance outstanding on loans and debt
securities was $2,216.3 million and $1,709.6 million
at December 31, 2005 and 2004, respectively. The difference
between principal and cost is represented by unamortized loan
origination fees and costs, original issue discounts, and market
discounts totaling $27.2 million and $29.8 million at
December 31, 2005 and 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 may be
subject to certain 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.
Senior loans generally carry a floating rate of interest,
usually set as a spread over LIBOR, and generally require
payments of both principal and interest throughout the life of
the loan. Interest is generally paid to the Company monthly or
quarterly. Senior loans generally have maturities of three to
five years. Loans other than senior loans generally carry a
fixed rate of interest with maturities of five to ten years.
These loans generally have interest-only payments in the early
years and payments of both principal and interest in the later
years, although maturities and principal amortization
F-24
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
schedules may vary. Interest is generally paid to the Company
quarterly. At December 31, 2005 and 2004, 87% and 94%,
respectively, of the private finance loans and debt securities
carried a fixed rate of interest and 13% and 6%, respectively,
carried a floating rate of interest.
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
December 31, 2005 and 2004, were in Advantage
Sales & Marketing, Inc. (Advantage) and
Business Loan Express, LLC (BLX).
Advantage Sales and Marketing, Inc. 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 $660.4 million at value at
December 31, 2005, and $258.7 million at cost and
$283.0 million at value at December 31, 2004.
Advantage is a sales and marketing agency providing outsourced
sales, merchandising, and marketing services to the consumer
packaged goods industry. Advantage has offices across the United
States and is headquartered in Irvine, CA.
Total interest and related portfolio income earned from the
Companys investment in Advantage for the years ended
December 31, 2005 and 2004, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
($ in millions) |
|
|
|
|
Interest income
|
|
$ |
30.9 |
|
|
$ |
15.5 |
|
Fees and other income
|
|
|
6.5 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
37.4 |
|
|
$ |
21.3 |
|
|
|
|
|
|
|
|
|
|
Interest income from Advantage for the year ended
December 31, 2004, included interest income of
$2.2 million that was paid in kind. The interest paid in
kind was paid to the Company through the issuance of additional
debt in 2004, which was subsequently paid in cash in 2005.
Interest income from Advantage for the year ended
December 31, 2005, did not include any income that was paid
in kind.
Net change in unrealized appreciation or depreciation for the
years ended December 31, 2005 and 2004, included
$378.4 million and $24.3 million, respectively, of
unrealized appreciation related to the Companys investment
in Advantage, and no change for the year ended December 31,
2003.
In March 2006, the Company signed a definitive agreement to sell
a majority equity interest in Advantage. The Company will retain
an equity investment in the business as a minority shareholder.
Based on the definitive agreement, Advantage will sell for an
enterprise value of approximately $1.05 billion, subject to
pre- and post-closing adjustments. The sale transaction is
expected to close by March 31, 2006, subject to certain
closing conditions.
Business Loan Express, LLC. The Companys
investment in BLX totaled $299.4 million at cost and
$357.1 million at value at December 31, 2005, and
$280.4 million at cost and $335.2 million at value at
December 31, 2004. BLX is a small business lender that
participates in the U.S. Small Business
Administrations 7(a) Guaranteed Loan Program. At
December 31, 2005 and 2004, the
F-25
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
Company owned 94.9% of the voting Class C equity interests.
BLX has an equity appreciation rights plan for management which
will dilute the value available to the Class C equity
interest holders. BLX is headquartered in New York, NY.
Total interest and related portfolio income earned from the
Companys investment in BLX for the years ended
December 31, 2005, 2004, and 2003, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
($ in millions) |
|
|
|
|
|
|
Interest income on subordinated debt and Class A equity
interests
|
|
$ |
14.3 |
|
|
$ |
23.2 |
|
|
$ |
21.9 |
|
Dividend income on Class B equity interests
|
|
|
14.0 |
|
|
|
14.8 |
|
|
|
7.8 |
|
Loan prepayment premiums
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Fees and other income
|
|
|
9.2 |
|
|
|
12.0 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
37.5 |
|
|
$ |
50.0 |
|
|
$ |
46.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income from BLX for the years ended
December 31, 2005, 2004, and 2003, included interest and
dividend income of $8.9 million, $25.4 million, and
$17.5 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 $2.9 million and $51.7 million
for the years ended December 31, 2005 and 2003,
respectively, and a net decrease in unrealized appreciation of
$32.3 million for the year ended December 31, 2004.
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.
At December 31, 2005, the Company had a commitment to BLX
of $30.0 million in the form of a subordinated revolving
credit facility to provide working capital to BLX which matures
on April 30, 2006. There was $10.0 million outstanding
under this facility at December 31, 2005.
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. 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
F-26
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
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
December 31, 2005 and 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
December 31, 2005 and 2004, was $135.4 million and
$94.6 million, respectively. 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
December 31, 2005 and 2004. At December 31, 2005 and
2004, the Company had also provided four standby letters of
credit totaling $34.1 million and $35.6 million,
respectively, 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 $6.3 million, $6.0 million, and
$4.1 million for the years ended December 31, 2005,
2004, and 2003, respectively.
The Hillman Companies, Inc. 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 year ended
December 31, 2004, the Company realized a gain of
$150.3 million on the transaction including a gain of
$1.3 million realized after closing, resulting from
post-closing adjustments, which provided additional cash
consideration to the Company in the same amount.
Collateralized Loan Obligations (CLOs)
and Collateralized Debt
Obligations (CDOs) At December 31,
2005, the Company owned bonds and preferred shares/income notes
in two collateralized loan obligations (CLOs) totaling
$89.3 million at value and bonds in one collateralized debt
obligation (CDO) totaling $28.5 million at value. At
December 31, 2004, the Company owned
F-27
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
the preferred shares in one CLO totaling $23.9 million at
value. These CLOs and CDO are managed by Callidus Capital
Corporation.
The bonds, preferred shares and income notes of the CLOs and CDO
in which the Company has invested are junior in priority for
payment of interest and principal to the more senior notes
issued by the CLOs and CDO. Cash flow from the underlying
collateral assets in the CLOs and CDO is generally allocated
first to the senior bonds in order of priority, then any
remaining cash flow is generally distributed to the preferred
shareholders and income note holders. To the extent there are
defaults and unrecoverable losses on the underlying collateral
assets that result in reduced cash flows, the preferred
shares/income notes will bear this loss first and then the
subordinated bonds would bear any loss after the preferred
shares/income notes.
At December 31, 2005, the face value of the CLO and CDO
bonds held by the Company were subordinate to approximately 82%
to 85% of the face value of the securities issued in these CLOs
and CDO. At December 31, 2005 and 2004, the face value of
the CLO and CDO preferred shares/income notes held by the
Company were subordinate to approximately 86% and 91%,
respectively, of the face value of the securities issued in
these various CLOs and CDO.
At December 31, 2005 and 2004, the Company owned CLO and
CDO investments issued in three and one issuances, respectively,
which had underlying collateral assets, consisting primarily of
senior debt, that were issued by 336 issuers and 151 issuers,
respectively, and had balances as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
($ in millions) |
|
|
|
|
Bonds
|
|
$ |
230.7 |
|
|
$ |
|
|
Syndicated Loans
|
|
|
704.0 |
|
|
|
377.0 |
|
Cash(1)
|
|
|
238.4 |
|
|
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
Total underlying collateral assets
|
|
$ |
1,173.1 |
|
|
$ |
389.7 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes undrawn liability amounts. |
At December 31, 2005 and 2004, there were no delinquencies
in the underlying collateral assets of the CLO and CDO issuances
owned by the Company.
The initial yields on the CLO and CDO bonds, preferred shares
and income notes are based on the estimated future cash flows
from the underlying collateral assets expected to be paid to
these CLO and CDO classes. As each CLO and CDO bond, preferred
share or income note ages, the estimated future cash flows will
be updated based on the estimated performance of the underlying
collateral assets, and the respective yield will be adjusted as
necessary. As future cash flows are subject to uncertainties and
contingencies that are difficult to predict and are subject to
future events that may alter current assumptions, no assurance
can be given that the anticipated yields to maturity will be
achieved.
F-28
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
Loans and Debt Securities on Non-Accrual Status.
At December 31, 2005 and 2004, private finance 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
|
|
$ |
15,622 |
|
|
$ |
34,374 |
|
|
Companies less than 5% owned
|
|
|
11,417 |
|
|
|
16,550 |
|
Loans and debt securities not in workout status
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
58,047 |
|
|
|
29,368 |
|
|
Companies 5% to 25% owned
|
|
|
534 |
|
|
|
678 |
|
|
Companies less than 5% owned
|
|
|
49,458 |
|
|
|
15,864 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
135,078 |
|
|
$ |
96,834 |
|
|
|
|
|
|
|
|
|
|
Industry and Geographic Compositions. The industry
and geographic compositions of the private finance portfolio at
value at December 31, 2005 and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Industry
|
|
|
|
|
|
|
|
|
Business services
|
|
|
45 |
% |
|
|
32 |
% |
Financial services
|
|
|
15 |
|
|
|
21 |
|
Consumer products
|
|
|
14 |
|
|
|
20 |
|
Industrial products
|
|
|
10 |
|
|
|
8 |
|
Retail
|
|
|
3 |
|
|
|
2 |
|
Healthcare services
|
|
|
2 |
|
|
|
8 |
|
Energy services
|
|
|
2 |
|
|
|
2 |
|
Broadcasting and cable
|
|
|
1 |
|
|
|
2 |
|
Other(1)
|
|
|
8 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Geographic
Region(2)
|
|
|
|
|
|
|
|
|
West
|
|
|
34 |
% |
|
|
27 |
% |
Mid-Atlantic
|
|
|
29 |
|
|
|
40 |
|
Midwest
|
|
|
21 |
|
|
|
15 |
|
Southeast
|
|
|
12 |
|
|
|
14 |
|
Northeast
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes investments in senior debt CDO and CLO funds. These
funds invest in senior debt representing a variety of industries. |
|
|
(2) |
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 in other geographic regions. |
F-29
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
|
|
|
Commercial Real Estate Finance |
At December 31, 2005 and 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
|
|
|
103,878 |
|
|
|
102,569 |
|
|
|
7.6% |
|
|
|
99,373 |
|
|
|
95,056 |
|
|
|
6.8% |
|
Real estate owned
|
|
|
14,240 |
|
|
|
13,932 |
|
|
|
|
|
|
|
16,170 |
|
|
|
16,871 |
|
|
|
|
|
Equity interests
|
|
|
13,577 |
|
|
|
10,564 |
|
|
|
|
|
|
|
11,169 |
|
|
|
13,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
131,695 |
|
|
$ |
127,065 |
|
|
|
|
|
|
$ |
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 year ended
December 31, 2005, the Company received a total of
$1.4 million under the transition services agreement as
reimbursement for employee and administrative expenses.
F-30
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
CMBS. At December 31, 2004, CMBS bonds consisted of
the following:
|
|
|
|
|
|
|
2004 |
($ in thousands) |
|
|
Face
|
|
$ |
1,043,688 |
|
Original issue discount
|
|
|
(660,378 |
) |
|
|
|
|
|
Cost
|
|
$ |
383,310 |
|
|
|
|
|
|
Value
|
|
$ |
373,805 |
|
|
|
|
|
|
The underlying rating classes of the CMBS bonds at cost and
value at December 31, 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
Percentage |
|
|
|
|
of Total |
|
|
Cost |
|
Value |
|
Value |
($ in thousands) |
|
|
|
|
|
|
AA
|
|
$ |
4,669 |
|
|
$ |
4,658 |
|
|
|
1.2 |
% |
A
|
|
|
4,549 |
|
|
|
4,539 |
|
|
|
1.2 |
|
BBB-
|
|
|
9,029 |
|
|
|
9,016 |
|
|
|
2.4 |
|
BB+
|
|
|
7,195 |
|
|
|
7,695 |
|
|
|
2.1 |
|
BB
|
|
|
5,940 |
|
|
|
5,952 |
|
|
|
1.6 |
|
BB-
|
|
|
7,490 |
|
|
|
7,676 |
|
|
|
2.1 |
|
B+
|
|
|
13,123 |
|
|
|
15,318 |
|
|
|
4.1 |
|
B
|
|
|
61,767 |
|
|
|
62,582 |
|
|
|
16.7 |
|
B-
|
|
|
89,341 |
|
|
|
88,099 |
|
|
|
23.6 |
|
CCC+
|
|
|
22,506 |
|
|
|
18,585 |
|
|
|
5.0 |
|
CCC
|
|
|
24,078 |
|
|
|
20,306 |
|
|
|
5.4 |
|
CCC-
|
|
|
|
|
|
|
|
|
|
|
|
|
CC
|
|
|
998 |
|
|
|
610 |
|
|
|
0.2 |
|
Unrated
|
|
|
132,625 |
|
|
|
128,769 |
|
|
|
34.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
383,310 |
|
|
$ |
373,805 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The CMBS bonds in which the Company invested were junior in
priority for payment of interest and principal to the more
senior tranches of the related CMBS bond issuance. Cash flow
from the underlying mortgages was generally allocated first to
the senior tranches in order of priority, with the most senior
tranches having a priority right to the cash flow. Then, any
remaining cash flow was allocated, generally, among the other
tranches in order of their relative seniority. To the extent
there were defaults and unrecoverable losses on the underlying
mortgages or the properties securing those mortgages resulting
in reduced cash flows, the most subordinate tranche bore this
loss first. At December 31, 2004, the face value of the
CMBS bonds rated BBB- and below held by the Company were
subordinate to 84% to 99% of the face value of the bonds issued
in these various CMBS transactions. Given that the
non-investment grade CMBS bonds in which the Company invested
were junior in priority for payment of interest and principal,
the Company invested in these CMBS bonds at a discount from the
face amount of the bonds.
F-31
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
At December 31, 2004, the Company held CMBS bonds in
45 separate CMBS issuances. The underlying collateral pool,
consisting of commercial mortgage loans and real estate owned
(REO) properties, for these CMBS issuances consisted
of the following at December 31, 2004:
|
|
|
|
|
|
|
2004 |
($ in millions) |
|
|
Approximate number of loans and REO
properties(1)
|
|
|
6,200 |
|
Total outstanding principal balance
|
|
|
$42,759 |
|
Loans over 30 days delinquent or classified as REO
properties(2)
|
|
|
1.6%(3) |
|
|
|
(1) |
Includes approximately 39 REO properties obtained through the
foreclosure of commercial mortgage loans at December 31,
2004. |
|
(2) |
As a percentage of total outstanding principal balance. |
|
(3) |
At December 31, 2004, the Companys investments
included bonds in the first loss, unrated bond class in 43
separate CMBS issuances. For these issuances, loans over
30 days delinquent or classified as REO properties were
1.7% of the total outstanding principal balance at
December 31, 2004. |
The Companys yield on its CMBS bonds was based upon a
number of assumptions that were subject to certain business and
economic uncertainties and contingencies. Examples include the
timing and magnitude of credit losses on the mortgage loans
underlying the CMBS bonds that are a result of the general
condition of the real estate market, including vacancies,
changes in market rental rates and tenant credit quality. The
initial yield on each CMBS bond was generally computed assuming
an approximate 1% loss rate on its underlying collateral
mortgage pool, with the estimated losses being assumed to occur
in three equal installments in years three, six, and nine. As
each CMBS bond aged, the expected amount of losses and the
expected timing of recognition of such losses in the underlying
collateral pool was updated, and the respective yield was
adjusted as appropriate. Changes in estimated yield were
recognized as an adjustment to the estimated yield over the
remaining life of the CMBS bonds from the date the estimated
yield was changed.
At December 31, 2004, the unamortized discount related to the
CMBS bond portfolio was $660.4 million and the Company had
set aside $346.5 million of this unamortized discount to
absorb potential future losses. The yield on the CMBS bonds of
14.6% at December 31, 2004, assumed that this amount that
has been set aside would not be amortized.
At December 31, 2004, the Company had reduced the face amount
and the original issue discount on the CMBS bonds for
specifically identified losses of $110.3 million which had
the effect of also reducing the amount of unamortized discount
set aside to absorb potential future losses since those losses
have now been recognized. The reduction of the face amount and
the original issue discount on the CMBS bonds to reflect
specifically identified losses did not result in a change in the
cost basis of the CMBS bonds.
The Company completed a securitization of $53.7 million of
commercial mortgage loans during 2004. In connection with this
securitization, the Company received proceeds, net of costs, of
$54.0 million, which included cash, A and AA rated bonds,
and LLC interests. The bonds and LLC interests are included in
the CMBS portfolio at December 31, 2004. The realized gain
from this securitization was $0.3 million.
CDOs. At December 31, 2004, the Company owned
BB+ rated bonds in one CDO totaling $5.9 million at
value and preferred shares in nine CDOs totaling
$206.7 million at value.
F-32
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
The bonds and preferred shares of the CDOs in which the Company
invested were junior in priority for payment of interest and
principal to the more senior tranches of debt issued by the
CDOs. Cash flow from the underlying collateral generally was
allocated first to the senior bond tranches in order of
priority, with the most senior tranches having a priority right
to the cash flow. Then, any remaining cash flow was generally
distributed to the preferred shareholders. To the extent there
were defaults and unrecoverable losses on the underlying
collateral that result in reduced cash flows, the preferred
shares bore this loss first and then the bonds bore any loss
after the preferred shares. At December 31, 2004, the
Companys bonds and preferred shares in the CDOs were
subordinate to 70% to 98% of the more senior tranches of debt
issued in the various CDO transactions. In addition, included in
the CMBS collateral for the CDOs at December 31, 2004, were
certain CMBS bonds that were senior in priority of repayment to
certain lower rated CMBS bonds held directly by the Company.
At December 31, 2004, the underlying collateral for the
Companys investment in the outstanding CDO issuances had
balances as follows:
|
|
|
|
|
|
($ in millions) |
|
2004 |
|
|
|
Investment grade REIT
debt(1)
|
|
|
$1,532.5 |
|
Investment grade CMBS
bonds(2)
|
|
|
918.8 |
|
Non-investment grade CMBS
bonds(3)
|
|
|
1,636.4 |
|
Other collateral
|
|
|
355.8 |
|
|
|
|
|
|
|
Total collateral
|
|
|
$4,443.5 |
|
|
|
|
|
|
|
|
(1) |
Issued by 44 REITs for the period presented. |
(2) |
Issued in 121 transactions for the period presented. |
(3) |
Issued in 109 transactions for the period presented. |
The initial yields on the CDO bonds and preferred shares were
based on the estimated future cash flows from the assets in the
underlying collateral pool to be paid to these CDO classes. As
each CDO bond and preferred share aged, the estimated future
cash flows were updated based on the estimated performance of
the collateral, and the respective yield was adjusted as
necessary.
As of December 31, 2004 and 2003, the Company acted as the
disposition consultant with respect to six and five,
respectively, of the CDOs, which allowed the Company to approve
disposition plans for individual collateral securities. For
these services, the Company collected annual fees based on the
outstanding collateral pool balance, and for the years ended
December 31, 2004 and 2003, these fees totaled
$1.7 million and $1.2 million, respectively.
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 December 31, 2005, approximately
97% and 3% 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. At December 31, 2005 and 2004, loans
with a value of $20.8 million and $18.0 million,
respectively, were not accruing interest. Loans greater than
120 days delinquent generally do not accrue interest.
F-33
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
Equity interests consist primarily of equity securities issued
by privately owned companies that invest in single real estate
properties. These equity interests may be subject to certain
restrictions on their resale and are generally illiquid. Equity
interests generally do not produce a current return, but are
generally held in anticipation of investment appreciation and
ultimate realized gain on sale.
The property types and the geographic composition securing the
commercial mortgage loans and equity interests at value at
December 31, 2005 and 2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Property Type
|
|
|
|
|
|
|
|
|
Hospitality
|
|
|
37 |
% |
|
|
49 |
% |
Housing
|
|
|
30 |
|
|
|
5 |
|
Retail
|
|
|
16 |
|
|
|
21 |
|
Office
|
|
|
11 |
|
|
|
17 |
|
Other
|
|
|
6 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Geographic Region
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
31 |
% |
|
|
20 |
% |
Southeast
|
|
|
25 |
|
|
|
26 |
|
Midwest
|
|
|
21 |
|
|
|
30 |
|
West
|
|
|
18 |
|
|
|
16 |
|
Northeast
|
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Note 4. Debt
At December 31, 2005 and 2004, the Company had the
following debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
Annual |
|
|
Facility |
|
Amount |
|
Interest |
|
Facility |
|
Amount |
|
Interest |
|
|
Amount |
|
Drawn |
|
Cost(1) |
|
Amount |
|
Drawn |
|
Cost(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable
|
|
$ |
1,164,540 |
|
|
$ |
1,164,540 |
|
|
|
6.2 |
% |
|
$ |
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
|
|
|
1,193,040 |
|
|
|
1,193,040 |
|
|
|
6.3 |
% |
|
|
1,071,868 |
|
|
|
1,064,568 |
|
|
|
6.6 |
% |
Revolving line of credit
|
|
|
772,500 |
|
|
|
91,750 |
|
|
|
5.6 |
%(2) |
|
|
552,500 |
|
|
|
112,000 |
|
|
|
4.7 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
1,965,540 |
|
|
$ |
1,284,790 |
|
|
|
6.5 |
%(3) |
|
$ |
1,624,368 |
|
|
$ |
1,176,568 |
|
|
|
6.6 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
The annual interest cost reflects the interest rate payable for
borrowings under the revolving line of credit. In addition to
the current interest rate payable, there were annual costs of
commitment fees and other facility fees of $3.3 million and
$1.8 million at December 31, 2005 and 2004,
respectively. |
|
(3) |
The annual interest cost for total debt includes the annual cost
of commitment fees and other facility fees regardless of the
amount outstanding on the facility as of the balance sheet date. |
F-34
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
Notes Payable and Debentures
Unsecured Notes Payable. The Company has issued
unsecured long-term notes to institutional investors. The notes
require semi-annual interest payments until maturity and have
original terms of five or seven years. At December 31,
2005, the notes had remaining maturities of four months to seven
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.
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%.
On November 15, 2004, the Company issued $252.5 million of
five-year and $72.5 million of seven-year unsecured
long-term notes, primarily to insurance companies. The five- and
seven-year notes have fixed interest rates of 5.5% and 6.0%,
respectively, and have substantially the same terms as the
Companys existing unsecured long-term notes. In addition,
on November 15, 2004, $102.0 million of the
Companys existing unsecured long-term notes matured and
the Company used the proceeds from the new long-term note
issuance to repay this debt. During 2004, the Company also
repaid $112.0 million of the unsecured notes payable that
matured on May 1, 2004.
On March 25, 2004, the Company 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.
SBA Debentures. At December 31, 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 December 31, 2005, the debentures had remaining
maturities of five to six years. The debentures 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 years ended December 31, 2005 and 2004, the Company
repaid $49.0 million and $17.0 million, respectively,
of the SBA debentures.
F-35
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
Scheduled Maturities. Scheduled future maturities
of notes payable and debentures at December 31, 2005, were
as follows:
|
|
|
|
|
|
Year |
|
Amount Maturing |
|
|
|
|
|
($ in thousands) |
2006
|
|
$ |
175,000 |
|
2007
|
|
|
|
|
2008
|
|
|
153,000 |
|
2009
|
|
|
267,040 |
|
2010
|
|
|
408,000 |
|
Thereafter
|
|
|
190,000 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,193,040 |
|
|
|
|
|
|
At December 31, 2005, the Company had an unsecured
revolving line of credit with a committed amount of
$772.5 million. The revolving line of credit, which closed
on September 30, 2005, replaced the Companys previous
revolving line of credit and expires on September 30, 2008.
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
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.
At December 31, 2004, the Company had an unsecured
revolving line of credit with a committed amount of
$552.5 million. During the second quarter of 2005, the
Company extended the maturity of the line of credit to April
2006 under substantially similar terms, which required the
payment of an extension fee of 0.3% on existing commitments of
$587.5 million. 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.
The annual cost of commitment fees and other facility fees was
$3.3 million and $1.8 million at December 31,
2005 and 2004, respectively.
The average debt outstanding on the revolving line of credit was
$33.3 million and $75.2 million, respectively, for the
years ended December 31, 2005 and 2004. The maximum amount
borrowed under this facility and the weighted average stated
interest rate for the years ended December 31, 2005 and
2004, were $263.3 million and 4.4%, respectively, and
$353.0 million and 3.1%, respectively. At December 31,
2005, the amount available under the revolving line of credit
was $643.6 million,
F-36
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
net of amounts committed for standby letters of credit of
$37.1 million issued under the credit facility.
The Company records debt at cost. The fair value of the
Companys outstanding debt was approximately
$1.3 billion and $1.2 billion at December 31,
2005 and 2004, respectively. The fair value of the
Companys debt was determined using market interest rates
as of the balance sheet date for similar instruments.
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 December 31, 2005
and 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 December 31, 2005 and
2004, the Company had issued guarantees of debt, rental
obligations, lease obligations and severance obligations
aggregating $148.6 million and $100.2 million,
respectively, and had extended standby letters of credit
aggregating $37.1 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
$185.7 million and $144.3 million at December 31,
2005 and 2004, respectively. At December 31, 2005 and 2004,
$2.5 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.
As of December 31, 2005, the guarantees and standby letters
of credit expired as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
After 2010 |
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$ |
148.6 |
|
|
$ |
1.3 |
|
|
$ |
136.2 |
|
|
$ |
3.1 |
|
|
$ |
2.5 |
|
|
$ |
|
|
|
$ |
5.5 |
|
Standby letters of
credit(1)
|
|
|
37.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
37.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
185.7 |
|
|
$ |
1.4 |
|
|
$ |
136.2 |
|
|
$ |
40.1 |
|
|
$ |
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. |
F-37
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5. Guarantees, continued
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 December 31, 2005, the Company had outstanding
commitments to fund investments totaling $302.8 million,
including $221.6 million related to private finance
investments and $81.2 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 $11.4 million at
December 31, 2005.
Note 6. Shareholders Equity
Sales of common stock for the years ended December 31,
2005, 2004, and 2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005(1) |
|
2004 |
|
2003 |
(in thousands) |
|
|
|
|
|
|
Number of common shares
|
|
|
|
|
|
|
3,000 |
|
|
|
18,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$ |
|
|
|
$ |
75,000 |
|
|
$ |
442,680 |
|
Less costs, including underwriting fees
|
|
|
|
|
|
|
(4,749 |
) |
|
|
(20,675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
$ |
|
|
|
$ |
70,251 |
|
|
$ |
422,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Company did not sell any common stock during the year ended
December 31, 2005. |
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 year ended
December 31, 2005, 0.1 million shares of common stock
with a value of $3.2 million as consideration for an
investment in Legacy Partners Group, LLC during the year ended
December 31, 2004, and 32 thousand shares of common
stock with a value of $0.9 million as consideration for an
investment in Callidus Capital Corporation for the year ended
December 31, 2003.
The Company issued 3.0 million shares, 1.6 million
shares, and 0.4 million shares of common stock upon the
exercise of stock options during the years ended
December 31, 2005, 2004, and 2003, 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
years ended December 31, 2005, 2004, and 2003, the Company
issued new shares in order to satisfy dividend reinvestment
requests.
F-38
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6. Shareholders Equity, continued
Dividend reinvestment plan activity for the years ended
December 31, 2005, 2004, and 2003, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
Shares issued
|
|
|
331 |
|
|
|
222 |
|
|
|
279 |
|
Average price per share
|
|
$ |
28.00 |
|
|
$ |
26.34 |
|
|
$ |
23.60 |
|
Note 7. Earnings Per Common Share
Earnings per common share for the years ended December 31,
2005, 2004, and 2003, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
872,814 |
|
|
$ |
249,486 |
|
|
$ |
192,011 |
|
Less preferred stock dividends
|
|
|
(10 |
) |
|
|
(62 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders
|
|
$ |
872,804 |
|
|
$ |
249,424 |
|
|
$ |
191,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding basic
|
|
|
134,700 |
|
|
|
129,828 |
|
|
|
116,747 |
|
Dilutive options outstanding to officers
|
|
|
2,574 |
|
|
|
2,630 |
|
|
|
1,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding diluted
|
|
|
137,274 |
|
|
|
132,458 |
|
|
|
118,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
6.48 |
|
|
$ |
1.92 |
|
|
$ |
1.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
6.36 |
|
|
$ |
1.88 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8. Employee Compensation Plans
The Companys 401(k) retirement investment plan is open to
all of its full-time employees who are at least 21 years of
age. The employees may elect voluntary pre-tax wage deferrals
ranging from 0% to 100% of eligible compensation for the year up
to $14 thousand annually for the 2005 plan year. Plan
participants who were age 50 or older during the 2005 plan year
were eligible to defer an additional $4 thousand during the
year. The Company makes contributions to the 401(k) plan of up
to 5% of each participants eligible compensation for the
year up to a maximum compensation permitted by the IRS, which
fully vests at the time of contribution. For the year ended
December 31, 2005, the maximum compensation was
$0.2 million. Employer contributions that exceed the IRS
limitation are directed to the participants deferred
compensation plan account. Total 401(k) contribution expense for
the years ended December 31, 2005, 2004, and 2003, was
$1.0 million, $0.9 million, and $0.7 million,
respectively.
The Company also has a deferred compensation plan. Eligible
participants in the deferred compensation plan may elect to
defer some of their compensation and have such compensation
credited to a participant account. In addition, the Company
makes contributions to the deferred compensation plan on
compensation deemed ineligible for a 401(k) contribution.
Contribution
F-39
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Employee Compensation Plans, continued
expense for the deferred compensation plan for the years ended
December 31, 2005, 2004, and 2003, was $0.7 million,
$0.7 million, and $0.4 million, respectively. All
amounts credited to a participants account 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 deferred compensation plan are at all
times 100% vested and non-forfeitable. A participants
account shall become distributable upon his or her separation
from service, retirement, disability, death, or at a future
determined date. All deferred compensation plan accounts will be
distributed in the event of a change of control of the Company
or in the event of the Companys insolvency. 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 December 31, 2005 and 2004, totaled
$16.6 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 the first
quarter of 2004. In conjunction with the program, the Board of
Directors has approved a non-qualified deferred compensation
plan (DCP II), which is administered through a
trust by a third-party trustee. The administrator of the
DCP II is the Compensation Committee of the Companys
Board of Directors (DCP II Administrator).
The IPA is generally determined annually at the beginning of
each year but may be adjusted throughout the year. The IPA 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 years
ended December 31, 2005 and 2004, 0.3 million shares
and 0.5 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.
Sixty days following a distributable event, the Company and each
participant
F-40
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Employee Compensation Plans, continued
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 December 31,
2005 and 2004, common stock held in DCP II was
$19.5 million and $13.5 million, respectively, and the
IPA liability was $22.3 million and $13.1 million,
respectively.
The IPA expenses for the years ended December 31, 2005 and
2004, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
($ in millions) |
|
|
|
|
IPA contributions
|
|
$ |
7.0 |
|
|
$ |
13.4 |
|
IPA mark to market expense (benefit)
|
|
|
2.0 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total IPA expense
|
|
$ |
9.0 |
|
|
$ |
13.0 |
|
|
|
|
|
|
|
|
|
|
The Company also has an individual performance bonus
(IPB) plan which was established in 2005. The IPB
for 2005 was distributed in cash to award recipients in equal
bi-weekly installments
as long as the recipient remained employed by the Company. If a
recipient terminated employment during the year, any remaining
cash payments under the IPB were forfeited. For the year ended
December 31, 2005, the IPB expense was $6.9 million.
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 to officers generally vest ratably
over a three- to five-year period. Options granted to
non-officer directors vest on the grant date.
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
F-41
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9. Stock Option Plan, continued
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.
At December 31, 2005, there were 32.2 million shares
authorized under the Option Plan and the number of shares
available to be granted under the Option Plan was
3.0 million. At December 31, 2004, there were
32.2 million shares authorized under the Option Plan and
the number of shares available to be granted under the Option
Plan was 7.9 million.
Information with respect to options granted, exercised and
forfeited under the Option Plan for the years ended
December 31, 2005, 2004, and 2003, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
Average |
|
|
|
|
Exercise Price |
|
|
Shares |
|
Per Share |
(in thousands, except per share amounts) |
|
|
|
|
Options outstanding at January 1, 2003
|
|
|
14,689 |
|
|
$ |
20.57 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,045 |
|
|
$ |
22.74 |
|
Exercised
|
|
|
(408 |
) |
|
$ |
21.01 |
|
Forfeited
|
|
|
(442 |
) |
|
$ |
21.66 |
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2003
|
|
|
14,884 |
|
|
$ |
20.68 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,170 |
|
|
$ |
28.34 |
|
Exercised
|
|
|
(1,635 |
) |
|
$ |
19.73 |
|
Forfeited
|
|
|
(1,059 |
) |
|
$ |
26.07 |
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2004
|
|
|
20,360 |
|
|
$ |
23.55 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
6,815 |
|
|
$ |
27.37 |
|
Exercised
|
|
|
(2,988 |
) |
|
$ |
22.32 |
|
Forfeited
|
|
|
(1,928 |
) |
|
$ |
27.83 |
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2005
|
|
|
22,259 |
|
|
$ |
24.52 |
|
|
|
|
|
|
|
|
|
|
F-42
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9. Stock Option Plan, continued
The following table summarizes information about stock options
outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
Exercisable |
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Weighted |
|
|
|
Weighted |
|
|
Total |
|
Remaining |
|
Average |
|
Total |
|
Average |
Range of |
|
Number |
|
Contractual Life |
|
Exercise |
|
Number |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
(Years) |
|
Price |
|
Exercisable |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts and years) |
|
|
$16.81 $17.75
|
|
|
2,244 |
|
|
|
4.36 |
|
|
$ |
16.92 |
|
|
|
2,244 |
|
|
$ |
16.92 |
|
$17.88 $21.38
|
|
|
2,056 |
|
|
|
2.23 |
|
|
$ |
20.99 |
|
|
|
2,056 |
|
|
$ |
20.99 |
|
$21.52
|
|
|
3,423 |
|
|
|
6.95 |
|
|
$ |
21.52 |
|
|
|
3,423 |
|
|
$ |
21.52 |
|
$21.59 $24.15
|
|
|
2,334 |
|
|
|
6.17 |
|
|
$ |
22.07 |
|
|
|
2,072 |
|
|
$ |
21.92 |
|
$24.44 $26.80
|
|
|
1,965 |
|
|
|
8.45 |
|
|
$ |
26.14 |
|
|
|
1,023 |
|
|
$ |
26.16 |
|
$27.00 $27.38
|
|
|
240 |
|
|
|
8.17 |
|
|
$ |
27.12 |
|
|
|
125 |
|
|
$ |
27.15 |
|
$27.51
|
|
|
5,575 |
|
|
|
9.59 |
|
|
$ |
27.51 |
|
|
|
|
|
|
$ |
|
|
$28.98
|
|
|
4,422 |
|
|
|
8.19 |
|
|
$ |
28.98 |
|
|
|
2,205 |
|
|
$ |
28.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,259 |
|
|
|
7.22 |
|
|
$ |
24.52 |
|
|
|
13,148 |
|
|
$ |
22.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for its stock options as required by APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and accordingly no compensation cost has been
recognized as the exercise price equals the market price on the
date of grant.
Notes Receivable from the
Sale of Common Stock
As a business development company under the Investment Company
Act of 1940, the Company is entitled to provide and has provided
loans to the Companys officers in connection with the
exercise of options. However, as a result of provisions of the
Sarbanes-Oxley Act of 2002, the Company is prohibited from
making new loans to its executive officers. The outstanding
loans are full recourse, have varying terms not exceeding ten
years, bear interest at the applicable federal interest rate in
effect at the date of issue and have been recorded as a
reduction to shareholders equity. At December 31,
2005 and 2004, the Company had outstanding loans to officers of
$3.9 million and $5.5 million, respectively. Officers
with outstanding loans repaid principal of $1.6 million,
$13.2 million, and $6.1 million, for the years ended
December 31, 2005, 2004, and 2003, respectively. The
Company recognized interest income from these loans of
$0.2 million, $0.5 million, and $1.3 million,
respectively, during these same periods. This interest income is
included in interest and dividends for companies less than 5%
owned.
F-43
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Dividends and Distributions and Taxes
For the years ended December 31, 2005, 2004, and 2003, the
Company declared the following distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Total |
|
Total Per |
|
Total |
|
Total Per |
|
Total |
|
Total Per |
|
|
Amount |
|
Share |
|
Amount |
|
Share |
|
Amount |
|
Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$ |
76,100 |
|
|
$ |
0.57 |
|
|
$ |
73,357 |
|
|
$ |
0.57 |
|
|
$ |
62,971 |
|
|
$ |
0.57 |
|
Second quarter
|
|
|
76,229 |
|
|
|
0.57 |
|
|
|
73,465 |
|
|
|
0.57 |
|
|
|
64,503 |
|
|
|
0.57 |
|
Third quarter
|
|
|
78,834 |
|
|
|
0.58 |
|
|
|
74,010 |
|
|
|
0.57 |
|
|
|
68,685 |
|
|
|
0.57 |
|
Fourth quarter
|
|
|
79,247 |
|
|
|
0.58 |
|
|
|
75,833 |
|
|
|
0.57 |
|
|
|
71,679 |
|
|
|
0.57 |
|
Extra dividend
|
|
|
4,099 |
|
|
|
0.03 |
|
|
|
2,661 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to common shareholders
|
|
$ |
314,509 |
|
|
$ |
2.33 |
|
|
$ |
299,326 |
|
|
$ |
2.30 |
|
|
$ |
267,838 |
|
|
$ |
2.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For income tax purposes, distributions for 2005, 2004, and 2003,
were composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Total |
|
Total Per |
|
Total |
|
Total Per |
|
Total |
|
Total Per |
|
|
Amount |
|
Share |
|
Amount |
|
Share |
|
Amount |
|
Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$ |
157,255 |
|
|
$ |
1.17 |
|
|
$ |
145,365 |
|
|
$ |
1.12 |
|
|
$ |
212,272 |
|
|
$ |
1.81 |
|
Long-term capital gains
|
|
|
157,254 |
|
|
|
1.16 |
|
|
|
153,961 |
|
|
|
1.18 |
|
|
|
55,566 |
|
|
|
0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions
to common
shareholders(1)(2)(3)
|
|
$ |
314,509 |
|
|
$ |
2.33 |
|
|
$ |
299,326 |
|
|
$ |
2.30 |
|
|
$ |
267,838 |
|
|
$ |
2.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
For the years ended December 31, 2005, 2004 and 2003,
ordinary income included dividend income of approximately $0.03
per share, $0.04 per share, and $0.05 per share,
respectively, that qualified to be taxed at the 15% maximum
capital gains rate. For the year ended December 31, 2005,
capital gain income subject to the 25% rate on unrecognized Code
section 1250 gains was $0.0097 per share. |
|
(2) |
For the year ended December 31, 2005, ordinary income that
was classified as excess inclusion was $0.0063 per share. |
|
(3) |
For certain eligible corporate shareholders, the dividend
received deduction for 2005, 2004 and 2003 was $0.034 per share,
$0.038 per share, and $0.044 per share, respectively. |
F-44
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Dividends and Distributions and Taxes,
continued
The following table summarizes the differences between financial
statement net increase in net assets resulting from operations
and taxable income available for distribution to shareholders
for the years ended December 31, 2005, 2004, and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
($ in thousands) |
|
(ESTIMATED)(1) |
|
|
|
|
Financial statement net increase in net assets resulting from
operations
|
|
$ |
872,814 |
|
|
$ |
249,486 |
|
|
$ |
192,011 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(462,092 |
) |
|
|
68,712 |
|
|
|
78,466 |
|
|
Amortization of discounts and fees
|
|
|
17,527 |
|
|
|
(5,420 |
) |
|
|
948 |
|
|
Interest- and dividend-related items
|
|
|
1,084 |
|
|
|
6,277 |
|
|
|
(2,400 |
) |
|
Employee compensation-related items
|
|
|
2,449 |
|
|
|
7,081 |
|
|
|
2,902 |
|
|
Net income (loss) from partnerships and limited liability
companies(2)
|
|
|
24,753 |
|
|
|
8,646 |
|
|
|
(1,316 |
) |
|
Realized gains recognized (deferred) through installment
treatment(3)
|
|
|
954 |
|
|
|
(33,733 |
) |
|
|
|
|
|
Net loss from consolidated SBIC subsidiary
|
|
|
(10,677 |
) |
|
|
15,223 |
|
|
|
|
|
|
Net (income) loss from consolidated taxable subsidiary, net of
tax
|
|
|
(5,022 |
) |
|
|
(1,008 |
) |
|
|
3,864 |
|
|
Other, including excise tax
|
|
|
10,520 |
|
|
|
7,913 |
|
|
|
(8,160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
$ |
452,310 |
|
|
$ |
323,177 |
|
|
$ |
266,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Companys taxable income for 2005 is an estimate and
will not be finally determined until the Company files its 2005
tax return in September 2006. Therefore, the final taxable
income may be different than this estimate. |
|
(2) |
Includes taxable income passed through to the Company from
Business Loan Express, LLC in excess of interest and
related portfolio income from BLX included in the financial
statements totaling $15.4 million, $10.0 million, and
$3.4 million for the years ended December 31, 2005,
2004 and 2003, respectively. See Note 3 for additional
related disclosure. |
|
(3) |
2004 includes the deferral of long-term capital gains through
installment treatment related to the Companys sale of its
control equity investment in Hillman. |
Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in
the recognition of income and expenses, and generally excludes
net unrealized appreciation or depreciation, as gains or losses
are not included in taxable income until they are realized.
The Company must distribute at least 90% of its investment
company taxable income to qualify for pass-through tax treatment
and maintain its RIC status. The Company has distributed and
currently intends to distribute or retain through a deemed
distribution sufficient dividends to eliminate taxable income.
Dividends declared and paid by the Company in a year generally
differ from taxable income for that year as such dividends may
include the distribution of current year taxable income, less
amounts carried over into the following year, and the
distribution of prior year taxable income
F-45
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Dividends and Distributions and Taxes,
continued
carried over into and distributed in the current year. For
income tax purposes, distributions for 2005, 2004, and 2003,
were made from taxable income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
(ESTIMATED)(1) |
|
|
|
|
Taxable income
|
|
$ |
452,310 |
|
|
$ |
323,177 |
|
|
$ |
266,315 |
|
Taxable income earned in current year and carried forward for
distribution in next
year(2)
|
|
|
(163,810 |
) |
|
|
(26,009 |
) |
|
|
(2,158 |
) |
Taxable income earned in prior year and carried forward and
distributed in current year
|
|
|
26,009 |
|
|
|
2,158 |
|
|
|
3,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to common shareholders
|
|
$ |
314,509 |
|
|
$ |
299,326 |
|
|
$ |
267,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Companys taxable income for 2005 is an estimate and
will not be finally determined until the Company files its 2005
tax return in September 2006. Therefore, the final taxable
income and the taxable income earned in 2005 and carried forward
for distribution in 2006 may be different than this estimate. |
|
(2) |
Estimated taxable income for 2005 includes undistributed income
of $163.8 million that is being carried over for
distribution in 2006, which included approximately
$72.4 million of ordinary income and $91.4 million of
net long-term capital gains. Taxable income for 2004 included
undistributed income of $26.0 million that was carried over
for distribution in 2005, which included $5.6 million of
ordinary income and $20.4 million of net long-term capital
gains. |
The Company will generally be required to pay an excise tax
equal to 4% of the amount by which 98% of the Companys
annual taxable income exceeds the distributions for the year.
The Companys 2005 (estimated) and 2004 annual taxable
income was in excess of its dividend distributions from such
taxable income in 2005 and 2004, and accordingly, the Company
accrued an excise tax of $6.2 million and
$1.0 million, respectively, on the excess taxable income
carried forward.
The Companys undistributed book earnings of
$112.3 million as of December 31, 2005, resulted from
undistributed ordinary income and long-term capital gains. The
Companys undistributed book earnings of $12.1 million
as of December 31, 2004, primarily resulted from
undistributed long-term capital gains. The difference between
undistributed book earnings at the end of the year and taxable
income carried over from the current year into the next year
relates to a variety of timing and permanent differences in the
recognition of income and expenses for book and tax purposes as
discussed above.
At December 31, 2005 and 2004, the aggregate gross
unrealized appreciation of the Companys investments above
cost for federal income tax purposes was $781.2 million
(estimated) and $323.3 million, respectively. At
December 31, 2005 and 2004, the aggregate gross unrealized
depreciation of the Companys investments below cost for
federal income tax purposes was $304.2 million (estimated)
and $265.0 million, respectively. The aggregate net
unrealized appreciation of the Companys investments over
cost for federal income tax purposes was $477.0 million
(estimated) and $58.3 million at December 31, 2005 and
2004, respectively. At December 31, 2005 and 2004, the
aggregate cost of securities, for federal income tax purposes
was $3.1 billion (estimated) and $3.0 billion,
respectively.
The Companys consolidated subsidiary, AC Corp, is subject
to federal and state income taxes. For the years ended
December 31, 2005, 2004, and 2003, AC Corps income
tax expense (benefit) was $5.3 million, $1.0 million,
and ($2.5) million, respectively. For the years ended
December 31, 2005, 2004, and 2003, paid in capital was
increased for the tax benefit of amounts deducted for tax
F-46
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Dividends and Distributions and Taxes,
continued
purposes but not for financial reporting purposes primarily
related to stock-based compensation by $3.7 million,
$3.8 million, and $0.3 million, respectively.
The net deferred tax asset at December 31, 2005, was
$4.1 million, consisting of deferred tax assets of
$8.9 million and deferred tax liabilities of
$4.8 million. The net deferred tax asset at
December 31, 2004, was $6.1 million, consisting of
deferred tax assets of $10.0 million and deferred tax
liabilities of $3.9 million. Deferred tax assets primarily
relate to loss carry forwards and deferred compensation.
Deferred tax liabilities primarily relate to depreciation.
Management believes that the realization of the net deferred tax
asset is more likely than not based on expectations as to future
taxable income and scheduled reversals of temporary differences.
Accordingly, the Company did not record a valuation allowance at
December 31, 2005, 2004, or 2003.
Note 11. Cash
The Company places its cash with financial institutions and, at
times, cash held in checking accounts in financial institutions
may be in excess of the Federal Deposit Insurance Corporation
insured limit.
At December 31, 2005 and 2004, cash consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
($ in thousands) |
|
|
|
|
Cash
|
|
$ |
33,436 |
|
|
$ |
57,576 |
|
Less escrows held
|
|
|
(2,073 |
) |
|
|
(416 |
) |
|
|
|
|
|
|
|
|
|
|
Total cash
|
|
$ |
31,363 |
|
|
$ |
57,160 |
|
|
|
|
|
|
|
|
|
|
Note 12. Supplemental Disclosure of Cash Flow
Information
The Company paid interest of $75.2 million,
$74.6 million, and $73.8 million, for the years ended
December 31, 2005, 2004, and 2003, respectively.
Principal collections related to investment repayments or sales
include the collection of discounts previously amortized into
interest income and added to the cost basis of a loan or debt
security totaling $8.4 million, $11.4 million, and
$17.6 million, for the years ended December 31, 2005,
2004, and 2003, respectively.
Non-cash operating activities for the year ended
December 31, 2005, included the following:
|
|
|
|
|
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 |
F-47
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12. Supplemental Disclosure of Cash Flow
Information, continued
|
|
|
|
|
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 third
quarter of 2005, GAC changed its name to Triview Investments,
Inc. |
Non-cash operating activities for the year ended
December 31, 2004, included the following:
|
|
|
|
|
notes or other securities received as consideration from the
sale of investments of $56.6 million. The notes received
for the year ended December 31, 2004, included a note
received for $47.5 million in conjunction with the sale of
the Companys investment in Hillman. 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 its investment, and no gain or loss
resulted from the transaction; |
|
|
|
an exchange of $93.7 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; |
|
|
|
an exchange of existing loans with a cost basis of
$11.1 million for a new loan and equity in Gordian Group,
Inc.; |
|
|
|
the repayment in kind of $12.7 million of existing debt in
American Healthcare Services, Inc. with $10.0 million of
debt in MedBridge Healthcare, LLC and $2.7 million of debt
and equity from other companies; |
|
|
|
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; |
|
|
|
GAC acquired certain assets of Galaxy out of bankruptcy during
the third quarter of 2004. The Company exchanged its
$50.7 million outstanding debt in Galaxy for debt and
equity in GAC to facilitate the asset acquisition; and |
|
|
|
$25.5 million of CMBS bonds and LLC interests received
from the securitization of commercial mortgage loans. |
Non-cash operating activities for the year ended
December 31, 2003, included transfers of commercial
mortgage loans and real estate owned in the repayment of the
Companys residual interest totaling $69.3 million,
real estate owned received in connection with foreclosure on
commercial mortgage loans of $9.1 million, receipt of
commercial mortgage loans in satisfaction of private finance
loans and debt securities of $9.1 million, and receipt of a
note as consideration from the sale of real estate owned of $3.0
million.
Non-cash financing activities included dividend reinvestment
totaling $9.3 million, $5.8 million, and
$6.6 million, for the years ended December 31, 2005,
2004, and 2003, respectively. In addition,
F-48
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12. Supplemental Disclosure of Cash Flow
Information, continued
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 year ended December 31, 2005, the
issuance of $3.2 million of the Companys common stock
as consideration for an investment in Legacy Partners Group, LLC
for the year ended December 31, 2004, and the issuance of
$0.9 million of the Companys common stock as
consideration for an investment in Callidus Capital Corporation
for the year ended December 31, 2003.
Note 13. Hedging Activities
The Company has invested in commercial mortgage loans and CMBS
and CDO bonds that were purchased at prices that are based in
part on comparable Treasury rates. The Company has entered into
transactions with one or more financial institutions to hedge
against movement in Treasury rates on certain of the commercial
mortgage loans and CMBS and CDO bonds. These transactions,
referred to as short sales, involve the Company receiving the
proceeds from the short sales of borrowed Treasury securities,
with the obligation to replenish the borrowed Treasury
securities at a later date based on the then current market
price. Borrowed Treasury securities and the related obligations
to replenish the borrowed Treasury securities at value,
including accrued interest payable on the obligations, as of
December 31, 2005 and 2004, consisted of the following:
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
Description of Issue |
|
2005 |
|
2004 |
|
|
|
|
|
5-year Treasury securities, due December 2009
|
|
$ |
|
|
|
$ |
533 |
|
5-year Treasury securities, due April 2010
|
|
|
17,666 |
|
|
|
|
|
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
|
|
$ |
17,666 |
|
|
$ |
38,226 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 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 $0.4 million and
$0.3 million, respectively.
The net proceeds related to the sales of the borrowed Treasury
securities were $17.9 million and $38.5 million at
December 31, 2005 and 2004, respectively. Under the terms
of the transactions, the Company had received cash payments of
$0.2 million and $0.3 million at December 31,
2005 and 2004, respectively, 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
agreements. The repurchase agreements are collateralized by
U.S. Treasury securities and are settled weekly. As of
December 31, 2005, the repurchase agreements were due on
January 6, 2006, and had a weighted average interest rate
of 3.3%. The weighted average interest rate on the repurchase
agreements as of December 31, 2004, was 1.3%.
F-49
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 14. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the Years |
|
|
Ended December 31, |
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
Per Common Share
Data(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$ |
14.87 |
|
|
$ |
14.94 |
|
|
$ |
14.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income(1)
|
|
|
1.00 |
|
|
|
1.52 |
|
|
|
1.65 |
|
|
Net realized
gains(1)(2)
|
|
|
1.99 |
|
|
|
0.88 |
|
|
|
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income plus net realized
gains(1)
|
|
|
2.99 |
|
|
|
2.40 |
|
|
|
2.28 |
|
|
|
Net change in unrealized appreciation or
depreciation(1)(2)
|
|
|
3.37 |
|
|
|
(0.52 |
) |
|
|
(0.66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
(1)
|
|
|
6.36 |
|
|
|
1.88 |
|
|
|
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from shareholder distributions
|
|
|
(2.33 |
) |
|
|
(2.30 |
) |
|
|
(2.28 |
) |
Net increase in net assets from capital share
transactions(1)
|
|
|
0.27 |
|
|
|
0.35 |
|
|
|
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$ |
19.17 |
|
|
$ |
14.87 |
|
|
$ |
14.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value, end of year
|
|
$ |
29.37 |
|
|
$ |
25.84 |
|
|
$ |
27.88 |
|
Total
return(3)
|
|
|
23.5 |
% |
|
|
1.1 |
% |
|
|
40.5 |
% |
Ratios and Supplemental Data
($ and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending net assets
|
|
$ |
2,620,546 |
|
|
$ |
1,979,778 |
|
|
$ |
1,914,577 |
|
Common shares outstanding at end of year
|
|
|
136,697 |
|
|
|
133,099 |
|
|
|
128,118 |
|
Diluted weighted average common shares outstanding
|
|
|
137,274 |
|
|
|
132,458 |
|
|
|
118,351 |
|
Employee and administrative expenses/average net assets
|
|
|
6.58 |
% |
|
|
4.65 |
% |
|
|
3.50 |
% |
Total operating expenses/average net assets
|
|
|
9.99 |
% |
|
|
8.53 |
% |
|
|
8.06 |
% |
Net investment income/average net assets
|
|
|
6.08 |
% |
|
|
10.45 |
% |
|
|
11.51 |
% |
Net increase in net assets resulting from operations/ average
net assets
|
|
|
38.68 |
% |
|
|
12.97 |
% |
|
|
11.33 |
% |
Portfolio turnover rate
|
|
|
47.72 |
% |
|
|
32.97 |
% |
|
|
31.12 |
% |
Average debt outstanding
|
|
$ |
1,087,118 |
|
|
$ |
985,616 |
|
|
$ |
943,507 |
|
Average debt per
share(1)
|
|
$ |
7.92 |
|
|
$ |
7.44 |
|
|
$ |
7.97 |
|
|
|
(1) |
Based on diluted weighted average number of common shares
outstanding for the year. |
|
(2) |
Net realized gains and net change in unrealized appreciation or
depreciation can fluctuate significantly from year to year. |
|
(3) |
Total return assumes the reinvestment of all dividends paid for
the periods presented. |
Note 15. Selected Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
($ in thousands, except per share amounts) |
|
Qtr. 1 |
|
Qtr. 2 |
|
Qtr. 3 |
|
Qtr. 4 |
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
94,919 |
|
|
$ |
86,207 |
|
|
$ |
94,857 |
|
|
$ |
98,169 |
|
Net investment income
|
|
$ |
38,752 |
|
|
$ |
15,267 |
|
|
$ |
46,134 |
|
|
$ |
37,073 |
|
Net increase in net assets resulting from operations
|
|
$ |
119,621 |
|
|
$ |
311,885 |
|
|
$ |
113,168 |
|
|
$ |
328,140 |
|
Basic earnings per common share
|
|
$ |
0.90 |
|
|
$ |
2.33 |
|
|
$ |
0.84 |
|
|
$ |
2.40 |
|
Diluted earnings per common share
|
|
$ |
0.88 |
|
|
$ |
2.29 |
|
|
$ |
0.82 |
|
|
$ |
2.36 |
|
F-50
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 15. Selected Quarterly Data (Unaudited),
continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
Qtr. 1 |
|
Qtr. 2 |
|
Qtr. 3 |
|
Qtr. 4 |
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
81,765 |
|
|
$ |
87,500 |
|
|
$ |
96,863 |
|
|
$ |
100,962 |
|
Net investment income
|
|
$ |
44,545 |
|
|
$ |
48,990 |
|
|
$ |
52,745 |
|
|
$ |
54,678 |
|
Net increase in net assets resulting from operations
|
|
$ |
20,308 |
|
|
$ |
95,342 |
|
|
$ |
85,999 |
|
|
$ |
47,837 |
|
Basic earnings per common share
|
|
$ |
0.16 |
|
|
$ |
0.74 |
|
|
$ |
0.67 |
|
|
$ |
0.36 |
|
Diluted earnings per common share
|
|
$ |
0.15 |
|
|
$ |
0.73 |
|
|
$ |
0.66 |
|
|
$ |
0.35 |
|
Note 16. 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.
F-51
Report of Independent Registered Public Accounting Firm
The Board of Directors
Allied Capital Corporation:
Under date of March 9, 2006, we reported on the
consolidated balance sheet of Allied Capital Corporation and
subsidiaries as of December 31, 2005 and 2004, including
the consolidated statement of investments as of
December 31, 2005, and the related consolidated statements
of operations, changes in net assets and cash flows, and the
financial highlights (included in Note 14), for each of the
years in the three-year period ended December 31, 2005,
which are included in the registration statement on
Form N-2. In
connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial
statement schedule as of and for the year ended
December 31, 2005. This financial statement schedule is the
responsibility of the Companys management. Our
responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects the information set forth therein.
Washington, D.C.
March 9, 2006
F-52
Schedule 12-14
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2004 |
|
Gross |
|
Gross |
|
December 31, 2005 |
(in thousands) |
|
Investment(1) |
|
to Income(7) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
Companies More Than 25% Owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acme Paging, L.P.
|
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(Telecommunications)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,230 |
|
|
|
|
|
|
|
(1,230 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Sales &
|
|
Subordinated Debt |
|
$ |
7,205 |
|
|
|
|
|
|
|
59,729 |
|
|
|
58 |
|
|
|
|
|
|
|
59,787 |
|
|
Marketing, Inc.
|
|
Subordinated Debt |
|
|
23,647 |
|
|
|
|
|
|
|
125,498 |
|
|
|
3,361 |
|
|
|
(4,859 |
) |
|
|
124,000 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
97,724 |
|
|
|
378,854 |
|
|
|
|
|
|
|
476,578 |
|
|
Alaris Consulting, LLC
|
|
Senior Loan(5) |
|
|
(64 |
) |
|
|
|
|
|
|
4,663 |
|
|
|
3,530 |
|
|
|
(8,193 |
) |
|
|
|
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
|
|
(140 |
) |
|
|
|
|
|
American Healthcare Services, Inc. and Affiliates |
|
Senior Loan(5) |
|
|
(1 |
) |
|
$ |
1 |
|
|
|
4,225 |
|
|
|
123 |
|
|
|
(251 |
) |
|
|
4,097 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne, Inc.
|
|
Subordinated Debt |
|
|
(78 |
) |
|
|
|
|
|
|
1,092 |
|
|
|
|
|
|
|
(1,092 |
) |
|
|
|
|
|
(Business Services)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
7,320 |
|
|
|
7,052 |
|
|
|
(13,480 |
) |
|
|
892 |
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance, Inc. |
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,401 |
|
|
|
(2,401 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Loan Express, LLC |
|
Subordinated Debt |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
10,000 |
|
|
(Financial Services)
|
|
Subordinated Debt |
|
|
1 |
|
|
|
|
|
|
|
44,615 |
|
|
|
160 |
|
|
|
(44,775 |
) |
|
|
|
|
|
|
Class A Equity Interests |
|
|
14,282 |
|
|
|
|
|
|
|
53,862 |
|
|
|
6,831 |
|
|
|
|
|
|
|
60,693 |
|
|
|
Class B Equity Interests * |
|
|
13,999 |
|
|
|
|
|
|
|
98,741 |
|
|
|
48,169 |
|
|
|
|
|
|
|
146,910 |
|
|
|
Class C Equity Interests |
|
|
|
|
|
|
|
|
|
|
137,988 |
|
|
|
1,533 |
|
|
|
|
|
|
|
139,521 |
|
|
Callidus Capital Corporation
|
|
Senior Loan |
|
|
1,996 |
|
|
|
|
|
|
|
42,213 |
|
|
|
138,300 |
|
|
|
(180,513 |
) |
|
|
|
|
|
(Financial Services)
|
|
Senior Loan |
|
|
113 |
|
|
|
|
|
|
|
66 |
|
|
|
3,201 |
|
|
|
(2,667 |
) |
|
|
600 |
|
|
|
Subordinated Debt |
|
|
819 |
|
|
|
|
|
|
|
4,051 |
|
|
|
781 |
|
|
|
|
|
|
|
4,832 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
3,600 |
|
|
|
4,368 |
|
|
|
|
|
|
|
7,968 |
|
|
Diversified Group
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728 |
|
|
|
|
|
|
|
728 |
|
|
Administrators, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841 |
|
|
|
|
|
|
|
841 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502 |
|
|
|
|
|
|
|
502 |
|
|
Fairchild Industrial Products Company
|
|
Senior Loan |
|
|
316 |
|
|
|
|
|
|
|
7,038 |
|
|
|
|
|
|
|
(7,038 |
) |
|
|
|
|
|
(Industrial Products)
|
|
Subordinated Debt |
|
|
255 |
|
|
|
|
|
|
|
3,833 |
|
|
|
|
|
|
|
(3,833 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
2,123 |
|
|
|
|
|
|
|
(2,123 |
) |
|
|
|
|
|
Financial Pacific Company
|
|
Subordinated Debt |
|
|
12,168 |
|
|
|
|
|
|
|
68,473 |
|
|
|
1,431 |
|
|
|
|
|
|
|
69,904 |
|
|
(Financial Services)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
10,448 |
|
|
|
2,668 |
|
|
|
|
|
|
|
13,116 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
14,819 |
|
|
|
29,361 |
|
|
|
|
|
|
|
44,180 |
|
|
ForeSite Towers, LLC
|
|
Equity Interests* |
|
|
2,450 |
|
|
|
|
|
|
|
21,511 |
|
|
|
3,574 |
|
|
|
(15,335 |
) |
|
|
9,750 |
|
|
(Tower Leasing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Communications, LLC
|
|
Senior Loan(5) |
|
|
361 |
|
|
|
|
|
|
|
13,990 |
|
|
|
2,320 |
|
|
|
(353 |
) |
|
|
15,957 |
|
|
(Business Services)
|
|
Subordinated Debt(5) |
|
|
472 |
|
|
|
|
|
|
|
10,472 |
|
|
|
726 |
|
|
|
|
|
|
|
11,198 |
|
|
|
Preferred Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
14,609 |
|
|
|
|
|
|
|
(10,306 |
) |
|
|
4,303 |
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
2,161 |
|
|
|
|
|
|
|
(2,161 |
) |
|
|
|
|
|
Gordian Group, Inc.
|
|
Senior Loan(5) |
|
|
(3 |
) |
|
|
|
|
|
|
7,381 |
|
|
|
2,000 |
|
|
|
(5,220 |
) |
|
|
4,161 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722 |
|
|
|
(722 |
) |
|
|
|
|
|
HealthASPex, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
700 |
|
|
|
|
|
|
|
(700 |
) |
|
|
|
|
|
(Business Services)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
1,753 |
|
|
|
|
|
|
|
(1,753 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See related footnotes at the end of this schedule.
F-53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2004 |
|
Gross |
|
Gross |
|
December 31, 2005 |
(in thousands) |
|
Investment(1) |
|
to Income(7) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
Healthy Pet Corp.
|
|
Senior Loan |
|
$ |
96 |
|
|
|
|
|
|
$ |
|
|
|
$ |
4,100 |
|
|
$ |
(14 |
) |
|
$ |
4,086 |
|
|
(Consumer Services)
|
|
Subordinated Debt |
|
|
1,964 |
|
|
|
|
|
|
|
|
|
|
|
38,535 |
|
|
|
|
|
|
|
38,535 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,766 |
|
|
|
|
|
|
|
25,766 |
|
|
HMT, Inc.
|
|
Subordinated Debt |
|
|
531 |
|
|
|
|
|
|
|
9,314 |
|
|
|
686 |
|
|
|
(10,000 |
) |
|
|
|
|
|
(Energy Services)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
2,537 |
|
|
|
149 |
|
|
|
(49 |
) |
|
|
2,637 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
3,610 |
|
|
|
1,733 |
|
|
|
|
|
|
|
5,343 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
1,390 |
|
|
|
667 |
|
|
|
|
|
|
|
2,057 |
|
|
Housecall Medical Resources, Inc. |
|
Subordinated Debt |
|
|
1,463 |
|
|
|
|
|
|
|
15,610 |
|
|
|
326 |
|
|
|
(15,936 |
) |
|
|
|
|
|
(Healthcare Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
31,898 |
|
|
|
|
|
|
|
(31,898 |
) |
|
|
|
|
|
Impact Innovations Group, LLC |
|
Equity Interests in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Business Services)
|
|
Affiliate |
|
|
|
|
|
|
|
|
|
|
772 |
|
|
|
|
|
|
|
(30 |
) |
|
|
742 |
|
|
Insight Pharmaceuticals Corporation
|
|
Senior Loan |
|
|
3,917 |
|
|
|
|
|
|
|
66,115 |
|
|
|
355 |
|
|
|
(66,470 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Subordinated Debt |
|
|
7,156 |
|
|
|
|
|
|
|
57,213 |
|
|
|
58,876 |
|
|
|
(57,791 |
) |
|
|
58,298 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
1,791 |
|
|
|
|
|
|
|
26,791 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
6,325 |
|
|
|
|
|
|
|
(6,089 |
) |
|
|
236 |
|
|
Jakel, Inc.
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
13,742 |
|
|
|
|
|
|
|
(13,742 |
) |
|
|
|
|
|
(Industrial Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
836 |
|
|
|
|
|
|
|
(836 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Partners Group, LLC
|
|
Senior Loan (5) |
|
|
|
|
|
|
|
|
|
|
6,647 |
|
|
|
1,000 |
|
|
|
(2,618 |
) |
|
|
5,029 |
|
|
(Financial Services)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
1,896 |
|
|
|
|
|
|
|
(1,896 |
) |
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
(1,500 |
) |
|
|
|
|
|
Litterer Beteiligungs-GmbH
|
|
Subordinated Debt |
|
|
42 |
|
|
|
|
|
|
|
715 |
|
|
|
|
|
|
|
(94 |
) |
|
|
621 |
|
|
(Business Services)
|
|
Equity Interest |
|
|
|
|
|
|
|
|
|
|
2,596 |
|
|
|
54 |
|
|
|
(424 |
) |
|
|
2,226 |
|
|
Maui Body Works, Inc.
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
1,080 |
|
|
|
155 |
|
|
|
(1,235 |
) |
|
|
|
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mercury Air Centers, Inc.
|
|
Senior Loan |
|
|
2,383 |
|
|
|
|
|
|
|
20,000 |
|
|
|
11,720 |
|
|
|
|
|
|
|
31,720 |
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
6,374 |
|
|
|
|
|
|
|
34,613 |
|
|
|
12,011 |
|
|
|
(105 |
) |
|
|
46,519 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
31,214 |
|
|
|
57,684 |
|
|
|
|
|
|
|
88,898 |
|
|
MVL Group, Inc.
|
|
Senior Loan |
|
|
2,954 |
|
|
|
|
|
|
|
15,080 |
|
|
|
13,892 |
|
|
|
(1,754 |
) |
|
|
27,218 |
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
4,050 |
|
|
|
|
|
|
|
18,102 |
|
|
|
14,315 |
|
|
|
|
|
|
|
32,417 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
9,800 |
|
|
|
|
|
|
|
(6,589 |
) |
|
|
3,211 |
|
|
Pennsylvania Avenue Investors, L.P.
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
792 |
|
|
|
1,549 |
|
|
|
(477 |
) |
|
|
1,864 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Powell Plant Farms, Inc.
|
|
Senior Loan |
|
|
4,442 |
|
|
|
|
|
|
|
23,192 |
|
|
|
8,850 |
|
|
|
(8,250 |
) |
|
|
23,792 |
|
|
(Consumer Products)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
10,588 |
|
|
|
|
|
|
|
(3,224 |
) |
|
|
7,364 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redox Brands, Inc.
|
|
Subordinated Debt |
|
|
168 |
|
|
|
|
|
|
|
3,325 |
|
|
|
60 |
|
|
|
(3,385 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Subordinated Debt |
|
|
528 |
|
|
|
|
|
|
|
10,672 |
|
|
|
570 |
|
|
|
(11,242 |
) |
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
11,664 |
|
|
|
433 |
|
|
|
|
|
|
|
12,097 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
584 |
|
|
|
|
|
|
|
(84 |
) |
|
|
500 |
|
|
Service Champ, Inc.
|
|
Subordinated Debt |
|
|
2,956 |
|
|
|
|
|
|
|
|
|
|
|
26,906 |
|
|
|
|
|
|
|
26,906 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,662 |
|
|
|
(343 |
) |
|
|
13,319 |
|
|
Staffing Partners Holding
|
|
Subordinated Debt(5) |
|
|
|
|
|
$ |
741 |
|
|
|
7,084 |
|
|
|
|
|
|
|
(741 |
) |
|
|
6,343 |
|
|
Company, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
1,961 |
|
|
|
|
|
|
|
(149 |
) |
|
|
1,812 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See related footnotes at the end of this schedule.
F-54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2004 |
|
Gross |
|
Gross |
|
December 31, 2005 |
(in thousands) |
|
Investment(1) |
|
to Income(7) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
Startec Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
Senior Loan |
|
$ |
2,080 |
|
|
|
|
|
|
$ |
16,521 |
|
|
$ |
8,800 |
|
|
$ |
(3,636 |
) |
|
$ |
21,685 |
|
|
Corporation
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
7,800 |
|
|
|
|
|
|
|
(7,800 |
) |
|
|
|
|
|
(Telecommunications)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STS Operating, Inc.
|
|
Subordinated Debt |
|
|
1,365 |
|
|
|
|
|
|
|
6,276 |
|
|
|
8,662 |
|
|
|
(8,345 |
) |
|
|
6,593 |
|
|
(Industrial Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
9,632 |
|
|
|
55,331 |
|
|
|
|
|
|
|
64,963 |
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
560 |
|
|
|
|
|
|
|
560 |
|
|
Triview Investments, Inc.
|
|
Senior Loan |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
7,749 |
|
|
|
|
|
|
|
7,449 |
|
|
(Broadcasting & Cable/
|
|
Subordinated Debt |
|
|
2,008 |
|
|
|
|
|
|
|
|
|
|
|
30,845 |
|
|
|
|
|
|
|
30,845 |
|
|
Consumer Products)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
7,517 |
|
|
|
23,003 |
|
|
|
(11,000 |
) |
|
|
19,520 |
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,766 |
|
|
|
(21,595 |
) |
|
|
29,171 |
|
|
Total companies more than 25% owned |
|
$ |
122,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,887,651 |
|
|
Companies 5% to 25% Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Evac Lifeteam
|
|
Subordinated Debt |
|
$ |
5,647 |
|
|
|
|
|
|
$ |
39,964 |
|
|
$ |
2,303 |
|
|
$ |
|
|
|
$ |
42,267 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,092 |
|
|
|
2,933 |
|
|
|
|
|
|
|
4,025 |
|
|
Aspen Pet Products, Inc.
|
|
Subordinated Debt |
|
|
3,789 |
|
|
|
|
|
|
|
18,784 |
|
|
|
1,175 |
|
|
|
|
|
|
|
19,959 |
|
|
(Consumer Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
897 |
|
|
|
741 |
|
|
|
|
|
|
|
1,638 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Subordinated Debt |
|
|
3,468 |
|
|
|
|
|
|
|
22,939 |
|
|
|
604 |
|
|
|
|
|
|
|
23,543 |
|
|
(Industrial Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
|
|
812 |
|
|
|
(3,612 |
) |
|
|
2,200 |
|
|
The Debt Exchange Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
1,457 |
|
|
|
1,762 |
|
|
|
|
|
|
|
3,219 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MasterPlan, Inc.
|
|
Subordinated Debt |
|
|
48 |
|
|
|
|
|
|
|
1,204 |
|
|
|
|
|
|
|
(1,204 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
3,300 |
|
|
|
|
|
|
|
(3,300 |
) |
|
|
|
|
|
MedBridge Healthcare, LLC
|
|
Senior Loan |
|
|
200 |
|
|
|
|
|
|
|
7,000 |
|
|
|
93 |
|
|
|
|
|
|
|
7,093 |
|
|
(Healthcare Services)
|
|
Subordinated Debt(5) |
|
|
225 |
|
|
|
|
|
|
|
4,311 |
|
|
|
499 |
|
|
|
(4,276 |
) |
|
|
534 |
|
|
|
Convertible |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Debt(5) |
|
|
(1 |
) |
|
$ |
30 |
|
|
|
678 |
|
|
|
|
|
|
|
(678 |
) |
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800 |
|
|
|
(800 |
) |
|
|
|
|
|
MortgageRamp, Inc.
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
903 |
|
|
|
|
|
|
|
(903 |
) |
|
|
|
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nexcel Synthetics, LLC
|
|
Subordinated Debt |
|
|
1,554 |
|
|
|
|
|
|
|
10,211 |
|
|
|
377 |
|
|
|
|
|
|
|
10,588 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
687 |
|
|
|
693 |
|
|
|
(13 |
) |
|
|
1,367 |
|
|
Packaging Advantage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
Subordinated Debt |
|
|
808 |
|
|
|
|
|
|
|
14,731 |
|
|
|
2,480 |
|
|
|
(17,211 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
1,479 |
|
|
|
|
|
|
|
(1,479 |
) |
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
597 |
|
|
|
23 |
|
|
|
(620 |
) |
|
|
|
|
|
Pres Air Trol LLC
|
|
Unitranche Debt |
|
|
762 |
|
|
|
|
|
|
|
6,021 |
|
|
|
11 |
|
|
|
(212 |
) |
|
|
5,820 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
34 |
|
|
|
(616 |
) |
|
|
318 |
|
|
Progressive International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
Subordinated Debt |
|
|
1,202 |
|
|
|
|
|
|
|
7,221 |
|
|
|
155 |
|
|
|
|
|
|
|
7,376 |
|
|
(Consumer Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
586 |
|
|
|
298 |
|
|
|
|
|
|
|
884 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soteria Imaging Services, LLC
|
|
Subordinated Debt |
|
|
1,467 |
|
|
|
|
|
|
|
8,340 |
|
|
|
5,107 |
|
|
$ |
|
|
|
|
13,447 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
2,114 |
|
|
|
194 |
|
|
|
|
|
|
|
2,308 |
|
|
Universal Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services, LLC
|
|
Unitranche Debt |
|
|
1,875 |
|
|
|
|
|
|
|
12,099 |
|
|
|
13 |
|
|
|
(1,250 |
) |
|
|
10,862 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,864 |
|
|
|
328 |
|
|
|
(864 |
) |
|
|
1,328 |
|
|
Total companies 5% to 25% owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
158,806 |
|
|
Companies less than 5% owned(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Border Foods, Inc.
|
|
Subordinated Debt(5) |
|
|
880 |
|
|
|
|
|
|
|
12,510 |
|
|
|
211 |
|
|
|
(12,721 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
893 |
|
|
|
(2,893 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245 |
|
|
|
(245 |
) |
|
|
|
|
|
Total
|
|
|
|
$ |
21,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This schedule should be read in conjunction with the
Companys consolidated financial statements as of and for
the year ended December 31, 2005, including the
consolidated statement of investments and Note 3 to the
consolidated financial statements. Note 3 includes
additional information regarding activities in the private
finance portfolio for the year ended December 31, 2005.
F-55
|
|
(1) |
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. The
principal amount for loans and debt securities and the number of
shares of common stock and preferred stock is shown in the
consolidated statement of investments as of December 31,
2005. |
|
(2) |
Other includes interest, dividend, or other income which was
applied to the principal of the investment and therefore reduced
the total investment. These reductions are also included in the
Gross Reductions for the investment, as applicable. |
|
(3) |
Gross additions include increases in the cost basis of
investments resulting from new portfolio investments,
paid-in-kind interest or dividends, the amortization of
discounts and closing fees, and the exchange of one or more
existing securities for one or more new securities. Gross
additions also include net increases in unrealized appreciation
or net decreases in unrealized depreciation. |
|
(4) |
Gross reductions include decreases in the cost basis of
investments resulting from principal collections related to
investment repayments or sales and the exchange of one or more
existing securities for one or more new securities. Gross
reductions also include net increases in unrealized depreciation
or net decreases in unrealized appreciation. |
|
(5) |
Loan or debt security is on non-accrual status at
December 31, 2005, and is therefore considered non-income
producing. Loans or debt securities on non-accrual status at the
end of the year may or may not have been on non-accrual status
for the full year ended December 31, 2005. |
|
(6) |
Data is included for these companies less than 5% owned at
December 31, 2005, as these companies were included in the
companies 5% to 25% owned category during the past year,
however, due to changes in affiliation status were classified in
the less than 5% owned category at December 31, 2005. |
|
(7) |
Represents the total amount of interest or dividends credited to
income for the portion of the year an investment was included in
the companies more than 25% owned or companies 5% to 25% owned
categories, respectively. |
|
|
* |
All or a portion of the dividend income on this investment was
or will be paid in the form of additional securities. Dividends
paid-in-kind are also included in the Gross Additions for the
investment, as applicable. |
F-56
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 March 31,
2006, and the related consolidated statements of operations,
changes in net assets and cash flows and the financial
highlights (included in Note 13) for the three-month periods
ended March 31, 2006 and 2005. 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, 2005, and the related
consolidated statements of operations, changes in net assets and
cash flows (not presented herein), and the financial highlights
(included in Note 14), for the year then ended; and in our
report dated March 9, 2006, 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, 2005, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
(KPMG LLP LOGO)
Washington, D.C.
May 5, 2006
F-57
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
(in thousands, except per share amounts) |
|
(unaudited) |
|
|
ASSETS |
Portfolio at value:
|
|
|
|
|
|
|
|
|
|
Private finance
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned (cost: 2006-$1,379,842;
2005-$1,489,782)
|
|
$ |
1,388,855 |
|
|
$ |
1,887,651 |
|
|
|
Companies 5% to 25% owned (cost: 2006-$342,144; 2005-$168,373)
|
|
|
341,645 |
|
|
|
158,806 |
|
|
|
Companies less than 5% owned (cost: 2006-$1,845,529;
2005-$1,448,268)
|
|
|
1,831,133 |
|
|
|
1,432,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total private finance (cost: 2006-$3,567,515; 2005-$3,106,423)
|
|
|
3,561,633 |
|
|
|
3,479,290 |
|
|
Commercial real estate finance (cost: 2006-$129,564;
2005-$131,695)
|
|
|
129,369 |
|
|
|
127,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio at value (cost: 2006-$3,697,079; 2005-$3,238,118)
|
|
|
3,691,002 |
|
|
|
3,606,355 |
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills
|
|
|
101,289 |
|
|
|
100,305 |
|
Investments in money market securities
|
|
|
139,764 |
|
|
|
121,967 |
|
Deposits of proceeds from sales of borrowed Treasury securities
|
|
|
17,534 |
|
|
|
17,666 |
|
Accrued interest and dividends receivable
|
|
|
50,034 |
|
|
|
60,366 |
|
Other assets
|
|
|
116,746 |
|
|
|
87,858 |
|
Cash
|
|
|
4,856 |
|
|
|
31,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
4,121,225 |
|
|
$ |
4,025,880 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures (maturing within one year:
2006-$175,000; 2005-$175,000)
|
|
$ |
1,181,245 |
|
|
$ |
1,193,040 |
|
|
Revolving line of credit
|
|
|
93,000 |
|
|
|
91,750 |
|
|
Obligations to replenish borrowed Treasury securities
|
|
|
17,534 |
|
|
|
17,666 |
|
|
Accounts payable and other liabilities
|
|
|
99,633 |
|
|
|
102,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,391,412 |
|
|
|
1,405,334 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 200,000 shares authorized;
139,984 and 136,697 shares issued and outstanding at
March 31, 2006, and December 31, 2005, respectively
|
|
|
14 |
|
|
|
14 |
|
|
Additional paid-in capital
|
|
|
2,271,434 |
|
|
|
2,177,283 |
|
|
Common stock held in deferred compensation trust
|
|
|
(21,543 |
) |
|
|
(19,460 |
) |
|
Notes receivable from sale of common stock
|
|
|
(3,738 |
) |
|
|
(3,868 |
) |
|
Net unrealized appreciation (depreciation)
|
|
|
(20,223 |
) |
|
|
354,325 |
|
|
Undistributed earnings
|
|
|
503,869 |
|
|
|
112,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,729,813 |
|
|
|
2,620,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
4,121,225 |
|
|
$ |
4,025,880 |
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$ |
19.50 |
|
|
$ |
19.17 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-58
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
Ended March 31, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
(unaudited) |
Interest and Related Portfolio Income:
|
|
|
|
|
|
|
|
|
|
Interest and dividends
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
30,146 |
|
|
$ |
28,251 |
|
|
|
Companies 5% to 25% owned
|
|
|
5,650 |
|
|
|
5,921 |
|
|
|
Companies less than 5% owned
|
|
|
53,085 |
|
|
|
50,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividends
|
|
|
88,881 |
|
|
|
84,945 |
|
|
|
|
|
|
|
|
|
|
|
Loan prepayment premiums
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
4,960 |
|
|
|
|
|
|
|
Companies 5% to 25% owned
|
|
|
|
|
|
|
|
|
|
|
Companies less than 5% owned
|
|
|
326 |
|
|
|
1,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan prepayment premiums
|
|
|
5,286 |
|
|
|
1,677 |
|
|
|
|
|
|
|
|
|
|
|
Fees and other income
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
7,127 |
|
|
|
4,881 |
|
|
|
Companies 5% to 25% owned
|
|
|
2,716 |
|
|
|
70 |
|
|
|
Companies less than 5% owned
|
|
|
7,001 |
|
|
|
3,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fees and other income
|
|
|
16,844 |
|
|
|
8,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
|
111,011 |
|
|
|
94,919 |
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
24,300 |
|
|
|
20,225 |
|
|
Employee
|
|
|
21,428 |
|
|
|
15,456 |
|
|
Stock options
|
|
|
3,606 |
|
|
|
|
|
|
Administrative
|
|
|
11,519 |
|
|
|
20,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60,853 |
|
|
|
56,435 |
|
|
|
|
|
|
|
|
|
|
Net investment income before income taxes
|
|
|
50,158 |
|
|
|
38,484 |
|
Income tax expense (benefit), including excise tax
|
|
|
8,858 |
|
|
|
(268 |
) |
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
41,300 |
|
|
|
38,752 |
|
|
|
|
|
|
|
|
|
|
Net Realized and Unrealized Gains (Losses):
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
433,187 |
|
|
|
399 |
|
|
|
Companies 5% to 25% owned
|
|
|
(343 |
) |
|
|
(3 |
) |
|
|
Companies less than 5% owned
|
|
|
(9 |
) |
|
|
9,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized gains
|
|
|
432,835 |
|
|
|
10,285 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(374,548 |
) |
|
|
70,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses)
|
|
|
58,287 |
|
|
|
80,869 |
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
99,587 |
|
|
$ |
119,621 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.72 |
|
|
$ |
0.90 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.70 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
138,759 |
|
|
|
133,283 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
141,738 |
|
|
|
135,579 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-59
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
Ended March 31, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
|
|
(unaudited) |
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$ |
41,300 |
|
|
$ |
38,752 |
|
|
Net realized gains
|
|
|
432,835 |
|
|
|
10,285 |
|
|
Net change in unrealized appreciation or depreciation
|
|
|
(374,548 |
) |
|
|
70,584 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
99,587 |
|
|
|
119,621 |
|
|
|
|
|
|
|
|
|
|
Shareholder distributions:
|
|
|
|
|
|
|
|
|
|
Common stock dividends
|
|
|
(82,518 |
) |
|
|
(76,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from shareholder
distributions
|
|
|
(82,518 |
) |
|
|
(76,100 |
) |
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
82,970 |
|
|
|
|
|
|
Issuance of common stock for portfolio investments
|
|
|
|
|
|
|
7,200 |
|
|
Issuance of common stock in lieu of cash distributions
|
|
|
3,640 |
|
|
|
1,418 |
|
|
Issuance of common stock upon the exercise of stock options
|
|
|
3,935 |
|
|
|
2,618 |
|
|
Stock option expense
|
|
|
3,606 |
|
|
|
|
|
|
Net decrease in notes receivable from sale of common stock
|
|
|
130 |
|
|
|
50 |
|
|
Purchase of common stock held in deferred compensation trust
|
|
|
(2,121 |
) |
|
|
(1,886 |
) |
|
Distribution of common stock held in deferred compensation trust
|
|
|
38 |
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
449 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from capital share
transactions
|
|
|
92,198 |
|
|
|
9,849 |
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in net assets
|
|
|
109,267 |
|
|
|
53,370 |
|
Net assets at beginning of period
|
|
|
2,620,546 |
|
|
|
1,979,778 |
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$ |
2,729,813 |
|
|
$ |
2,033,148 |
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$ |
19.50 |
|
|
$ |
15.22 |
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of period
|
|
|
139,984 |
|
|
|
133,563 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-60
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
Ended March 31, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands) |
|
|
|
|
|
|
(unaudited) |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$ |
99,587 |
|
|
$ |
119,621 |
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
Portfolio investments
|
|
|
(647,851 |
) |
|
|
(257,957 |
) |
|
|
Principal collections related to investment repayments or sales
|
|
|
340,410 |
|
|
|
158,262 |
|
|
|
Change in accrued or reinvested interest and dividends
|
|
|
2,061 |
|
|
|
(10,534 |
) |
|
|
Amortization of discounts and fees
|
|
|
(277 |
) |
|
|
(1,772 |
) |
|
|
Change in investments in money market securities
|
|
|
(16,726 |
) |
|
|
|
|
|
|
Stock option expense
|
|
|
3,606 |
|
|
|
|
|
|
|
Changes in other assets and liabilities
|
|
|
2,797 |
|
|
|
8,158 |
|
|
|
Depreciation and amortization
|
|
|
433 |
|
|
|
486 |
|
|
|
Realized gains from the receipt of notes and other securities as
consideration from sale of investments, net of collections
|
|
|
(179,987 |
) |
|
|
152 |
|
|
|
Realized losses
|
|
|
3,651 |
|
|
|
4,418 |
|
|
|
Net change in unrealized (appreciation) or depreciation
|
|
|
374,548 |
|
|
|
(70,584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(17,748 |
) |
|
|
(49,750 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Sale of common stock
|
|
|
82,970 |
|
|
|
|
|
|
Sale of common stock upon the exercise of stock options
|
|
|
3,935 |
|
|
|
2,618 |
|
|
Collections of notes receivable from sale of common stock
|
|
|
130 |
|
|
|
50 |
|
|
Borrowings under notes payable and debentures
|
|
|
|
|
|
|
|
|
|
Repayments on notes payable and debentures
|
|
|
(12,000 |
) |
|
|
(31,000 |
) |
|
Net borrowings under (repayments on) revolving line of credit
|
|
|
1,250 |
|
|
|
151,250 |
|
|
Purchase of common stock held in deferred compensation trust
|
|
|
(2,121 |
) |
|
|
(1,886 |
) |
|
Other financing activities
|
|
|
53 |
|
|
|
(12 |
) |
|
Common stock dividends and distributions paid
|
|
|
(82,976 |
) |
|
|
(77,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(8,759 |
) |
|
|
43,677 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(26,507 |
) |
|
|
(6,073 |
) |
Cash at beginning of period
|
|
|
31,363 |
|
|
|
57,160 |
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$ |
4,856 |
|
|
$ |
51,087 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-61
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Companies More Than 25% Owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
Acme Paging,
L.P.(4)
|
|
Senior Loan (6.0%, Due
12/07)(6) |
|
$ |
3,750 |
|
|
$ |
3,750 |
|
|
$ |
|
|
|
(Telecommunications)
|
|
Subordinated Debt (10.0%, Due
1/08)(6) |
|
|
881 |
|
|
|
881 |
|
|
|
|
|
|
|
|
Common Stock (23,513 shares) |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
Alaris Consulting, LLC
|
|
Senior Loan (16.5%, Due 12/05 12/07)
(6) |
|
|
27,055 |
|
|
|
27,034 |
|
|
|
|
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
5,305 |
|
|
|
|
|
|
|
Guaranty ($1,100) |
|
|
|
|
|
|
|
|
|
|
|
|
|
American Healthcare Services, Inc.
|
|
Senior Loan (0.7%, Due 12/04 12/05)
(6) |
|
|
4,998 |
|
|
|
4,600 |
|
|
|
4,002 |
|
|
and Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne,
Inc.(7)
|
|
Preferred Stock (12,500 shares) |
|
|
|
|
|
|
658 |
|
|
|
892 |
|
|
(Business Services)
|
|
Common Stock (27,500 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance,
Inc.(7)
|
|
Preferred Stock (1,568 shares) |
|
|
|
|
|
|
2,401 |
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (2,750 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranty ($2,401) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Loan Express, LLC
|
|
Class A Equity Interests |
|
|
62,532 |
|
|
|
62,532 |
|
|
|
62,532 |
|
|
(Financial Services)
|
|
Class B Equity Interests |
|
|
|
|
|
|
119,436 |
|
|
|
136,090 |
|
|
|
Class C Equity Interests |
|
|
|
|
|
|
109,301 |
|
|
|
127,619 |
|
|
|
Guaranty ($141,118 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letters of Credit
($34,050 See Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Capital Corporation
|
|
Senior Loan (9.6%, Due 4/06 12/06) |
|
|
7,480 |
|
|
|
7,480 |
|
|
|
7,480 |
|
|
(Financial Services)
|
|
Subordinated Debt (18.0%, Due 10/08) |
|
|
5,049 |
|
|
|
5,049 |
|
|
|
5,049 |
|
|
|
Common Stock (10 shares) |
|
|
|
|
|
|
2,058 |
|
|
|
10,355 |
|
|
CR Brands, Inc.
|
|
Senior Loan (8.1%, Due 2/07) |
|
|
37,219 |
|
|
|
37,048 |
|
|
|
37,048 |
|
|
(Consumer Products)
|
|
Subordinated Debt (16.6%, Due 2/13) |
|
|
38,898 |
|
|
|
38,705 |
|
|
|
38,705 |
|
|
|
Common Stock (37,200,551 shares) |
|
|
|
|
|
|
33,321 |
|
|
|
37,431 |
|
|
Diversified Group Administrators, Inc.
|
|
Preferred Stock (1,000,000 shares) |
|
|
|
|
|
|
700 |
|
|
|
714 |
|
|
(Business Services)
|
|
Preferred Stock (1,451,380 shares) |
|
|
|
|
|
|
841 |
|
|
|
841 |
|
|
|
|
Common Stock (1,451,380 shares) |
|
|
|
|
|
|
|
|
|
|
571 |
|
|
Financial Pacific Company
(Financial Services)
|
|
Subordinated Debt (17.4%, Due 2/12 8/12) |
|
|
70,525 |
|
|
|
70,266 |
|
|
|
70,266 |
|
|
|
|
Preferred Stock (10,964 shares) |
|
|
|
|
|
|
10,276 |
|
|
|
13,771 |
|
|
|
|
Common Stock (14,735 shares) |
|
|
|
|
|
|
14,819 |
|
|
|
43,669 |
|
|
ForeSite Towers, LLC
|
|
Equity Interests |
|
|
|
|
|
|
7,620 |
|
|
|
11,294 |
|
|
(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.
F-62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Global Communications, LLC
|
|
Senior Loan (10.7%, Due 9/02 11/07)
(6) |
|
$ |
15,957 |
|
|
$ |
15,957 |
|
|
$ |
15,957 |
|
|
(Business Services)
|
|
Subordinated Debt (17.0%, Due
12/03 9/05)(6) |
|
|
11,339 |
|
|
|
11,336 |
|
|
|
11,336 |
|
|
|
Preferred Equity Interest |
|
|
|
|
|
|
14,067 |
|
|
|
554 |
|
|
|
Options |
|
|
|
|
|
|
1,639 |
|
|
|
|
|
|
Gordian Group, Inc.
|
|
Senior Loan (10.0%, Due 6/06 12/08)
(6) |
|
|
11,567 |
|
|
|
11,591 |
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (1,000 shares) |
|
|
|
|
|
|
6,762 |
|
|
|
|
|
|
Healthy Pet Corp.
|
|
Senior Loan (10.5%, Due 8/10) |
|
|
16,738 |
|
|
|
16,738 |
|
|
|
16,738 |
|
|
(Consumer Services)
|
|
Subordinated Debt (15.0%, Due 8/10) |
|
|
43,257 |
|
|
|
43,086 |
|
|
|
43,086 |
|
|
|
|
Common Stock (30,266 shares) |
|
|
|
|
|
|
30,266 |
|
|
|
30,940 |
|
|
HMT, Inc.
|
|
Preferred Stock (554,052 shares) |
|
|
|
|
|
|
2,637 |
|
|
|
2,637 |
|
|
(Energy Services)
|
|
Common Stock (300,000 shares) |
|
|
|
|
|
|
3,000 |
|
|
|
5,920 |
|
|
|
Warrants |
|
|
|
|
|
|
1,155 |
|
|
|
2,280 |
|
|
Impact Innovations Group, LLC
(Business Services)
|
|
Equity Interests in Affiliate |
|
|
|
|
|
|
|
|
|
|
869 |
|
|
Insight Pharmaceuticals Corporation
|
|
Subordinated Debt (16.1%, Due 9/12) |
|
|
58,912 |
|
|
|
58,685 |
|
|
|
58,685 |
|
|
(Consumer Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
25,000 |
|
|
|
24,776 |
|
|
|
Common Stock (620,000 shares) |
|
|
|
|
|
|
6,325 |
|
|
|
|
|
|
Jakel, Inc.
|
|
Subordinated Debt (15.5%, Due
3/08)(6) |
|
|
14,442 |
|
|
|
14,442 |
|
|
|
1,066 |
|
|
(Industrial Products)
|
|
Preferred Stock (6,460 shares) |
|
|
|
|
|
|
6,460 |
|
|
|
|
|
|
|
|
Common Stock (158,061 shares) |
|
|
|
|
|
|
9,347 |
|
|
|
|
|
|
Legacy Partners Group, LLC
|
|
Senior Loan (14.0%, Due
5/09)(6) |
|
|
7,646 |
|
|
|
7,646 |
|
|
|
5,122 |
|
|
(Financial Services)
|
|
Subordinated Debt (18.0%, Due
5/09)(6) |
|
|
2,952 |
|
|
|
2,952 |
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
4,248 |
|
|
|
|
|
|
Litterer
Beteiligungs-GmbH(4)
|
|
Subordinated Debt (8.0%, Due 3/07) |
|
|
633 |
|
|
|
633 |
|
|
|
633 |
|
|
(Business Services)
|
|
Equity Interest |
|
|
|
|
|
|
1,810 |
|
|
|
2,989 |
|
|
Mercury Air Centers, Inc.
|
|
Senior Loan (10.0%, Due 4/09) |
|
|
35,720 |
|
|
|
35,720 |
|
|
|
35,720 |
|
|
(Business Services)
|
|
Subordinated Debt (16.0%, Due 4/09) |
|
|
50,872 |
|
|
|
50,684 |
|
|
|
50,684 |
|
|
|
|
Common Stock (57,970 shares) |
|
|
|
|
|
|
35,053 |
|
|
|
93,600 |
|
|
|
|
Standby Letters of Credit ($1,998) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MVL Group, Inc.
|
|
Senior Loan (12.1%, Due 7/09) |
|
|
27,525 |
|
|
|
27,286 |
|
|
|
27,286 |
|
|
(Business Services)
|
|
Subordinated Debt (14.4%, Due 7/09) |
|
|
33,114 |
|
|
|
32,653 |
|
|
|
32,653 |
|
|
|
Common Stock (648,661 shares) |
|
|
|
|
|
|
643 |
|
|
|
2,033 |
|
|
Powell Plant Farms, Inc.
|
|
Senior Loan (15.0%, Due 12/06) |
|
|
38,715 |
|
|
|
29,867 |
|
|
|
29,867 |
|
|
(Consumer Products)
|
|
Subordinated Debt (20.0%, Due
6/03)(6) |
|
|
19,291 |
|
|
|
19,224 |
|
|
|
8,457 |
|
|
|
Preferred Stock (1,483 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
F-63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Service Champ, Inc.
|
|
Subordinated Debt (15.5%, Due 4/12) |
|
$ |
27,214 |
|
|
$ |
27,084 |
|
|
$ |
27,084 |
|
|
(Business Services)
|
|
Common Stock (63,888 shares) |
|
|
|
|
|
|
13,662 |
|
|
|
15,565 |
|
|
Staffing Partners Holding
|
|
Subordinated Debt (13.5%,
Due 1/07)(6) |
|
|
5,987 |
|
|
|
5,987 |
|
|
|
4,170 |
|
|
Company, Inc. |
|
Preferred Stock (439,600 shares) |
|
|
|
|
|
|
4,968 |
|
|
|
|
|
|
(Business Services)
|
|
Common Stock (69,773 shares) |
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
Startec Global Communications
|
|
Senior Loan (10.0%, Due 5/07 5/09) |
|
|
24,283 |
|
|
|
24,283 |
|
|
|
22,987 |
|
|
Corporation
|
|
Common Stock (19,180,000 shares) |
|
|
|
|
|
|
37,255 |
|
|
|
|
|
|
(Telecommunications)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STS Operating, Inc.
|
|
Subordinated Debt (15.3%, Due 3/12) |
|
|
6,593 |
|
|
|
6,593 |
|
|
|
6,593 |
|
|
(Industrial Products)
|
|
Common Stock (3,000,000 shares) |
|
|
|
|
|
|
3,522 |
|
|
|
97,002 |
|
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
852 |
|
|
Triview Investments,
Inc.(8)
|
|
Senior Loan (8.9%, Due 6/07) |
|
|
14,325 |
|
|
|
14,295 |
|
|
|
14,295 |
|
|
(Broadcasting & Cable/ |
|
Subordinated Debt (15.0%, Due 7/12) |
|
|
37,877 |
|
|
|
37,687 |
|
|
|
37,687 |
|
|
Consumer Products) |
|
Subordinated Debt (16.8%, Due 7/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/12)(6) |
|
|
19,600 |
|
|
|
19,520 |
|
|
|
19,520 |
|
|
|
|
Common Stock (202 shares) |
|
|
|
|
|
|
93,906 |
|
|
|
30,883 |
|
|
|
Guaranty ($800) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letter of Credit ($200) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies more than 25% owned |
|
|
|
|
|
$ |
1,379,842 |
|
|
$ |
1,388,855 |
|
|
Companies 5% to 25% Owned |
|
|
|
|
|
Advantage Sales & Marketing, Inc.
|
|
Subordinated Debt (12.0%, Due 3/14) |
|
$ |
150,000 |
|
|
$ |
149,258 |
|
|
$ |
149,258 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
2,048 |
|
|
|
15,000 |
|
|
Air Evac Lifeteam LLC
|
|
Subordinated Debt (13.9%, Due 7/10) |
|
|
42,627 |
|
|
|
42,488 |
|
|
|
42,488 |
|
|
(Healthcare Services) |
|
Equity Interests |
|
|
|
|
|
|
3,941 |
|
|
|
5,400 |
|
|
BB&T Capital Partners/Windsor
|
|
Equity Interests |
|
|
|
|
|
|
5,867 |
|
|
|
5,867 |
|
|
Mezzanine Fund, LLC
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Private Equity Fund) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Subordinated Debt (14.5%, Due 8/12) |
|
|
23,790 |
|
|
|
23,698 |
|
|
|
23,698 |
|
|
(Industrial Products)
|
|
Common Stock (5,073 shares) |
|
|
|
|
|
|
5,813 |
|
|
|
1,500 |
|
|
BI Incorporated
|
|
Senior Loan (8.1%, Due 2/13) |
|
|
5,000 |
|
|
|
4,891 |
|
|
|
4,891 |
|
|
(Business Services)
|
|
Subordinated Debt (13.5%, Due 2/14) |
|
|
30,000 |
|
|
|
29,852 |
|
|
|
29,852 |
|
|
|
Common Stock (40,000 shares) |
|
|
|
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
(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. holds investments in Longview Cable
& Data, LLC (Broadcasting & Cable) with a cost of
$66.5 million and value of $15.8 million and Triax
Holdings, LLC (Consumer Products) with a cost of
$98.9 million and a value of $86.6 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.
F-64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
MedBridge Healthcare, LLC
|
|
Senior Loan (4.0%, Due
8/09)(6) |
|
$ |
7,164 |
|
|
$ |
7,164 |
|
|
$ |
5,154 |
|
|
(Healthcare Services)
|
|
Subordinated Debt (10.0%, Due
8/14)(6) |
|
|
5,184 |
|
|
|
5,184 |
|
|
|
|
|
|
|
Convertible Subordinated Debt (2.0%,
Due
8/14)(6) |
|
|
2,970 |
|
|
|
984 |
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
1,302 |
|
|
|
|
|
|
Nexcel Synthetics, LLC
|
|
Subordinated Debt (14.5%, Due 6/09) |
|
|
10,711 |
|
|
|
10,685 |
|
|
|
10,685 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,708 |
|
|
|
1,482 |
|
|
Pres Air Trol LLC
|
|
Unitranche Debt (12.0%, Due
4/10)(6) |
|
|
5,911 |
|
|
|
5,583 |
|
|
|
5,583 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,361 |
|
|
|
328 |
|
|
Progressive International
|
|
Subordinated Debt (16.0%, Due 12/09) |
|
|
7,439 |
|
|
|
7,415 |
|
|
|
7,415 |
|
|
Corporation
|
|
Preferred Stock (500 shares) |
|
|
|
|
|
|
500 |
|
|
|
902 |
|
|
(Consumer Products)
|
|
Common Stock (197 shares) |
|
|
|
|
|
|
13 |
|
|
|
300 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Soteria Imaging Services, LLC
|
|
Subordinated Debt (11.8%, Due 11/10) |
|
|
14,500 |
|
|
|
13,480 |
|
|
|
13,480 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
2,159 |
|
|
|
2,354 |
|
|
Universal Environmental Services, LLC
|
|
Unitranche Debt (15.5%, Due 2/09) |
|
|
10,975 |
|
|
|
10,940 |
|
|
|
10,940 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
1,810 |
|
|
|
1,068 |
|
|
Total
companies 5% to 25% owned |
|
|
|
|
|
$ |
342,144 |
|
|
$ |
341,645 |
|
|
Companies Less Than 5% Owned |
|
|
|
|
|
3SI Security Systems, Inc.
|
|
Senior Loan (8.4%, Due 2/12 2/13) |
|
$ |
48,400 |
|
|
$ |
47,685 |
|
|
$ |
47,685 |
|
|
(Consumer Products)
|
|
Subordinated Debt (14.4%, Due 8/13) |
|
|
26,300 |
|
|
|
26,170 |
|
|
|
26,170 |
|
|
Advanced Circuits, Inc.
|
|
Senior Loan (10.5%, Due 9/11 3/12) |
|
|
17,821 |
|
|
|
17,735 |
|
|
|
17,735 |
|
|
(Industrial Products)
|
|
Common Stock (40,000 shares) |
|
|
|
|
|
|
1,000 |
|
|
|
1,400 |
|
|
Amerex Group, LLC
|
|
Subordinated Debt (12.0%, Due 1/13) |
|
|
8,400 |
|
|
|
8,400 |
|
|
|
8,400 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
3,600 |
|
|
|
3,600 |
|
|
Anthony, Inc.
(Industrial Products)
|
|
Subordinated Debt (13.0%, Due 8/11 9/12) |
|
|
14,707 |
|
|
|
14,650 |
|
|
|
14,650 |
|
|
Benchmark Medical, Inc.
|
|
Warrants |
|
|
|
|
|
|
18 |
|
|
|
30 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Border Foods, Inc.
(Consumer Products)
|
|
Subordinated Debt (13.0%, Due
12/10)(6) |
|
|
13,428 |
|
|
|
12,721 |
|
|
|
|
|
|
|
Preferred Stock (140,214 shares) |
|
|
|
|
|
|
2,893 |
|
|
|
|
|
|
|
Common Stock (1,810 shares) |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
910 |
|
|
|
|
|
|
Broadcast Electronics, Inc.
|
|
Senior Loan (10.3%, Due 7/12) |
|
|
5,000 |
|
|
|
4,963 |
|
|
|
4,963 |
|
|
(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. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
C&K Market, Inc.
|
|
Subordinated Debt (14.0%, Due 12/08) |
|
$ |
25,638 |
|
|
$ |
25,536 |
|
|
$ |
25,536 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
Class C Notes (12.9%, Due 12/13) |
|
|
18,800 |
|
|
|
18,968 |
|
|
|
18,968 |
|
|
CDO Fund I,
Ltd.(4)(9)
|
|
Class D Notes (17.0%, Due 12/13) |
|
|
9,400 |
|
|
|
9,484 |
|
|
|
9,484 |
|
|
(Senior Debt Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus Debt Partners
|
|
Preferred Shares (23,600,000 shares) |
|
|
|
|
|
|
24,106 |
|
|
|
24,106 |
|
|
CLO Fund III, Ltd.
(4)(9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Senior Debt Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callidus MAPS CLO Fund I
LLC(9)
|
|
Class E Notes (10.2%, Due 12/17) |
|
|
17,000 |
|
|
|
17,000 |
|
|
|
17,000 |
|
|
(Senior Debt Fund)
|
|
Income Notes |
|
|
|
|
|
|
49,836 |
|
|
|
49,836 |
|
|
Camden Partners Strategic Fund II,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,142 |
|
|
|
3,149 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catterton Partners V,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,650 |
|
|
|
2,748 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CBS Personnel Holdings, Inc.
(Business Services)
|
|
Subordinated Debt (14.5%, Due 12/09) |
|
|
20,749 |
|
|
|
20,677 |
|
|
|
20,677 |
|
|
Centre Capital Investors IV,
LP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,752 |
|
|
|
1,639 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Credit Group, Inc.
|
|
Subordinated Debt (14.8%, Due 2/11) |
|
|
5,000 |
|
|
|
4,952 |
|
|
|
4,952 |
|
|
(Financial Services)
|
|
Preferred Stock (32,500 shares) |
|
|
|
|
|
|
3,900 |
|
|
|
3,900 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Education
Centers, Inc.
|
|
Subordinated Debt (16.0%, Due 12/10) |
|
|
33,392 |
|
|
|
33,284 |
|
|
|
33,284 |
|
|
(Education Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Component Hardware Group, Inc.
|
|
Preferred Stock (18,000 shares) |
|
|
|
|
|
|
2,605 |
|
|
|
2,881 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
900 |
|
|
Cooper Natural Resources, Inc.
|
|
Subordinated Debt (0%, Due 11/07) |
|
|
675 |
|
|
|
675 |
|
|
|
675 |
|
|
(Industrial Products)
|
|
Preferred Stock (6,316 shares) |
|
|
|
|
|
|
1,424 |
|
|
|
20 |
|
|
|
Warrants |
|
|
|
|
|
|
830 |
|
|
|
|
|
|
Coverall North America, Inc.
|
|
Subordinated Debt (14.6%, Due 2/11) |
|
|
27,488 |
|
|
|
27,443 |
|
|
|
27,443 |
|
|
(Business Services)
|
|
Preferred Stock (6,500 shares) |
|
|
|
|
|
|
6,500 |
|
|
|
6,969 |
|
|
|
Warrants |
|
|
|
|
|
|
2,950 |
|
|
|
3,100 |
|
|
Deluxe Entertainment Services
Group, Inc.
|
|
Subordinated Debt (13.2%, Due 7/11) |
|
|
30,000 |
|
|
|
30,000 |
|
|
|
30,000 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distant Lands Trading Co.
|
|
Senior Loan (8.6%, Due 1/11) |
|
|
1,000 |
|
|
|
976 |
|
|
|
976 |
|
|
(Consumer Products)
|
|
Unitranche Debt (10.3% Due 1/11) |
|
|
25,000 |
|
|
|
24,881 |
|
|
|
24,881 |
|
|
|
|
Common Stock (1,500 shares) |
|
|
|
|
|
|
1,500 |
|
|
|
1,500 |
|
|
|
|
|
(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)
|
|
The fund is managed by Callidus Capital Corporation, a portfolio
company of Allied Capital. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Drilltec Patents & Technologies
|
|
Subordinated Debt (17.5%, Due 8/06) |
|
$ |
3,952 |
|
|
$ |
3,952 |
|
|
$ |
3,952 |
|
|
Company, Inc.
(Energy Services)
|
|
Subordinated Debt (10.0%, Due
8/06)(6) |
|
|
10,994 |
|
|
|
10,918 |
|
|
|
13,116 |
|
|
DVS VideoStream, LLC
|
|
Unitranche Debt (11.0%, Due 2/12) |
|
|
20,000 |
|
|
|
19,879 |
|
|
|
19,879 |
|
|
(Business Services)
|
|
Convertible Subordinated Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.0%, Due 2/16) |
|
|
3,500 |
|
|
|
3,483 |
|
|
|
3,483 |
|
|
Dynamic India Fund IV
(4)(5)
|
|
Equity Interests |
|
|
|
|
|
|
1,650 |
|
|
|
1,650 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
eCentury Capital Partners,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
5,649 |
|
|
|
82 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elexis Beta
GmbH(4)
|
|
Options |
|
|
|
|
|
|
426 |
|
|
|
50 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event Rentals, Inc.
(Consumer Services)
|
|
Senior Loans (9.9%, Due 11/11) |
|
|
18,341 |
|
|
|
18,248 |
|
|
|
18,248 |
|
|
Farleys & Sathers Candy Company, Inc.
|
|
Subordinated Debt (11.0%, Due 3/11) |
|
|
20,000 |
|
|
|
19,900 |
|
|
|
19,900 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frozen Specialties, Inc.
|
|
Warrants |
|
|
|
|
|
|
435 |
|
|
|
470 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Ridge Corporation
(Retail)
|
|
Subordinated Debt (7.0%, Due
5/12)(6) |
|
|
22,500 |
|
|
|
22,500 |
|
|
|
15,369 |
|
|
Geotrace Technologies, Inc.
|
|
Subordinated Debt (10.0%, Due 6/09) |
|
|
25,293 |
|
|
|
23,617 |
|
|
|
23,617 |
|
(Energy Services)
|
|
Warrants |
|
|
|
|
|
|
2,350 |
|
|
|
2,500 |
|
|
Ginsey Industries, Inc.
|
|
Subordinated Debt (12.5%, Due 3/07) |
|
|
3,455 |
|
|
|
3,455 |
|
|
|
3,455 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Broadcasting Systems II
|
|
Subordinated Debt (5.0%, Due 6/09) |
|
|
2,896 |
|
|
|
2,896 |
|
|
|
2,896 |
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grotech Partners, VI,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
7,645 |
|
|
|
5,000 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Havco Wood Products LLC
|
|
Unitranche Debt (10.8%, Due 8/11) |
|
|
28,376 |
|
|
|
27,210 |
|
|
|
27,210 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,048 |
|
|
|
1,400 |
|
|
Haven Eldercare of New England,
LLC(10)
|
|
Subordinated Debt (12.0%, Due
8/09)(6) |
|
|
4,020 |
|
|
|
4,020 |
|
|
|
4,020 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Haven Healthcare Management,
LLC(10)
|
|
Subordinated Debt (18.0% Due
4/07)(6) |
|
|
508 |
|
|
|
620 |
|
|
|
125 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthASPex Services Inc.
|
|
Senior Loan (4.0%, Due 7/08) |
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Hillman Companies,
Inc.(3)
|
|
Subordinated Debt (13.5%, Due 9/11) |
|
|
44,247 |
|
|
|
44,070 |
|
|
|
44,070 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homax Holdings, Inc.
|
|
Subordinated Debt (12.0%, Due 8/11) |
|
|
14,000 |
|
|
|
13,074 |
|
|
|
13,074 |
|
|
(Consumer Products)
|
|
Preferred Stock (89 shares) |
|
|
|
|
|
|
89 |
|
|
|
85 |
|
|
|
|
Common Stock (28 shares) |
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
|
Warrants |
|
|
|
|
|
|
1,106 |
|
|
|
1,384 |
|
|
|
|
|
|
|
|
(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) |
|
|
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.
F-67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Hot Stuff Foods, LLC
|
|
Senior Loan (8.2%, Due 2/11-2/12) |
|
$ |
45,690 |
|
|
$ |
45,690 |
|
|
$ |
45,690 |
|
|
(Consumer Products)
|
|
Subordinated Debt (13.9%, Due 8/12 2/13) |
|
|
72,500 |
|
|
|
72,148 |
|
|
|
72,148 |
|
|
|
|
Common Stock
(375,000 shares)(11) |
|
|
|
|
|
|
37,500 |
|
|
|
37,500 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Integrity Interactive Corporation
|
|
Unitranche Debt (10.5%, Due 2/12) |
|
|
30,000 |
|
|
|
29,786 |
|
|
|
29,786 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Fiber Corporation
|
|
Subordinated Debt (14.0%, Due 6/12) |
|
|
21,656 |
|
|
|
21,574 |
|
|
|
21,574 |
|
|
(Industrial Products)
|
|
Preferred Stock (25,000 shares) |
|
|
|
|
|
|
2,500 |
|
|
|
1,900 |
|
|
Kodiak Fund
LP(5)
|
|
Equity Interests |
|
|
|
|
|
|
5,000 |
|
|
|
5,000 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line-X, Inc.
|
|
Senior Loan (8.4%, Due 8/11) |
|
|
4,134 |
|
|
|
4,111 |
|
|
|
4,111 |
|
|
(Consumer Products)
|
|
Unitranche Debt (10.0% Due 8/11) |
|
|
50,225 |
|
|
|
49,990 |
|
|
|
49,990 |
|
|
|
|
Standby Letter of Credit ($1,500) |
|
|
|
|
|
|
|
|
|
|
|
|
|
MedAssets, Inc.
|
|
Preferred Stock (227,865 shares) |
|
|
|
|
|
|
2,049 |
|
|
|
3,417 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
136 |
|
|
|
55 |
|
|
Meineke Car Care Centers, Inc.
|
|
Senior Loan (8.4%, Due 6/11) |
|
|
28,000 |
|
|
|
27,871 |
|
|
|
27,871 |
|
|
(Business Services)
|
|
Subordinated Debt (11.9%, Due 6/12 6/13) |
|
|
72,000 |
|
|
|
71,690 |
|
|
|
71,690 |
|
|
|
|
Common Stock (10,696,308
shares)(11) |
|
|
|
|
|
|
26,985 |
|
|
|
26,130 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
MHF Logistical Solutions, Inc.
|
|
Unitranche Debt (10.0%, Due 5/11) |
|
|
21,922 |
|
|
|
21,823 |
|
|
|
21,823 |
|
|
(Business Services)
|
|
Preferred Stock (431 shares) |
|
|
|
|
|
|
431 |
|
|
|
465 |
|
|
|
|
Common Stock (1,438 shares) |
|
|
|
|
|
|
144 |
|
|
|
750 |
|
|
Mid-Atlantic Venture Fund IV,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
6,600 |
|
|
|
3,002 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mogas Energy, LLC
(Energy Services)
|
|
Subordinated Debt (9.5%, Due 3/12 4/12) |
|
|
16,703 |
|
|
|
15,355 |
|
|
|
15,355 |
|
|
|
|
Warrants |
|
|
|
|
|
|
1,774 |
|
|
|
4,000 |
|
|
Network Hardware Resale, Inc.
|
|
Unitranche Debt (10.5%, Due 12/11) |
|
|
38,500 |
|
|
|
38,739 |
|
|
|
38,739 |
|
|
(Business Services)
|
|
Convertible Subordinated Debt (9.8%, Due 12/15) |
|
|
12,000 |
|
|
|
12,074 |
|
|
|
12,074 |
|
|
N.E.W. Customer Service Companies, Inc.
|
|
Subordinated Debt (11.0%, Due 7/12) |
|
|
40,000 |
|
|
|
40,014 |
|
|
|
40,014 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Norwesco, Inc.
(Industrial Products)
|
|
Subordinated Debt (12.6%, Due 1/12 7/12) |
|
|
82,167 |
|
|
|
81,805 |
|
|
|
81,805 |
|
|
|
|
Common Stock (559,603
shares)(11) |
|
|
|
|
|
|
38,313 |
|
|
|
44,659 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Novak Biddle Venture Partners III,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,594 |
|
|
|
1,703 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oahu Waste Services, Inc.
|
|
Stock Appreciation Rights |
|
|
|
|
|
|
239 |
|
|
|
1,120 |
|
|
(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. |
|
(11) |
|
|
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.
F-68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Odyssey Investment Partners Fund III,
LP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
$ |
1,552 |
|
|
$ |
1,418 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opinion Research
Corporation(3)
|
|
Warrants |
|
|
|
|
|
|
996 |
|
|
|
175 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Trading Company, Inc.
|
|
Common Stock (13,820 shares) |
|
|
|
|
|
|
|
|
|
|
5,200 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palm Coast Data, LLC
|
|
Senior Loan (8.0%, Due 8/10) |
|
$ |
15,850 |
|
|
|
15,778 |
|
|
|
15,778 |
|
|
(Business Services)
|
|
Subordinated Debt (15.5%, Due 8/12 8/15) |
|
|
29,865 |
|
|
|
29,731 |
|
|
|
29,731 |
|
|
|
|
Common Stock (21,743
shares)(11) |
|
|
|
|
|
|
21,743 |
|
|
|
19,019 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
Performant Financial Corporation
|
|
Common Stock (478,816 shares) |
|
|
|
|
|
|
734 |
|
|
|
600 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Mach, Inc.
|
|
Subordinated Debt (13.8%, Due 6/12) |
|
|
19,359 |
|
|
|
19,281 |
|
|
|
19,281 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
1,500 |
|
|
|
1,500 |
|
|
Promo Works, LLC
|
|
Senior Loan (8.9%, Due 12/11) |
|
|
900 |
|
|
|
853 |
|
|
|
853 |
|
|
(Business Services)
|
|
Unitranche Debt (10.3%, Due 12/11) |
|
|
31,000 |
|
|
|
30,739 |
|
|
|
30,739 |
|
|
|
|
Guaranty ($1,500) |
|
|
|
|
|
|
|
|
|
|
|
|
|
RadioVisa Corporation
|
|
Unitranche Debt (15.5%, Due 12/08) |
|
|
27,405 |
|
|
|
27,308 |
|
|
|
27,308 |
|
|
(Broadcasting & Cable)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Red Hawk Industries, LLC
|
|
Unitranche Debt (11.0%, Due 4/11) |
|
|
56,328 |
|
|
|
56,060 |
|
|
|
56,060 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.B. Restaurant Company
(Retail)
|
|
Subordinated Debt (14.7%, Due 11/08 12/09) |
|
|
29,188 |
|
|
|
28,758 |
|
|
|
28,758 |
|
|
|
|
Preferred Stock (54,125 shares) |
|
|
|
|
|
|
135 |
|
|
|
135 |
|
|
|
Warrants |
|
|
|
|
|
|
619 |
|
|
|
1,200 |
|
|
SBBUT, LLC
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soff-Cut Holdings, Inc.
|
|
Preferred Stock (300 shares) |
|
|
|
|
|
|
300 |
|
|
|
300 |
|
|
(Industrial Products)
|
|
Common Stock (2,000 shares) |
|
|
|
|
|
|
200 |
|
|
|
72 |
|
|
SPP Mezzanine Fund,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
2,993 |
|
|
|
3,021 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradesmen International, Inc.
|
|
Subordinated Debt (12.0%, Due 12/09) |
|
|
15,000 |
|
|
|
14,357 |
|
|
|
14,357 |
|
|
(Business Services)
|
|
Warrants |
|
|
|
|
|
|
710 |
|
|
|
1,950 |
|
|
TransAmerican Auto Parts, LLC
|
|
Senior Loan (8.2%, Due 11/11) |
|
|
8,944 |
|
|
|
8,944 |
|
|
|
8,944 |
|
|
(Consumer Products)
|
|
Subordinated Debt (14.0%, Due 11/12) |
|
|
12,780 |
|
|
|
12,719 |
|
|
|
12,719 |
|
|
|
|
Equity Interests |
|
|
|
|
|
|
1,190 |
|
|
|
1,190 |
|
|
United Site Services, Inc.
|
|
Subordinated Debt (12.6%, Due 8/11) |
|
|
49,712 |
|
|
|
49,515 |
|
|
|
49,515 |
|
|
(Business Services)
|
|
Common Stock (160,588 shares) |
|
|
|
|
|
|
1,000 |
|
|
|
1,200 |
|
|
Universal Air Filter Company
|
|
Unitranche Debt (11.0%, Due 11/11) |
|
|
19,867 |
|
|
|
19,763 |
|
|
|
19,763 |
|
|
(Industrial Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(11) |
|
|
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.
F-69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
Private Finance |
|
|
|
|
Portfolio Company |
|
|
|
(unaudited) |
(in thousands, except number of shares) |
|
Investment(1)(2) |
|
Principal |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Universal Tax Systems, Inc.
|
|
Subordinated Debt (14.5%, Due 10/13) |
|
$ |
19,190 |
|
|
$ |
19,120 |
|
|
$ |
19,120 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Updata Venture Partners II,
L.P.(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
5,277 |
|
|
|
4,809 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venturehouse-Cibernet Investors, LLC
|
|
Equity Interest |
|
|
|
|
|
|
42 |
|
|
|
42 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Venturehouse Group,
LLC(5)
|
|
Equity Interest |
|
|
|
|
|
|
598 |
|
|
|
419 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VICORP Restaurants,
Inc.(3)
|
|
Warrants |
|
|
|
|
|
|
33 |
|
|
|
250 |
|
|
(Retail)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Walker Investment Fund II,
LLLP(5)
|
|
Limited Partnership Interest |
|
|
|
|
|
|
1,330 |
|
|
|
548 |
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wear Me Apparel Corporation
|
|
Subordinated Debt (15.0%, Due 12/10) |
|
|
40,000 |
|
|
|
39,088 |
|
|
|
39,088 |
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
1,219 |
|
|
|
2,400 |
|
|
Wilshire Restaurant Group, Inc.
(Retail)
|
|
Subordinated Debt (20.0%, Due
6/07)(6) |
|
|
23,707 |
|
|
|
23,166 |
|
|
|
23,166 |
|
|
Wilton Industries, Inc.
|
|
Subordinated Debt (16.0%, Due 6/08) |
|
|
4,800 |
|
|
|
4,800 |
|
|
|
4,800 |
|
|
(Consumer Products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Woodstream Corporation
(Consumer Products)
|
|
Subordinated Debt (13.3%, Due 11/12 5/13) |
|
|
52,573 |
|
|
|
52,432 |
|
|
|
52,432 |
|
|
|
|
Common Stock (180 shares) |
|
|
|
|
|
|
673 |
|
|
|
3,336 |
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
2,365 |
|
|
Other companies
|
|
Other debt investments |
|
|
55 |
|
|
|
55 |
|
|
|
55 |
|
|
|
Other debt
investments(6) |
|
|
468 |
|
|
|
468 |
|
|
|
348 |
|
|
|
Other equity investments |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
Guaranty ($104) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
companies less than 5% owned |
|
|
|
|
|
$ |
1,845,529 |
|
|
$ |
1,831,133 |
|
|
Total
private finance (126 portfolio companies) |
|
|
|
|
|
$ |
3,567,515 |
|
|
$ |
3,561,633 |
|
|
|
|
|
|
|
|
(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.
F-70
|
|
|
|
|
|
|
|
|
Commercial Real Estate Finance
|
|
|
|
|
|
|
|
|
(in thousands, except number of loans)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
Interest |
|
Number of |
|
(unaudited) |
|
|
Rate Ranges |
|
Loans |
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
Commercial Mortgage Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to 6.99% |
|
|
|
4 |
|
|
$ |
22,779 |
|
|
$ |
21,920 |
|
|
|
|
7.00%8.99% |
|
|
|
25 |
|
|
|
48,564 |
|
|
|
48,695 |
|
|
|
|
9.00%10.99% |
|
|
|
4 |
|
|
|
25,816 |
|
|
|
25,816 |
|
|
|
|
11.00%14.99% |
|
|
|
1 |
|
|
|
2,293 |
|
|
|
2,293 |
|
|
|
15.00% and above |
|
|
2 |
|
|
|
3,970 |
|
|
|
3,970 |
|
|
|
Total commercial mortgage
loans(12)
|
|
|
|
|
|
|
36 |
|
|
$ |
103,422 |
|
|
$ |
102,694 |
|
|
Real Estate Owned
|
|
|
|
|
|
|
|
|
|
$ |
13,002 |
|
|
$ |
15,006 |
|
|
Equity
Interests(2)
Companies more than 25% owned
(Guarantees $7,004) |
|
|
|
|
|
$ |
13,140 |
|
|
$ |
11,669 |
|
|
|
Total commercial real estate finance
|
|
|
|
|
|
|
|
|
|
$ |
129,564 |
|
|
$ |
129,369 |
|
|
Total portfolio
|
|
|
|
|
|
|
|
|
|
$ |
3,697,079 |
|
|
$ |
3,691,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yield |
|
Cost |
|
Value |
|
|
|
|
|
|
|
Liquidity Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bills (Due June 2006)
|
|
|
4.2% |
|
|
$ |
100,000 |
|
|
$ |
101,289 |
|
|
SEI Daily Income Tr Prime Obligation
Fund(13)
|
|
|
4.6% |
|
|
|
101,072 |
|
|
|
101,072 |
|
|
|
|
Total liquidity portfolio
|
|
|
|
|
|
$ |
201,072 |
|
|
$ |
202,361 |
|
|
Other Investments in Money Market
Securities(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PNC Bank Corporate Money Market Deposit Account
|
|
|
4.5% |
|
|
$ |
29,318 |
|
|
$ |
29,318 |
|
|
Columbia Treasury Reserves Money Market Fund
|
|
|
4.5% |
|
|
$ |
9,374 |
|
|
$ |
9,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
(12) Commercial
mortgage loans totaling $21.2 million at value were on
non-accrual status and therefore were considered non-income
producing. |
(13) Included
in investments in money market securities on the accompanying
Consolidated Balance Sheet. |
The accompanying notes are an integral part of these
consolidated financial statements.
F-71
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at and for the three months ended March 31,
2006 and 2005 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 that are single member limited liability companies
established primarily to hold real estate properties. ACC also
has a subsidiary, A.C. Corporation (AC Corp),
that generally provides diligence and structuring services as
well as structuring, transaction, management, consulting and
other services to the Company and its portfolio companies.
AC Corp has a wholly-owned subsidiary, AC Finance LLC
(AC Finance), that generally underwrites and
arranges senior loans for the Companys portfolio companies
and other third parties.
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 2005 balances to conform
with the 2006 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 March 31, 2006, and
the results of operations, changes in net assets, and cash flows
for the three months ended March 31, 2006 and 2005. The
results of operations for the three months ended March 31,
2006, are not necessarily indicative of the operating results to
be expected for the full year.
F-72
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 and CDO and
CLO bonds and preferred shares/income notes. The Companys
investments may be subject to certain 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. The value of loan and debt
securities may be greater than the Companys cost basis
F-73
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
if the amount that would be repaid on the loan or debt security
upon the sale of the portfolio company is greater than the
Companys cost basis.
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 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 a method that approximates 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.
F-74
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
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 securities is recorded on the record
date for private companies or on the ex-dividend date for
publicly traded companies.
|
|
|
Collateralized Debt Obligations (CDO) and
Collateralized Loan Obligations (CLO) |
CDO and CLO bonds and preferred shares/ income notes (CDO/
CLO Assets) are carried at fair value, which is based on a
discounted cash flow model that utilizes 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 bonds
and preferred shares/income notes, when available. The Company
recognizes unrealized appreciation or depreciation on its CDO/
CLO Assets as comparable yields in the market change and/or
based on changes in estimated cash flows resulting from changes
in prepayment or loss assumptions in the underlying collateral
pool. The Company determines the fair value of its CDO/ CLO
Assets on an individual security-by-security basis.
The Company recognizes 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 are revised when there are changes in actual and
estimated prepayment speeds or actual and estimated credit
losses. Changes in estimated yield are recognized as an
adjustment to the estimated yield over the remaining life of the
CDO/ CLO Assets 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,
the change in the value of U.S. Treasury bills and deposits
of proceeds from sales of borrowed Treasury securities, and
depreciation on accrued interest and dividends receivable and
other assets where collection is doubtful.
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.
F-75
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. See
Note 5.
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
using a method that approximates the effective interest method.
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.
|
|
|
Dividends to Shareholders |
Dividends to shareholders are recorded on the record date.
The Company has a stock-based employee compensation plan. See
Note 9. Effective January 1, 2006, the Company adopted
the provisions of Statement No. 123 (Revised 2004),
Share-Based Payment (the Statement). With
respect to options granted prior to January 1, 2006, the
Company has used the modified prospective method for
adoption of the Statement. Under this method, the unamortized
cost of previously awarded options that were unvested as of
January 1, 2006, is recognized over the service period in
the statement of operations beginning in 2006. With respect to
options granted on or after January 1, 2006, compensation
cost is recognized over the service period in the statement of
operations. The effect of this adoption for the three months
ended March 31, 2006, was employee-related stock option
expense of $3.6 million or $0.03 per basic and diluted
share, which included $3.4 million related to previously
awarded options that were unvested as of January 1, 2006,
and $0.2 million related to options granted during the
three months ended March 31, 2006.
Prior to January 1, 2006, the Company accounted for this
plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Prior to
January 1, 2006, no stock-based employee compensation cost
was 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
F-76
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 months ended March 31, 2005.
|
|
|
|
|
|
|
|
For the Three |
|
|
Months Ended |
|
|
March 31, |
|
|
|
|
|
2005 |
(in thousands, except per share amounts) |
|
|
Net increase in net assets resulting from operations as reported
|
|
$ |
119,621 |
|
Less total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects
|
|
|
(2,856 |
) |
|
|
|
|
|
Pro forma net increase in net assets resulting from operations
available to common shareholders
|
|
$ |
116,765 |
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
As reported
|
|
$ |
0.90 |
|
|
Pro forma
|
|
$ |
0.88 |
|
Diluted earnings per common share:
|
|
|
|
|
|
As reported
|
|
$ |
0.88 |
|
|
Pro forma
|
|
$ |
0.86 |
|
The stock option expense for 2006 and the pro forma expense for
2005 shown in the table above were based on the underlying value
of the options granted by the Company. The fair value of each
option grant was estimated on the date of grant using the
Black-Scholes option pricing model and expensed over the vesting
period. The following assumptions were used to calculate the
fair value of options granted during the three months ended
March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
Months Ended |
|
|
March 31, |
|
|
|
|
|
2006 |
|
2005(1) |
|
|
|
|
|
Risk-free interest rate
|
|
|
4.3 |
% |
|
|
|
% |
Expected life
|
|
|
5.0 |
|
|
|
|
|
Expected volatility
|
|
|
29.6 |
% |
|
|
|
% |
Dividend yield
|
|
|
9.0 |
% |
|
|
|
% |
Weighted average fair value per option
|
|
$ |
3.35 |
|
|
$ |
|
|
|
|
(1) |
The Company did not grant any options during the three months
ended March 31, 2005. |
The risk free rate was based on the U.S. Treasury bond yield
curve at the date of grant. The Company used historical data to
estimate option exercise and employee termination in order to
determine the expected life of the option. The expected life of
the options granted represents the period of time that such
options are expected to be outstanding. Expected volatilities
were determined based on the historical volatility of the
Companys common stock. The dividend yield was determined
based on the Companys historical dividend yield.
The Company estimates that the stock option expense under the
Statement that will be recorded in the Companys statement
of operations will be approximately $14.3 million,
$9.3 million, and $2.8 million for the years ended
December 31, 2006, 2007, and 2008, respectively, which
includes
F-77
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
stock option expense related to options granted in the first
quarter of 2006 of approximately $0.8 million,
$0.5 million, and $0.2 million, respectively. This
estimate may change if the Companys assumptions related to
future option forfeitures change. This estimate does not include
any expense related to future stock option grants as the fair
value of those stock options will be determined at the time of
grant. The aggregate total stock option expense is expected to
be recognized over an estimated weighted-average period of 1.42
years.
|
|
|
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 (REIT). ACC 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 income taxes for these entities. Income taxes for AC Corp
are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases as well as operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled.
If the Company does not distribute at least 98% of its annual
taxable income in the year earned, the Company will generally be
required to pay an excise tax equal to 4% of the amount by which
98% of the Companys annual taxable income exceeds the
distributions from such taxable income for the 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 from such taxable income,
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.
F-78
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
The consolidated financial statements include portfolio
investments at value of $3.7 billion and $3.6 billion
at March 31, 2006, and December 31, 2005,
respectively. At both March 31, 2006, and December 31,
2005, 90% of the Companys total assets represented
portfolio investments whose fair values have been determined by
the Board of Directors in good faith in the absence of readily
available market values. Because of the inherent uncertainty of
valuation, the Board of Directors determined values may
differ significantly from the values that would have been used
had a ready market existed for the investments, and the
differences could be material.
Note 3. Portfolio
At March 31, 2006, and December 31, 2005, the private
finance portfolio consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Cost |
|
Value |
|
Yield(1) |
|
Cost |
|
Value |
|
Yield(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$ |
468,987 |
|
|
$ |
420,065 |
|
|
|
9.3 |
% |
|
$ |
284,680 |
|
|
$ |
239,838 |
|
|
|
9.5 |
% |
|
Unitranche
debt(2)
|
|
|
362,726 |
|
|
|
362,726 |
|
|
|
11.1 |
% |
|
|
294,201 |
|
|
|
294,201 |
|
|
|
11.4 |
% |
|
Subordinated debt
|
|
|
1,801,347 |
|
|
|
1,747,235 |
|
|
|
13.6 |
% |
|
|
1,610,228 |
|
|
|
1,560,851 |
|
|
|
13.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and debt
securities(3)
|
|
|
2,633,060 |
|
|
|
2,530,026 |
|
|
|
12.5 |
% |
|
|
2,189,109 |
|
|
|
2,094,890 |
|
|
|
13.0 |
% |
Equity securities
|
|
|
934,455 |
|
|
|
1,031,607 |
|
|
|
|
|
|
|
917,314 |
|
|
|
1,384,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,567,515 |
|
|
$ |
3,561,633 |
|
|
|
|
|
|
$ |
3,106,423 |
|
|
$ |
3,479,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 March 31,
2006, and December 31, 2005, the cost and value of
subordinated debt 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) |
Unitranche debt is a single debt investment that is a blend of
senior and subordinated debt terms. |
|
(3) |
The total principal balance outstanding on loans and debt
securities was $2,662.5 million and $2,216.3 million
at March 31, 2006, and December 31, 2005, respectively. The
difference between principal and cost is represented by
unamortized loan origination fees and costs, original issue
discounts, and market discounts totaling $29.4 million and
$27.2 million at March 31, 2006, and December 31,
2005, 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 may be
subject to certain 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
F-79
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
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 March 31, 2006, 80% of the private finance loans and
debt securities had a fixed rate of interest and 20% had a
floating rate of interest. At December 31, 2005, 87% of the
private finance loans and debt securities had a fixed rate of
interest and 13% had a floating rate of interest. Senior loans
generally carry a floating rate of interest, usually set as a
spread over LIBOR, and generally require payments of both
principal and interest throughout the life of the loan. Senior
loans generally have maturities of three to five years and
interest is generally paid to the Company monthly or quarterly.
Loans other than senior loans generally carry a fixed rate of
interest with maturities of five to ten years. These loans
generally have interest-only payments in the early years and
payments of both principal and interest in the later years,
although maturities and principal amortization schedules may
vary. Interest is generally paid to the Company quarterly.
Equity securities consist primarily of securities issued by
private companies and may be subject to certain restrictions on
their resale and are generally illiquid. The Company may make
equity investments for minority stakes in portfolio companies in
conjunction with its debt investments. The Company may also
invest in the equity (preferred and/or voting or non-voting
common) of a portfolio company where the Companys equity
ownership may represent a significant portion of the equity, but
may or may not represent a controlling interest. If the Company
invests in non-voting equity in a buyout investment, the Company
generally has the option to acquire a controlling stake in the
voting securities of the portfolio company at fair market value.
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 investment at value at March 31,
2006, was in Business Loan Express, LLC (BLX). The
Companys largest investments at value at December 31,
2005, were in Advantage Sales & Marketing, Inc.
(Advantage) and BLX. On March 29, 2006, the
Company sold its majority equity interest in Advantage.
Business Loan Express, LLC. The Companys
investment in BLX totaled $291.3 million at cost and
$326.2 million at value at March 31, 2006, and
$299.4 million at cost and $357.1 million at value at
December 31, 2005. BLX is a small business lender that
participates in the U.S. Small Business
Administrations 7(a) Guaranteed Loan Program. At
March 31, 2006, and December 31, 2005, the Company
owned 94.9% of the voting Class C equity interests. BLX has
an equity appreciation rights plan for management which will
dilute the value available to the Class C equity interest
holders. BLX is headquartered in New York, NY.
F-80
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
Total interest and related portfolio income earned from the
Companys investment in BLX for the three months ended
March 31, 2006 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Interest income on subordinated debt and Class A equity
interests
|
|
$ |
3.9 |
|
|
$ |
3.4 |
|
Dividend income on Class B equity interests
|
|
|
|
|
|
|
2.0 |
|
Fees and other income
|
|
|
2.2 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
6.1 |
|
|
$ |
7.8 |
|
|
|
|
|
|
|
|
|
|
Interest and dividend income from BLX for the three months ended
March 31, 2006 and 2005, included interest and dividend
income of $1.8 million and $1.6 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 decrease in unrealized appreciation on the Companys
investment in BLX of $22.7 million and $6.3 million
for the three months ended March 31, 2006 and 2005,
respectively.
At March 31, 2006, and December 31, 2005, the Company
had a commitment to BLX of $30.0 million in the form of a
subordinated revolving credit facility to provide working
capital to BLX. There were no amounts outstanding under this
facility at March 31, 2006, and there was
$10.0 million outstanding under this facility at
December 31, 2005. This facility matured on April 30,
2006.
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. 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 may declare dividends on its
Class B interests. If declared, BLX would determine the
amount of such dividend considering its estimated 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
F-81
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
to $40 million. At March 31, 2006, and
December 31, 2005, 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.
At December 31, 2005, BLX had a three-year
$275.0 million revolving credit facility provided by third
party lenders that was scheduled to mature in January 2007. As
the controlling equity owner in BLX, the Company had 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. The total obligation guaranteed by the Company
at December 31, 2005, was $135.4 million.
On March 17, 2006, BLX closed on a new three-year
$500.0 million revolving credit facility that matures in
March 2009, which replaced the existing facility. The revolving
credit facility may be expanded through new or additional
commitments up to $600.0 million at BLXs option. This
new facility provides for a sub-facility for the issuance of
letters of credit for up to an amount equal to 25% of the
committed facility. The Company has provided an unconditional
guaranty to these 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 this facility. The amount guaranteed by the
Company at March 31, 2006, was $141.1 million. This
guaranty can be called by the lenders only in the event of a
default under the BLX credit facility, which includes certain
defaults under the Companys revolving credit facility. BLX
was in compliance with the terms of this facility at
March 31, 2006.
At March 31, 2006, and December 31, 2005, the Company
had also provided four standby letters of credit totaling
$34.1 million in connection with four term securitization
transactions completed by BLX. In consideration for providing
the revolving credit facility guaranty and the standby letters
of credit, BLX paid the Company fees of $1.6 million for
both the three months ended March 31, 2006 and 2005.
Advantage Sales and Marketing, Inc. In
June 2004, the Company completed the purchase of a majority
voting ownership in Advantage, which was subject to dilution by
a management option pool. Advantage is a 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.
At December 31, 2005, the Companys investment in
Advantage totaled $257.7 million at cost and
$660.4 million at value, which included unrealized
appreciation of $402.7 million.
On March 29, 2006, the Company sold its majority equity
interest in Advantage. The Company was repaid its
$184 million in subordinated debt outstanding and realized
a gain on its equity investment sold of $433.1 million,
subject to post-closing adjustments. As consideration for the
common stock sold in the transaction, the Company received a
$150 million subordinated note, with the balance of the
consideration paid in cash. Approximately $34 million of
the Companys cash proceeds from the sale of the common
stock have been held in escrow, subject to certain holdback
provisions. In addition, there is potential for the Company to
receive additional consideration through an earn-out payment
that would be based on Advantages 2006 audited results.
The Companys realized gain of $433.1 million excludes
any earn-out amounts. In connection with the transaction, the
F-82
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
Company retained an equity investment in the business valued at
$15 million as a minority shareholder.
After the completion of the sale transaction, the Companys
investment in Advantage at March 31, 2006, which was
composed of subordinated debt and a minority equity interest,
totaled $151.3 million at cost and $164.3 million at
value. This investment was included in companies 5% to 25% owned
in the consolidated financial statements as the Company
continues to hold a seat on Advantages board of directors.
Total interest and related portfolio income earned from the
Companys investment in Advantage while the Company held a
majority equity interest for the three months ended
March 31, 2006 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Interest income
|
|
$ |
7.3 |
|
|
$ |
7.7 |
|
Loan prepayment premiums
|
|
|
5.0 |
|
|
|
|
|
Fees and other income
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and related portfolio income
|
|
$ |
14.1 |
|
|
$ |
9.2 |
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation or depreciation for the
three months ended March 31, 2006, included the reversal of
$389.7 million of previously recorded unrealized
appreciation associated with the realization of a gain on the
sale of the Companys majority equity interest in
Advantage and for the three months ended March 31,
2005, included an increase of $68.9 million in unrealized
appreciation related to the Companys investment in
Advantage.
STS Operating, Inc. On May 1, 2006, the
Company announced the completion of the sale of STS Operating,
Inc. (STS). The Company was repaid its $6.8 million in
subordinated debt outstanding and realized a gain on the sale of
its common stock in STS of approximately $94 million,
subject to post-closing adjustments. The cost basis of its
equity was $3.5 million. As part of the consideration for
the sale of its equity, the Company received a $30 million
subordinated note. Approximately $10.7 million of its
proceeds are subject to certain holdback provisions and
post-closing adjustments.
Collateralized Loan Obligations (CLOs)
and Collateralized Debt
Obligations (CDOs) At March 31,
2006, and December 31, 2005, the Company owned bonds and
preferred shares/income notes in two collateralized loan
obligations (CLOs) totaling $90.9 million and
$89.3 million at value, respectively, and bonds in one
collateralized debt obligation (CDO) totaling
$28.5 million at value at both periods. These CLOs and CDO
are managed by Callidus Capital Corporation.
The bonds, preferred shares and income notes of the CLOs and CDO
in which the Company has invested are junior in priority for
payment of interest and principal to the more senior notes
issued by the CLOs and CDO. Cash flow from the underlying
collateral assets in the CLOs and CDO is generally allocated
first to the senior bonds in order of priority, then any
remaining cash flow is generally distributed to the preferred
shareholders and income note holders. To the extent there are
defaults and unrecoverable losses on the underlying collateral
assets that result in reduced cash flows, the preferred
shares/income notes would bear this loss first and then the
subordinated bonds would bear any loss after the preferred
shares/income notes.
F-83
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
At both March 31, 2006, and December 31, 2005, the
face value of the CLO and CDO bonds held by the Company were
subordinate to approximately 82% to 85% of the face value of the
securities issued in these CLOs and CDO. At both March 31,
2006, and December 31, 2005, the face value of the CLO
preferred shares/income notes held by the Company were
subordinate to approximately 86% to 91% of the face value of the
securities issued in these CLOs.
At March 31, 2006, and December 31, 2005, the Company
owned CLO and CDO investments from three issuances. The
underlying collateral assets of these CLO and CDO investments,
consisting primarily of senior debt, were issued by 332 issuers
and 336 issuers, respectively, and had balances as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
Bonds
|
|
$ |
228.9 |
|
|
$ |
230.7 |
|
Syndicated Loans
|
|
|
758.9 |
|
|
|
704.0 |
|
Cash(1)
|
|
|
185.0 |
|
|
|
238.4 |
|
|
|
|
|
|
|
|
|
|
|
Total underlying collateral assets
|
|
$ |
1,172.8 |
|
|
$ |
1,173.1 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes undrawn liability amounts. |
At March 31, 2006, and December 31, 2005, there were
no delinquencies in the underlying collateral assets of the CLO
and CDO issuances owned by the Company.
The initial yields on the CLO and CDO bonds, preferred shares
and income notes are based on the estimated future cash flows
from the underlying collateral assets expected to be paid to
these CLO and CDO classes. As each CLO and CDO bond, preferred
share or income note ages, the estimated future cash flows will
be updated based on the estimated performance of the underlying
collateral assets, and the respective yield will be adjusted as
necessary. As future cash flows are subject to uncertainties and
contingencies that are difficult to predict and are subject to
future events that may alter current assumptions, no assurance
can be given that the anticipated yields to maturity will be
achieved.
Loans and Debt Securities on Non-Accrual Status.
At March 31, 2006, and December 31, 2005, private
finance loans and debt securities at value not accruing interest
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in thousands) |
|
|
|
|
Loans and debt securities in workout status (classified as
Grade 4 or 5)
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
$ |
29,030 |
|
|
$ |
15,622 |
|
|
Companies 5% to 25% owned
|
|
|
5,583 |
|
|
|
|
|
|
Companies less than 5% owned
|
|
|
51,776 |
|
|
|
11,417 |
|
Loans and debt securities not in workout status
|
|
|
|
|
|
|
|
|
|
Companies more than 25% owned
|
|
|
40,599 |
|
|
|
58,047 |
|
|
Companies 5% to 25% owned
|
|
|
5,154 |
|
|
|
534 |
|
|
Companies less than 5% owned
|
|
|
4,369 |
|
|
|
49,458 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
136,511 |
|
|
$ |
135,078 |
|
|
|
|
|
|
|
|
|
|
F-84
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
Industry and Geographic Compositions. The industry
and geographic compositions of the private finance portfolio at
value at March 31, 2006, and December 31, 2005, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
Industry
|
|
|
|
|
|
|
|
|
Business services
|
|
|
33 |
% |
|
|
45 |
% |
Consumer products
|
|
|
25 |
|
|
|
14 |
|
Financial services
|
|
|
14 |
|
|
|
15 |
|
Industrial products
|
|
|
11 |
|
|
|
10 |
|
Retail
|
|
|
3 |
|
|
|
3 |
|
Healthcare services
|
|
|
2 |
|
|
|
2 |
|
Energy services
|
|
|
2 |
|
|
|
2 |
|
Broadcasting and cable
|
|
|
1 |
|
|
|
1 |
|
Other(1)
|
|
|
9 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Geographic
Region(2)
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
30 |
% |
|
|
29 |
% |
Midwest
|
|
|
28 |
|
|
|
21 |
|
West
|
|
|
21 |
|
|
|
34 |
|
Southeast
|
|
|
16 |
|
|
|
12 |
|
Northeast
|
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes investments in senior debt CDO and CLO funds. These
funds invest in senior debt representing a variety of industries. |
|
(2) |
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 in other geographic regions. |
|
|
|
Commercial Real Estate Finance |
At March 31, 2006, and December 31, 2005, the
commercial real estate finance portfolio consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
Cost |
|
Value |
|
Yield(1) |
|
Cost |
|
Value |
|
Yield(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans
|
|
$ |
103,422 |
|
|
$ |
102,694 |
|
|
|
7.6% |
|
|
$ |
103,878 |
|
|
$ |
102,569 |
|
|
|
7.6% |
|
Real estate owned
|
|
|
13,002 |
|
|
|
15,006 |
|
|
|
|
|
|
|
14,240 |
|
|
|
13,932 |
|
|
|
|
|
Equity interests
|
|
|
13,140 |
|
|
|
11,669 |
|
|
|
|
|
|
|
13,577 |
|
|
|
10,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
129,564 |
|
|
$ |
129,369 |
|
|
|
|
|
|
$ |
131,695 |
|
|
$ |
127,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
F-85
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Portfolio, continued
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 both March 31, 2006, and
December 31, 2005, approximately 97% and 3% of the
Companys commercial mortgage loan portfolio was composed
of fixed and adjustable interest rate loans, respectively. At
March 31, 2006, and December 31, 2005, loans with a
value of $21.2 million and $20.8 million,
respectively, were not accruing interest. Loans greater than
120 days delinquent generally do not accrue interest.
Equity interests consist primarily of equity securities issued
by privately owned companies that invest in single real estate
properties. These equity interests may be subject to certain
restrictions on their resale and are generally illiquid. Equity
interests generally do not produce a current return, but are
generally held in anticipation of investment appreciation and
ultimate realized gain on sale.
The property types and the geographic composition securing the
commercial mortgage loans and equity interests at value at
March 31, 2006, and December 31, 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
Property Type
|
|
|
|
|
|
|
|
|
Hospitality
|
|
|
40 |
% |
|
|
37 |
% |
Housing
|
|
|
29 |
|
|
|
30 |
|
Retail
|
|
|
16 |
|
|
|
16 |
|
Office
|
|
|
11 |
|
|
|
11 |
|
Other
|
|
|
4 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Geographic Region
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
31 |
% |
|
|
31 |
% |
Southeast
|
|
|
24 |
|
|
|
25 |
|
Midwest
|
|
|
21 |
|
|
|
21 |
|
West
|
|
|
18 |
|
|
|
18 |
|
Northeast
|
|
|
6 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
F-86
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt
At March 31, 2006, and December 31, 2005, the Company
had the following debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Annual |
|
|
|
Annual |
|
|
Facility |
|
Amount |
|
Interest |
|
Facility |
|
Amount |
|
Interest |
|
|
Amount |
|
Drawn |
|
Cost(1) |
|
Amount |
|
Drawn |
|
Cost(1) |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured notes payable
|
|
$ |
1,164,745 |
|
|
$ |
1,164,745 |
|
|
|
6.2 |
% |
|
$ |
1,164,540 |
|
|
$ |
1,164,540 |
|
|
|
6.2 |
% |
|
SBA debentures
|
|
|
16,500 |
|
|
|
16,500 |
|
|
|
7.4 |
% |
|
|
28,500 |
|
|
|
28,500 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and debentures
|
|
|
1,181,245 |
|
|
|
1,181,245 |
|
|
|
6.2 |
% |
|
|
1,193,040 |
|
|
|
1,193,040 |
|
|
|
6.3 |
% |
Revolving line of credit
|
|
|
772,500 |
|
|
|
93,000 |
|
|
|
6.2 |
%(2) |
|
|
772,500 |
|
|
|
91,750 |
|
|
|
5.6 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$ |
1,953,745 |
|
|
$ |
1,274,245 |
|
|
|
6.5 |
%(3) |
|
$ |
1,965,540 |
|
|
$ |
1,284,790 |
|
|
|
6.5 |
%(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
The annual interest cost reflects the interest rate payable for
borrowings under the revolving line of credit. In addition to
the current interest rate payable, there were annual costs of
commitment fees and other facility fees of $3.3 million at
both March 31, 2006, and December 31, 2005. |
|
(3) |
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. |
Notes Payable and Debentures
Unsecured Notes Payable. The Company has issued
unsecured long-term notes to institutional investors. The notes
require semi-annual interest payments until maturity and have
original terms of five or seven years. At March 31, 2006,
the notes had remaining maturities of one month to
seven years. The notes may be prepaid in whole or in part,
together with an interest premium, as stipulated in the note
agreement.
On May 1, 2006, the Company issued $50 million of
seven-year, unsecured notes with a fixed interest rate of 6.75%.
This debt matures in May 2013. The proceeds from the issuance of
the notes were used to repay $25 million of 7.49% unsecured
long-term notes that matured on May 1, 2006, with the
remainder being used to fund new portfolio investments and for
general corporate purposes.
SBA Debentures. At March 31, 2006, and
December 31, 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 6.3% and 5.9% to 6.4%, respectively.
At March 31, 2006, the debentures had remaining maturities
of five to six years. The debentures 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
quarters of 2006 and 2005, the Company repaid $12.0 million
and $31.0 million, respectively, of the SBA debentures.
F-87
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
Scheduled Maturities. Scheduled future maturities
of notes payable and debentures at March 31, 2006, were as
follows:
|
|
|
|
|
|
Year |
|
Amount Maturing |
|
|
|
|
|
($ in thousands) |
2006
|
|
$ |
175,000 |
|
2007
|
|
|
|
|
2008
|
|
|
153,000 |
|
2009
|
|
|
267,245 |
|
2010
|
|
|
408,000 |
|
Thereafter
|
|
|
178,000 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,181,245 |
|
|
|
|
|
|
At March 31, 2006, and December 31, 2005, the Company
had an unsecured revolving line of credit with a committed
amount of $772.5 million. The revolving line of credit
expires on September 30, 2008, and 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
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
$3.3 million at both March 31, 2006, and
December 31, 2005.
The average debt outstanding on the revolving line of credit was
$301.9 million and $72.3 million for the three months
ended March 31, 2006 and 2005, respectively. The maximum
amount borrowed under this facility and the weighted average
stated interest rate for the three months ended March 31,
2006 and 2005, were $540.3 million and 5.9%, respectively,
and $263.3 million and 4.1%, respectively. As of
March 31, 2006, the amount available under the revolving
line of credit was $641.8 million, net of amounts committed
for standby letters of credit of $37.7 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. These credit facilities
provide for customary events of default, including, but not
limited to, payment defaults, breach of representations or
covenants, cross-defaults, bankruptcy events, failure to pay
judgments, attachment of our assets, change of control and the
issuance of an order of dissolution. Certain of these events of
default are subject to notice and cure periods or materiality
thresholds. The Companys credit facilities limit its
ability to declare dividends if the Company defaults under
certain
F-88
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Debt, continued
provisions. As of March 31, 2006, and December 31,
2005, the Company was in compliance with these covenants.
Note 5. Guarantees and Commitments
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 March 31, 2006, and
December 31, 2005, the Company had issued guarantees of
debt, rental obligations, and lease obligations aggregating
$154.0 million and $148.6 million, respectively, and
had extended standby letters of credit aggregating
$37.7 million and $37.1 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
$191.7 million and $185.7 million at March 31,
2006, and December 31, 2005, respectively. At both
March 31, 2006, and December 31, 2005,
$2.5 million 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.
As of March 31, 2006, the guarantees and standby letters of
credit expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
After 2010 |
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$ |
154.0 |
|
|
$ |
1.3 |
|
|
$ |
0.6 |
|
|
$ |
3.0 |
|
|
$ |
143.6 |
|
|
$ |
|
|
|
$ |
5.5 |
|
Standby letters of
credit(1)
|
|
|
37.7 |
|
|
|
0.1 |
|
|
|
|
|
|
|
37.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
191.7 |
|
|
$ |
1.4 |
|
|
$ |
0.6 |
|
|
$ |
40.6 |
|
|
$ |
143.6 |
|
|
$ |
|
|
|
$ |
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 March 31, 2006, the Company had outstanding commitments
to fund investments totaling $329.9 million, including
$316.3 million related to private finance investments and
$13.6 million 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 $11.3 million at March 31, 2006.
F-89
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6. Shareholders Equity
Sales of common stock for the three months ended March 31,
2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005(1) |
(in thousands) |
|
|
|
|
Number of common shares
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds
|
|
$ |
87,750 |
|
|
$ |
|
|
Less costs, including underwriting fees
|
|
|
4,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds
|
|
$ |
82,970 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Company did not sell any common stock during the three
months ended March 31, 2005. |
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 Center, Inc. during the three months
ended March 31, 2005.
The Company issued 0.2 million shares of common stock upon
the exercise of stock options during each of the three months
ended March 31, 2006 and 2005.
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
three months ended March 31, 2006 and 2005, the Company
issued new shares in order to satisfy dividend reinvestment
requests.
Dividend reinvestment plan activity for the three months ended
March 31, 2006 and 2005, was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
Months |
|
|
Ended March 31, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
Shares issued
|
|
|
120 |
|
|
|
55 |
|
Average price per share
|
|
$ |
30.29 |
|
|
$ |
25.65 |
|
F-90
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 7. Earnings Per Common Share
Earnings per common share for the three months ended
March 31, 2006 and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
Ended March 31, |
|
|
|
|
|
2006 |
|
2005 |
(in thousands, except per share amounts) |
|
|
|
|
Net increase in net assets resulting from operations available
to common shareholders
|
|
$ |
99,587 |
|
|
$ |
119,621 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
138,759 |
|
|
|
133,283 |
|
Dilutive options outstanding to officers
|
|
|
2,979 |
|
|
|
2,296 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding diluted
|
|
|
141,738 |
|
|
|
135,579 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$ |
0.72 |
|
|
$ |
0.90 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$ |
0.70 |
|
|
$ |
0.88 |
|
|
|
|
|
|
|
|
|
|
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
March 31, 2006, and December 31, 2005, totaled
$17.4 million and $16.6 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 administered through a trust
by a third-party trustee. The administrator of the DCP II
is the Compensation Committee of the Companys Board of
Directors (DCP II Administrator).
The IPA is generally determined annually at the beginning of
each year but may be adjusted throughout the year. The IPA 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 both the
three months ended March 31, 2006 and 2005,
0.1 million shares 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
F-91
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Employee Compensation Plans, continued
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. 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 March 31, 2006,
and December 31, 2005, common stock held in DCP II was
$21.5 million and $19.5 million, respectively, and the
IPA liability was $25.4 million and $22.3 million,
respectively.
The IPA expenses for the three months ended March 31, 2006
and 2005, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2005 |
($ in millions) |
|
|
|
|
IPA contributions
|
|
$ |
1.7 |
|
|
$ |
1.9 |
|
IPA mark to market expense
|
|
|
1.0 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
Total IPA expense
|
|
$ |
2.7 |
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
The Company also has an individual performance bonus
(IPB) plan which is distributed in cash to award
recipients in equal
bi-weekly installments
as long as the recipient remains employed by the Company. If a
recipient terminated employment during the year, any remaining
cash payments under the IPB would be forfeited. For the three
months ended March 31, 2006 and 2005, the IPB expense was
$1.4 million and $1.5 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
F-92
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9. Stock Option Plan, continued
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. Options granted to
non-officer directors
vest on the grant date.
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 March 31, 2006, and December 31, 2005, the
number of shares available to be granted under the Option Plan
was 2.8 million and 3.0 million, respectively.
Information with respect to options granted, exercised and
forfeited under the Option Plan for the three months ended
March 31, 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
Average |
|
Average |
|
Aggregate |
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic Value |
|
|
|
|
Price Per |
|
Remaining |
|
at March 31, |
|
|
Shares |
|
Share |
|
Term (Years) |
|
2006(1) |
(in thousands, except per share amounts) |
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2006
|
|
|
22,259 |
|
|
$ |
24.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
515 |
|
|
$ |
29.23 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(167 |
) |
|
$ |
23.53 |
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(251 |
) |
|
$ |
27.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
22,356 |
|
|
$ |
24.60 |
|
|
|
7.02 |
|
|
$ |
134,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006
|
|
|
12,982 |
|
|
$ |
22.37 |
|
|
|
5.63 |
|
|
$ |
106,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable and expected to be exercisable at March 31,
2006(2)
|
|
|
21,572 |
|
|
$ |
24.48 |
|
|
|
6.95 |
|
|
$ |
131,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the difference between the market value of the
options at March 31, 2006, and the cost for the option
holders to exercise the options. |
|
(2) |
The amount of options expected to be exercisable at March 31,
2006, is calculated based on an estimate of expected forfeitures. |
The fair value of the shares vested during the three months
ended March 31, 2006 and 2005, was $6 thousand and
$172 thousand, respectively. The total intrinsic value of
options exercised during the three months ended March 31,
2006 and 2005, was $1.1 million and $1.0 million,
respectively.
Note 10. Dividends and Distributions and Taxes
The Companys Board of Directors declared and the Company
paid a dividend of $0.59 per common share and $0.57 per
common share for the first quarters of 2006 and 2005,
respectively. These dividends totaled $82.5 million and
$76.1 million for the three months ended March 31,
2006 and 2005, respectively. The Company declared an extra cash
dividend of $0.03 per share during 2005 and this was paid to
shareholders on January 27, 2006.
The Companys Board of Directors also declared a dividend
of $0.60 per common share for the second quarter of 2006.
F-93
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Dividends and Distributions and Taxes,
continued
The Company will generally be required to pay a nondeductible
excise tax equal to 4% of the amount by which 98% of the
Companys annual taxable income exceeds the distributions
for the year. The Company currently estimates that its 2006
annual taxable income will be in excess of its dividend
distributions from such taxable income in 2006, and that such
estimated excess taxable income will be carried over for
distribution in 2007. Accordingly, the Company has accrued an
excise tax of $8.4 million on the estimated excess taxable
income earned for the three months ended March 31, 2006.
There was no excise tax accrual for the three months ended
March 31, 2005.
Note 11. Supplemental Disclosure of Cash Flow
Information
For the three months ended March 31, 2006 and 2005, the
Company paid $7.5 million and $7.0 million,
respectively, for interest.
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 $0 and $1.1 million for the three months
ended March 31, 2006 and 2005, respectively.
Non-cash operating activities for the three months ended
March 31, 2006, included the following:
|
|
|
|
|
a note received as consideration from the sale of the
Companys investment in Advantage of $150.0 million;
and |
|
|
|
the exchange of existing preferred stock and common stock of
Redox Brands, Inc. for common stock in CR Brands, Inc. with
a cost basis of $10.2 million. |
Non-cash operating activities for the three months ended
March 31, 2005, included the following:
|
|
|
|
|
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; |
|
|
|
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, 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. During the third quarter of 2005, GAC changed its name to
Triview Investments, Inc. |
For the three months ended March 31, 2006 and 2005, the
Companys non-cash financing activities included
$3.6 million and $1.4 million, respectively, related
to the issuance of common stock in lieu of cash distributions.
In addition, the non-cash financing activities for the three
months ended March 31, 2005, also included the issuance of
$7.2 million of the Companys common stock as
consideration for an additional investment in Mercury Air
Centers, Inc.
Note 12. Hedging Activities
The Company has invested in commercial mortgage loans that were
purchased at prices that were based in part on comparable
Treasury rates. The Company has entered into transactions with
one or more financial institutions to hedge against movement in
Treasury rates on certain of these commercial mortgage loans.
These transactions, referred to as short sales, involve the
Company
F-94
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12. Hedging Activities, continued
receiving the proceeds from the short sales of borrowed Treasury
securities, with the obligation to replenish the borrowed
Treasury securities at a later date based on the then current
market price. Borrowed Treasury securities and the related
obligations to replenish the borrowed Treasury securities at
value, including accrued interest payable on the obligations, as
of March 31, 2006, and December 31, 2005, consisted of
the following:
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
Description of Issue |
|
2006 |
|
2005 |
|
|
|
|
|
5-year Treasury securities, due April 2010
|
|
$ |
17,534 |
|
|
$ |
17,666 |
|
As of March 31, 2006, and December 31, 2005, 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 $0.7 million
and $0.4 million, respectively.
The net proceeds related to the sales of the borrowed Treasury
securities were $17.9 million at both March 31, 2006,
and December 31, 2005. Under the terms of the transactions,
the Company had received cash payments of $0.4 million and
$0.2 million at March 31, 2006, and December 31,
2005, respectively, 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
agreements. The repurchase agreements are collateralized by
U.S. Treasury securities and are settled weekly. As of
March 31, 2006, the repurchase agreements were due on
April 5, 2006, and had a weighted average interest rate of
4.0%. The weighted average interest rate on the repurchase
agreements as of December 31, 2005, was 3.3%.
Note 13. Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
|
|
|
Three Months Ended |
|
At and for the |
|
|
March 31, |
|
Year Ended |
|
|
|
|
December 31, |
|
|
2006(1) |
|
2005 |
|
2005 |
|
|
|
|
|
|
|
Per Common Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$ |
19.17 |
|
|
$ |
14.87 |
|
|
$ |
14.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income(2)
|
|
|
0.29 |
|
|
|
0.29 |
|
|
|
1.00 |
|
|
Net realized
gains(2)(3)
|
|
|
3.05 |
|
|
|
0.07 |
|
|
|
1.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income plus net realized
gains(2)
|
|
|
3.34 |
|
|
|
0.36 |
|
|
|
2.99 |
|
|
Net change in unrealized appreciation or depreciation
(2)(3)
|
|
|
(2.64 |
) |
|
|
0.52 |
|
|
|
3.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
(2)
|
|
|
0.70 |
|
|
|
0.88 |
|
|
|
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from shareholder distributions
|
|
|
(0.59 |
) |
|
|
(0.57 |
) |
|
|
(2.33 |
) |
Net increase in net assets from capital share
transactions(2)
|
|
|
0.22 |
|
|
|
0.04 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$ |
19.50 |
|
|
$ |
15.22 |
|
|
$ |
19.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value, end of period
|
|
$ |
30.60 |
|
|
$ |
26.10 |
|
|
$ |
29.37 |
|
Total
return(4)
|
|
|
6.2 |
% |
|
|
3.3 |
% |
|
|
23.5 |
% |
F-95
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 13. Financial Highlights, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and for the |
|
|
|
|
Three Months Ended |
|
At and for the |
|
|
March 31, |
|
Year Ended |
|
|
|
|
December 31, |
|
|
2006(1) |
|
2005 |
|
2005 |
|
|
|
|
|
|
|
Ratios and Supplemental Data
($ and shares in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending net assets
|
|
$ |
2,729,813 |
|
|
$ |
2,033,148 |
|
|
$ |
2,620,546 |
|
Common shares outstanding at end of period
|
|
|
139,984 |
|
|
|
133,563 |
|
|
|
136,697 |
|
Diluted weighted average common shares outstanding
|
|
|
141,738 |
|
|
|
135,579 |
|
|
|
137,274 |
|
Employee, stock option and administrative expenses/average net
assets
|
|
|
1.37 |
% |
|
|
1.80 |
% |
|
|
6.58 |
% |
Total operating expenses/average net assets
|
|
|
2.27 |
% |
|
|
2.81 |
% |
|
|
9.99 |
% |
Net investment income/average net assets
|
|
|
1.54 |
% |
|
|
1.93 |
% |
|
|
6.08 |
% |
Net increase in net assets resulting from operations/ average
net assets
|
|
|
3.72 |
% |
|
|
5.96 |
% |
|
|
38.68 |
% |
Portfolio turnover rate
|
|
|
9.33 |
% |
|
|
5.10 |
% |
|
|
47.72 |
% |
Average debt outstanding
|
|
$ |
1,491,513 |
|
|
$ |
1,125,007 |
|
|
$ |
1,087,118 |
|
Average debt per
share(2)
|
|
$ |
10.52 |
|
|
$ |
8.30 |
|
|
$ |
7.92 |
|
|
|
(1) |
The results for the three months ended March 31, 2006, 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, quarterly comparisons may not be meaningful. |
|
(4) |
Total return assumes the reinvestment of all dividends paid for
the periods presented. |
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.
F-96
Schedule 12-14
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2005 |
|
Gross |
|
Gross |
|
March 31, 2006 |
(in thousands) |
|
Investment(1) |
|
to Income(6) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
Companies More Than 25% Owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acme Paging, L.P.
|
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(Telecommunications)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Sales &
|
|
Subordinated Debt |
|
$ |
1,712 |
|
|
|
|
|
|
|
59,787 |
|
|
|
213 |
|
|
|
(60,000 |
) |
|
|
|
|
|
Marketing, Inc.(7)
|
|
Subordinated Debt |
|
|
5,555 |
|
|
|
|
|
|
|
124,000 |
|
|
|
374 |
|
|
|
(124,374 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
476,578 |
|
|
|
|
|
|
|
(476,578 |
) |
|
|
|
|
|
Alaris Consulting, LLC
|
|
Senior Loan(5) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
(16 |
) |
|
|
|
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Healthcare Services, Inc. and Affiliates |
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
|
4,097 |
|
|
|
|
|
|
|
(95 |
) |
|
|
4,002 |
|
|
(Healthcare Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
892 |
|
|
|
|
|
|
|
|
|
|
|
892 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avborne Heavy Maintenance, Inc. |
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Loan Express, LLC |
|
Subordinated Debt |
|
|
38 |
|
|
|
|
|
|
|
10,000 |
|
|
|
15,000 |
|
|
|
(25,000 |
) |
|
|
|
|
|
(Financial Services)
|
|
Class A Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests |
|
|
3,845 |
|
|
|
|
|
|
|
60,693 |
|
|
|
1,839 |
|
|
|
|
|
|
|
62,532 |
|
|
|
Class B Equity Interests * |
|
|
|
|
|
|
|
|
|
|
146,910 |
|
|
|
|
|
|
|
(10,820 |
) |
|
|
136,090 |
|
|
|
Class C Equity Interests |
|
|
|
|
|
|
|
|
|
|
139,521 |
|
|
|
|
|
|
|
(11,902 |
) |
|
|
127,619 |
|
|
Callidus Capital Corporation
|
|
Senior Loan |
|
|
284 |
|
|
|
|
|
|
|
600 |
|
|
|
6,880 |
|
|
|
|
|
|
|
7,480 |
|
|
(Financial Services)
|
|
Subordinated Debt |
|
|
227 |
|
|
|
|
|
|
|
4,832 |
|
|
|
217 |
|
|
|
|
|
|
|
5,049 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
7,968 |
|
|
|
2,387 |
|
|
|
|
|
|
|
10,355 |
|
|
CR Brands, Inc.
|
|
Senior Loan |
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
37,048 |
|
|
|
|
|
|
|
37,048 |
|
|
(Consumer Products)
|
|
Subordinated Debt |
|
|
702 |
|
|
|
|
|
|
|
|
|
|
|
38,705 |
|
|
|
|
|
|
|
38,705 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,431 |
|
|
|
|
|
|
|
37,431 |
|
|
Diversified Group
|
|
Preferred Stock |
|
|
33 |
|
|
|
|
|
|
|
728 |
|
|
|
|
|
|
|
(14 |
) |
|
|
714 |
|
|
Administrators, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
841 |
|
|
|
|
|
|
|
|
|
|
|
841 |
|
|
(Business Services)
|
|
Common Stock |
|
|
68 |
|
|
|
|
|
|
|
502 |
|
|
|
69 |
|
|
|
|
|
|
|
571 |
|
|
Financial Pacific Company
|
|
Subordinated Debt |
|
|
3,080 |
|
|
|
|
|
|
|
69,904 |
|
|
|
362 |
|
|
|
|
|
|
|
70,266 |
|
|
(Financial Services)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
13,116 |
|
|
|
655 |
|
|
|
|
|
|
|
13,771 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
44,180 |
|
|
|
|
|
|
|
(511 |
) |
|
|
43,669 |
|
|
ForeSite Towers, LLC
|
|
Equity Interests |
|
|
80 |
|
|
|
|
|
|
|
9,750 |
|
|
|
1,544 |
|
|
|
|
|
|
|
11,294 |
|
|
(Tower Leasing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Communications, LLC
|
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
|
15,957 |
|
|
|
|
|
|
|
|
|
|
|
15,957 |
|
|
(Business Services)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
11,198 |
|
|
|
138 |
|
|
|
|
|
|
|
11,336 |
|
|
|
Preferred Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
|
|
4,303 |
|
|
|
|
|
|
|
(3,749 |
) |
|
|
554 |
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gordian Group, Inc.
|
|
Senior Loan(5) |
|
|
(5 |
) |
|
|
|
|
|
|
4,161 |
|
|
|
175 |
|
|
|
(4,336 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
(220 |
) |
|
|
|
|
|
Healthy Pet Corp.
|
|
Senior Loan |
|
|
386 |
|
|
|
|
|
|
|
4,086 |
|
|
|
12,652 |
|
|
|
|
|
|
|
16,738 |
|
|
(Consumer Services)
|
|
Subordinated Debt |
|
|
1,623 |
|
|
|
|
|
|
|
38,535 |
|
|
|
4,551 |
|
|
|
|
|
|
|
43,086 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
25,766 |
|
|
|
5,174 |
|
|
|
|
|
|
|
30,940 |
|
|
HMT, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
2,637 |
|
|
|
|
|
|
|
|
|
|
|
2,637 |
|
|
(Energy Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
5,343 |
|
|
|
577 |
|
|
|
|
|
|
|
5,920 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
2,057 |
|
|
|
223 |
|
|
|
|
|
|
|
2,280 |
|
|
Impact Innovations Group, LLC |
|
Equity Interests in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Business Services)
|
|
Affiliate |
|
|
|
|
|
|
|
|
|
|
742 |
|
|
|
127 |
|
|
|
|
|
|
|
869 |
|
|
See related footnotes at the end of this schedule.
F-97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2005 |
|
Gross |
|
Gross |
|
March 31, 2006 |
(in thousands) |
|
Investment(1) |
|
to Income(6) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
Insight Pharmaceuticals
|
|
Subordinated Debt |
|
$ |
2,374 |
|
|
|
|
|
|
$ |
58,298 |
|
|
$ |
387 |
|
|
$ |
|
|
|
$ |
58,685 |
|
|
Corporation
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
26,791 |
|
|
|
|
|
|
|
(2,015 |
) |
|
|
24,776 |
|
|
(Consumer Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
236 |
|
|
|
|
|
|
|
(236 |
) |
|
|
|
|
|
Jakel, Inc.
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,066 |
|
|
|
|
|
|
|
1,066 |
|
|
(Industrial Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy Partners Group, LLC
|
|
Senior Loan (5) |
|
|
|
|
|
|
|
|
|
|
5,029 |
|
|
|
93 |
|
|
|
|
|
|
|
5,122 |
|
|
(Financial Services)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
(18 |
) |
|
|
|
|
|
Litterer Beteiligungs-GmbH
|
|
Subordinated Debt |
|
|
10 |
|
|
|
|
|
|
|
621 |
|
|
|
12 |
|
|
|
|
|
|
|
633 |
|
|
(Business Services)
|
|
Equity Interest |
|
|
|
|
|
|
|
|
|
|
2,226 |
|
|
|
763 |
|
|
|
|
|
|
|
2,989 |
|
|
Mercury Air Centers, Inc.
|
|
Senior Loan |
|
|
864 |
|
|
|
|
|
|
|
31,720 |
|
|
|
4,000 |
|
|
|
|
|
|
|
35,720 |
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
2,007 |
|
|
|
|
|
|
|
46,519 |
|
|
|
4,165 |
|
|
|
|
|
|
|
50,684 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
88,898 |
|
|
|
4,702 |
|
|
|
|
|
|
|
93,600 |
|
|
MVL Group, Inc.
|
|
Senior Loan |
|
|
884 |
|
|
|
|
|
|
|
27,218 |
|
|
|
68 |
|
|
|
|
|
|
|
27,286 |
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
1,223 |
|
|
|
|
|
|
|
32,417 |
|
|
|
236 |
|
|
|
|
|
|
|
32,653 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
3,211 |
|
|
|
|
|
|
|
(1,178 |
) |
|
|
2,033 |
|
|
Pennsylvania Avenue
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,864 |
|
|
|
1,193 |
|
|
|
(3,057 |
) |
|
|
|
|
|
Investors, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Powell Plant Farms, Inc.
|
|
Senior Loan |
|
|
1,157 |
|
|
|
|
|
|
|
23,792 |
|
|
|
6,075 |
|
|
|
|
|
|
|
29,867 |
|
|
(Consumer Products)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
7,364 |
|
|
|
1,093 |
|
|
|
|
|
|
|
8,457 |
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redox Brands, Inc.
|
|
Preferred Stock |
|
|
363 |
|
|
|
|
|
|
|
12,097 |
|
|
|
1,708 |
|
|
|
(13,805 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
84 |
|
|
|
(584 |
) |
|
|
|
|
|
Service Champ, Inc.
|
|
Subordinated Debt |
|
|
1,060 |
|
|
|
|
|
|
|
26,906 |
|
|
|
178 |
|
|
|
|
|
|
|
27,084 |
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
13,319 |
|
|
|
2,246 |
|
|
|
|
|
|
|
15,565 |
|
|
Staffing Partners Holding
|
|
Subordinated Debt(5) |
|
|
|
|
|
$ |
355 |
|
|
|
6,343 |
|
|
|
|
|
|
|
(2,173 |
) |
|
|
4,170 |
|
|
Company, Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
1,812 |
|
|
|
|
|
|
|
(1,812 |
) |
|
|
|
|
|
(Business Services)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Startec Global
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
Senior Loan |
|
|
623 |
|
|
|
|
|
|
|
21,685 |
|
|
|
2,244 |
|
|
|
(942 |
) |
|
|
22,987 |
|
|
Corporation
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Telecommunications)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STS Operating, Inc.
|
|
Subordinated Debt |
|
|
251 |
|
|
|
|
|
|
|
6,593 |
|
|
|
|
|
|
|
|
|
|
|
6,593 |
|
|
(Industrial Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
64,963 |
|
|
|
32,039 |
|
|
|
|
|
|
|
97,002 |
|
|
|
Options |
|
|
|
|
|
|
|
|
|
|
560 |
|
|
|
292 |
|
|
|
|
|
|
|
852 |
|
|
Triview Investments, Inc.
|
|
Senior Loan |
|
|
246 |
|
|
|
|
|
|
|
7,449 |
|
|
|
6,846 |
|
|
|
|
|
|
|
14,295 |
|
|
(Broadcasting & Cable/
|
|
Subordinated Debt |
|
|
1,131 |
|
|
|
|
|
|
|
30,845 |
|
|
|
6,842 |
|
|
|
|
|
|
|
37,687 |
|
|
Consumer Products)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
19,520 |
|
|
|
|
|
|
|
|
|
|
|
19,520 |
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
29,171 |
|
|
|
1,854 |
|
|
|
(142 |
) |
|
|
30,883 |
|
|
Total companies more than 25% owned |
|
$ |
30,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,388,855 |
|
|
Companies 5% to 25% Owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advantage Sales &
|
|
Subordinated Debt |
|
$ |
158 |
|
|
|
|
|
|
$ |
|
|
|
$ |
149,258 |
|
|
$ |
|
|
|
$ |
149,258 |
|
|
Marketing, Inc.(7)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
15,000 |
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Air Evac Lifeteam LLC
|
|
Subordinated Debt |
|
|
1,477 |
|
|
|
|
|
|
|
42,267 |
|
|
|
221 |
|
|
|
|
|
|
|
42,488 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
4,025 |
|
|
|
1,375 |
|
|
|
|
|
|
|
5,400 |
|
|
Aspen Pet Products, Inc.
|
|
Subordinated Debt |
|
|
1,130 |
|
|
|
|
|
|
|
19,959 |
|
|
|
399 |
|
|
|
(20,358 |
) |
|
|
|
|
|
(Consumer Products)
|
|
Preferred Stock |
|
|
29 |
|
|
|
|
|
|
|
1,638 |
|
|
|
516 |
|
|
|
(2,154 |
) |
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
123 |
|
|
|
(140 |
) |
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BB&T Capital
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,867 |
|
|
|
|
|
|
|
5,867 |
|
|
Partners/Windsor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine Fund, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Private Equity Fund)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Becker Underwood, Inc.
|
|
Subordinated Debt |
|
|
866 |
|
|
|
|
|
|
|
23,543 |
|
|
|
155 |
|
|
|
|
|
|
|
23,698 |
|
|
(Industrial Products)
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
2,200 |
|
|
|
|
|
|
|
(700 |
) |
|
|
1,500 |
|
|
See related footnotes at the end of this schedule.
F-98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Interest or |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
|
|
PRIVATE FINANCE |
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company |
|
|
|
Credited |
|
|
|
December 31, 2005 |
|
Gross |
|
Gross |
|
March 31, 2006 |
(in thousands) |
|
Investment(1) |
|
to Income(6) |
|
Other(2) |
|
Value |
|
Additions(3) |
|
Reductions(4) |
|
Value |
|
BI Incorporated
|
|
Senior Loan |
|
$ |
60 |
|
|
|
|
|
|
$ |
|
|
|
$ |
14,891 |
|
|
$ |
(10,000 |
) |
|
$ |
4,891 |
|
|
(Business Services)
|
|
Subordinated Debt |
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
29,852 |
|
|
|
|
|
|
|
29,852 |
|
|
|
|
Subordinated Debt |
|
|
|
|
|
|
|
|
|
|
16,133 |
|
|
|
153 |
|
|
|
(16,286 |
) |
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
|
The Debt Exchange Inc.
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
3,219 |
|
|
|
|
|
|
|
(3,219 |
) |
|
|
|
|
|
(Business Services)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MedBridge Healthcare, LLC
|
|
Senior Loan(5) |
|
|
|
|
|
|
|
|
|
|
7,093 |
|
|
|
71 |
|
|
|
(2,010 |
) |
|
|
5,154 |
|
|
(Healthcare Services)
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
534 |
|
|
|
375 |
|
|
|
(909 |
) |
|
|
|
|
|
|
Convertible |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Debt(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501 |
|
|
|
(501 |
) |
|
|
|
|
|
Nexcel Synthetics, LLC
|
|
Subordinated Debt |
|
|
390 |
|
|
|
|
|
|
|
10,588 |
|
|
|
97 |
|
|
|
|
|
|
|
10,685 |
|
|
(Consumer Products)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,367 |
|
|
|
115 |
|
|
|
|
|
|
|
1,482 |
|
|
Pres Air Trol LLC
|
|
Unitranche Debt(5) |
|
|
(10 |
) |
|
$ |
184 |
|
|
|
5,820 |
|
|
|
|
|
|
|
(237 |
) |
|
|
5,583 |
|
|
(Industrial Products)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
318 |
|
|
|
10 |
|
|
|
|
|
|
|
328 |
|
|
Progressive International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation
|
|
Subordinated Debt |
|
|
299 |
|
|
|
|
|
|
|
7,376 |
|
|
|
39 |
|
|
|
|
|
|
|
7,415 |
|
|
(Consumer Products)
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
884 |
|
|
|
18 |
|
|
|
|
|
|
|
902 |
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
287 |
|
|
|
|
|
|
|
300 |
|
|
|
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soteria Imaging Services, LLC
|
|
Subordinated Debt |
|
|
462 |
|
|
|
|
|
|
|
13,447 |
|
|
|
33 |
|
|
|
|
|
|
|
13,480 |
|
|
(Healthcare Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
2,308 |
|
|
|
46 |
|
|
|
|
|
|
|
2,354 |
|
|
Universal Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services, LLC
|
|
Unitranche Debt |
|
|
428 |
|
|
|
|
|
|
|
10,862 |
|
|
|
78 |
|
|
|
|
|
|
|
10,940 |
|
|
(Business Services)
|
|
Equity Interests |
|
|
|
|
|
|
|
|
|
|
1,328 |
|
|
|
18 |
|
|
|
(278 |
) |
|
|
1,068 |
|
|
Total companies 5% to 25% owned |
|
$ |
5,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
341,645 |
|
|
This schedule should be read in conjunction with the
Companys consolidated financial statements, including the
consolidated statement of investments and Note 3 to the
consolidated financial statements. Note 3 includes
additional information regarding activities in the private
finance portfolio.
|
|
(1) |
Common stock, preferred stock, warrants, options, and equity
interests are generally non-income producing and restricted. The
principal amount for loans and debt securities and the number of
shares of common stock and preferred stock is shown in the
consolidated statement of investments as of March 31, 2006. |
|
(2) |
Other includes interest, dividend, or other income which was
applied to the principal of the investment and therefore reduced
the total investment. These reductions are also included in the
Gross Reductions for the investment, as applicable. |
|
(3) |
Gross additions include increases in the cost basis of
investments resulting from new portfolio investments,
paid-in-kind interest or dividends, the amortization of
discounts and closing fees, the exchange of one or more existing
securities for one or more new securities and the movement of an
existing portfolio company into this category from a different
category. Gross additions also include net increases in
unrealized appreciation or net decreases in unrealized
depreciation. |
|
(4) |
Gross reductions include decreases in the cost basis of
investments resulting from principal collections related to
investment repayments or sales, the exchange of one or more
existing securities for one or more new securities and the
movement of an existing portfolio company out of this category
into a different category. Gross reductions also include net
increases in unrealized depreciation or net decreases in
unrealized appreciation. |
|
(5) |
Loan or debt security is on non-accrual status at March 31,
2006, and is therefore considered non-income producing. Loans or
debt securities on non-accrual status at the end of the period
may or may not have been on non-accrual status for the full
period. |
|
(6) |
Represents the total amount of interest or dividends credited to
income for the portion of the year an investment was included in
the companies more than 25% owned or companies 5% to 25% owned
categories, respectively. |
|
(7) |
Included in the companies more than 25% owned category while the
Company held a majority equity interest. On March 29, 2006,
the Company sold its majority equity interest in Advantage. The
Companys investment in Advantage after the sale
transaction is included in the companies 5% to 25% owned
category. See Note 3 to the consolidated financial
statements for further information. |
|
|
|
|
* |
All or a portion of the dividend income on this investment was
or will be paid in the form of additional securities. Dividends
paid-in-kind are also included in the Gross Additions for the
investment, as applicable. |
F-99