FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
| x |
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For The Quarterly
Period
Ended March 31,
2009
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File
Number:
0-22832
ALLIED CAPITAL
CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
|
Maryland (State or Jurisdiction of Incorporation or Organization) |
52-1081052 (IRS Employer Identification No.) |
1919 Pennsylvania Avenue,
N.W.
Washington, DC 20006
(Address of Principal Executive
Offices)
Registrant’s telephone number, including area code:
(202) 721-6100
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES x NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). YES o NO o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting
company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). YES o NO x
On May 8, 2009, there were 178,691,875 shares outstanding of the
Registrant’s common stock, $0.0001 par value.
ALLIED
CAPITAL CORPORATION
FORM 10-Q TABLE OF CONTENTS
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| 119 |
PART I:
FINANCIAL INFORMATION
Item
1. Financial Statements
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
CONSOLIDATED BALANCE SHEET
|
March 31, |
December 31, |
|||||||
| (in thousands, except per share amounts) | 2009 | 2008 | ||||||
|
(unaudited) |
||||||||
|
ASSETS
|
||||||||
|
Portfolio at value:
|
||||||||
|
Private finance
|
||||||||
|
Companies more than 25% owned (cost:
2009-$2,147,724;
2008-$2,167,020)
|
$ | 1,039,191 | $ | 1,187,722 | ||||
|
Companies 5% to 25% owned (cost:
2009-$267,235;
2008-$392,516)
|
196,460 | 352,760 | ||||||
|
Companies less than 5% owned (cost:
2009-$2,234,718;
2008-$2,317,856)
|
1,594,387 | 1,858,581 | ||||||
|
Total private finance (cost:
2009-$4,649,677;
2008-$4,877,392)
|
2,830,038 | 3,399,063 | ||||||
|
Commercial real estate finance (cost:
2009-$82,341;
2008-$85,503)
|
79,030 | 93,887 | ||||||
|
Total portfolio at value (cost:
2009-$4,732,018;
2008-$4,962,895)
|
2,909,068 | 3,492,950 | ||||||
|
Accrued interest and dividends receivable
|
52,347 | 55,638 | ||||||
|
Other assets
|
135,939 | 122,909 | ||||||
|
Investments in money market and other securities
|
5 | 287 | ||||||
|
Cash
|
290,227 | 50,402 | ||||||
|
Total assets
|
$ | 3,387,586 | $ | 3,722,186 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Liabilities:
|
||||||||
|
Notes payable (maturing within one year:
2009-$1,015,000;
2008-$1,015,000)
|
$ | 1,892,500 | $ | 1,895,000 | ||||
|
Revolving line of credit
|
50,000 | 50,000 | ||||||
|
Accounts payable and other liabilities
|
75,333 | 58,786 | ||||||
|
Total liabilities
|
2,017,833 | 2,003,786 | ||||||
|
Commitments and contingencies
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Common stock, $0.0001 par value, 400,000 shares authorized;
178,692 shares issued and outstanding at March 31, 2009,
and December 31, 2008
|
18 | 18 | ||||||
|
Additional paid-in capital
|
3,036,236 | 3,037,845 | ||||||
|
Notes receivable from sale of common stock
|
(457 | ) | (1,089 | ) | ||||
|
Net unrealized appreciation (depreciation)
|
(1,853,159 | ) | (1,503,089 | ) | ||||
|
Undistributed earnings
|
187,115 | 184,715 | ||||||
|
Total shareholders’ equity
|
1,369,753 | 1,718,400 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 3,387,586 | $ | 3,722,186 | ||||
|
Net asset value per common share
|
$ | 7.67 | $ | 9.62 | ||||
The accompanying notes are an
integral part of these consolidated financial statements.
1
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
For the Three |
||||||||
|
Months Ended |
||||||||
| March 31, | ||||||||
| (in thousands, except per share amounts) | 2009 | 2008 | ||||||
|
(unaudited) |
||||||||
|
Interest and Related Portfolio Income:
|
||||||||
|
Interest and dividends
|
||||||||
|
Companies more than 25% owned
|
$ | 25,353 | $ | 28,624 | ||||
|
Companies 5% to 25% owned
|
11,136 | 12,674 | ||||||
|
Companies less than 5% owned
|
52,241 | 93,362 | ||||||
|
Total interest and dividends
|
88,730 | 134,660 | ||||||
|
Fees and other income
|
||||||||
|
Companies more than 25% owned
|
5,276 | 5,465 | ||||||
|
Companies 5% to 25% owned
|
17 | 53 | ||||||
|
Companies less than 5% owned
|
1,159 | 4,766 | ||||||
|
Total fees and other income
|
6,452 | 10,284 | ||||||
|
Total interest and related portfolio income
|
95,182 | 144,944 | ||||||
|
Expenses:
|
||||||||
|
Interest
|
43,485 | 37,560 | ||||||
|
Employee
|
11,070 | 22,652 | ||||||
|
Employee stock options
|
773 | 4,195 | ||||||
|
Administrative
|
9,845 | 9,019 | ||||||
|
Impairment of long-lived asset
|
2,873 | — | ||||||
|
Total operating expenses
|
68,046 | 73,426 | ||||||
|
Gain on repurchase of debt
|
1,995 | — | ||||||
|
Net investment income before income taxes
|
29,131 | 71,518 | ||||||
|
Income tax expense (benefit), including excise tax
|
(378 | ) | 1,969 | |||||
|
Net investment income
|
29,509 | 69,549 | ||||||
|
Net Realized and Unrealized Gains (Losses):
|
||||||||
|
Net realized gains (losses)
|
||||||||
|
Companies more than 25% owned
|
(4,050 | ) | (303 | ) | ||||
|
Companies 5% to 25% owned
|
(30,095 | ) | 1,243 | |||||
|
Companies less than 5% owned
|
7,036 | 2,203 | ||||||
|
Total net realized gains (losses)
|
(27,109 | ) | 3,143 | |||||
|
Net change in unrealized appreciation or depreciation
|
(350,070 | ) | (113,404 | ) | ||||
|
Total net gains (losses)
|
(377,179 | ) | (110,261 | ) | ||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (347,670 | ) | $ | (40,712 | ) | ||
|
Basic earnings (loss) per common share
|
$ | (1.95 | ) | $ | (0.25 | ) | ||
|
Diluted earnings (loss) per common share
|
$ | (1.95 | ) | $ | (0.25 | ) | ||
|
Weighted average common shares outstanding — basic
|
178,692 | 161,507 | ||||||
|
Weighted average common shares outstanding — diluted
|
178,692 | 161,507 | ||||||
The accompanying notes are an
integral part of these consolidated financial statements.
2
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
For the Three Months |
||||||||
| Ended March 31, | ||||||||
| (in thousands, except per share amounts) | 2009 | 2008 | ||||||
|
(unaudited) |
||||||||
|
Operations:
|
||||||||
|
Net investment income
|
$ | 29,509 | $ | 69,549 | ||||
|
Net realized gains (losses)
|
(27,109 | ) | 3,143 | |||||
|
Net change in unrealized appreciation or depreciation
|
(350,070 | ) | (113,404 | ) | ||||
|
Net increase (decrease) in net assets resulting from operations
|
(347,670 | ) | (40,712 | ) | ||||
|
Shareholder distributions:
|
||||||||
|
Common stock dividends
|
— | (108,081 | ) | |||||
|
Net decrease in net assets resulting from shareholder
distributions
|
— | (108,081 | ) | |||||
|
Capital share transactions:
|
||||||||
|
Sale of common stock
|
— | 170,883 | ||||||
|
Issuance of common stock in lieu of cash distributions
|
— | 3,751 | ||||||
|
Stock option expense
|
773 | 4,195 | ||||||
|
Net decrease in notes receivable from sale of common stock
|
632 | 143 | ||||||
|
Purchase of common stock held in deferred compensation trusts
|
— | (943 | ) | |||||
|
Distribution of common stock held in deferred compensation trusts
|
— | 27,335 | ||||||
|
Other
|
(2,382 | ) | — | |||||
|
Net increase (decrease) in net assets resulting from capital
share transactions
|
(977 | ) | 205,364 | |||||
|
Total increase (decrease) in net assets
|
(348,647 | ) | 56,571 | |||||
|
Net assets at beginning of period
|
1,718,400 | 2,771,847 | ||||||
|
Net assets at end of period
|
$ | 1,369,753 | $ | 2,828,418 | ||||
|
Net asset value per common share
|
$ | 7.67 | $ | 16.99 | ||||
|
Common shares outstanding at end of period
|
178,692 | 166,472 | ||||||
The accompanying notes are an
integral part of these consolidated financial statements.
3
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
For the Three Months |
||||||||
| Ended March 31, | ||||||||
| (in thousands) | 2009 | 2008 | ||||||
|
(unaudited) |
||||||||
|
Cash flows from operating activities:
|
||||||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (347,670 | ) | $ | (40,712 | ) | ||
|
Adjustments:
|
||||||||
|
Portfolio investments
|
(39,917 | ) | (275,130 | ) | ||||
|
Principal collections related to investment repayments or sales
|
109,524 | 264,777 | ||||||
|
Collections of notes and other consideration received from sale
of investments
|
132,246 | 4,901 | ||||||
|
Realized gains from the receipt of notes and other consideration
from sale of investments
|
(4,058 | ) | (5,466 | ) | ||||
|
Realized losses
|
39,874 | 29,597 | ||||||
|
Payment-in-kind interest and dividends, net of cash collections
|
(7,659 | ) | (13,392 | ) | ||||
|
Change in accrued interest and dividends
|
1,554 | (2,280 | ) | |||||
|
Net collection (amortization) of discounts and fees
|
(4,697 | ) | (3,748 | ) | ||||
|
Redemption of (investments in) U.S. Treasury bills, money market
and other securities
|
282 | 80,834 | ||||||
|
Stock option expense
|
773 | 4,195 | ||||||
|
Impairment of long-lived asset
|
2,873 | — | ||||||
|
Changes in other assets and liabilities
|
8,498 | (46,218 | ) | |||||
|
Depreciation and amortization
|
398 | 528 | ||||||
|
Gain on repurchase of debt
|
(1,995 | ) | — | |||||
|
Net change in unrealized (appreciation) or depreciation
|
350,070 | 113,404 | ||||||
|
Net cash provided by operating activities
|
240,096 | 111,290 | ||||||
|
Cash flows from financing activities:
|
||||||||
|
Sale of common stock
|
— | 170,883 | ||||||
|
Collections of notes receivable from sale of common stock
|
258 | 143 | ||||||
|
Repurchase of notes payable
|
(529 | ) | — | |||||
|
Net borrowings under (repayments on) revolving line of credit
|
— | (98,500 | ) | |||||
|
Purchase of common stock held in deferred compensation trusts
|
— | (943 | ) | |||||
|
Other financing activities
|
— | (916 | ) | |||||
|
Common stock dividends and distributions paid
|
— | (104,330 | ) | |||||
|
Net cash provided by (used in) financing activities
|
(271 | ) | (33,663 | ) | ||||
|
Net increase (decrease) in cash
|
239,825 | 77,627 | ||||||
|
Cash at beginning of period
|
50,402 | 3,540 | ||||||
|
Cash at end of period
|
$ | 290,227 | $ | 81,167 | ||||
The accompanying notes are an
integral part of these consolidated financial statements.
4
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||
|
AGILE Fund I,
LLC(5)
|
Equity Interests | $ | 679 | $ | 416 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 679 | 416 | |||||||||||
|
AllBridge Financial, LLC
|
Equity Interests | 34,967 | 11,071 | |||||||||||
|
(Asset Management)
|
Total Investment | 34,967 | 11,071 | |||||||||||
| Standby Letter of Credit ($15,000) | ||||||||||||||
|
Allied Capital Senior Debt Fund,
L.P.(5)
|
Equity Interests (See Note 3) | 31,800 | 32,877 | |||||||||||
|
(Private Debt Fund)
|
Total Investment | 31,800 | 32,877 | |||||||||||
|
Avborne,
Inc.(7)
|
Preferred Stock (12,500 shares) | — | 938 | |||||||||||
|
(Business Services)
|
Common Stock (27,500 shares) | — | — | |||||||||||
| Total Investment | — | 938 | ||||||||||||
|
Avborne Heavy Maintenance,
Inc.(7)
|
Common Stock (2,750 shares) | — | 660 | |||||||||||
|
(Business Services)
|
Total Investment | |||||||||||||
| — | 660 | |||||||||||||
|
Aviation Properties Corporation
|
Common Stock (100 shares) | 93 | — | |||||||||||
|
(Business Services)
|
Total Investment | 93 | — | |||||||||||
| Standby Letters of Credit ($1,000) | ||||||||||||||
|
Border Foods, Inc.
|
Senior Loan (12.8%, Due 3/12) | $ | 33,900 | 27,962 | 33,900 | |||||||||
|
(Consumer Products)
|
Preferred Stock (100,000 shares) | 12,721 | 9,215 | |||||||||||
| Common Stock (260,467 shares) | 3,847 | — | ||||||||||||
| Total Investment | 44,530 | 43,115 | ||||||||||||
|
Calder Capital Partners,
LLC(5)
|
Senior Loan (10.5%, Due 5/09)(6) | 4,496 | 4,496 | 881 | ||||||||||
|
(Asset Management)
|
Equity Interests | 2,453 | — | |||||||||||
| Total Investment | 6,949 | 881 | ||||||||||||
|
Callidus Capital Corporation
|
Subordinated Debt (18.0%, Due 8/13) | 16,203 | 16,203 | 16,203 | ||||||||||
|
(Asset Management)
|
Common Stock (100 shares) | — | 27,705 | |||||||||||
| Total Investment | 16,203 | 43,908 | ||||||||||||
| Guaranty ($6,447) | ||||||||||||||
|
(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. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(7)
|
Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies. |
The accompanying notes are an
integral part of these consolidated financial statements.
5
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Ciena Capital LLC
|
Senior Loan (5.5%, Due 3/09)(6) | $ | 319,031 | $ | 319,031 | $ | 64,088 | |||||||
|
(Financial Services)
|
Class B Equity Interests | 119,436 | — | |||||||||||
| Class C Equity Interests | 112,601 | — | ||||||||||||
| Total Investment | 551,068 | 64,088 | ||||||||||||
| Guaranty ($5,000 — See Note 3) | ||||||||||||||
|
Standby Letters of Credit ($94,100 — See Note 3) |
||||||||||||||
|
CitiPostal Inc.
|
Senior Loan (4.0%, Due 12/13) | 692 | 682 | 682 | ||||||||||
|
(Business Services)
|
Unitranche Debt (12.0%, Due 12/13) | 51,892 | 51,692 | 51,692 | ||||||||||
| Subordinated Debt (16.0%, Due 12/15) | 9,491 | 9,491 | 9,491 | |||||||||||
| Common Stock (37,024 shares) | 12,726 | — | ||||||||||||
| Total Investment | 74,591 | 61,865 | ||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt (12.0%, Due 7/11) | 32,035 | 31,956 | 31,956 | ||||||||||
|
(Business Services)
|
Subordinated Debt (15.0%, Due 7/11) | 5,563 | 5,550 | 5,550 | ||||||||||
| Common Stock (763,333 shares) | 14,362 | 19,011 | ||||||||||||
| Total Investment | 51,868 | 56,517 | ||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt (16.6%, Due 2/13)(6) | 39,307 | 39,193 | 9,992 | ||||||||||
|
(Consumer Products)
|
Common Stock (32,090,696 shares) | 28,744 | — | |||||||||||
| Total Investment | 67,937 | 9,992 | ||||||||||||
|
Crescent Equity
Corp.(8)
|
Senior Loan (10.0%, Due 1/09) | 433 | 433 | 433 | ||||||||||
|
(Business Services)
|
Subordinated Debt (11.0%, Due 6/17) | 2,092 | 2,084 | — | ||||||||||
| Subordinated Debt (12.0%, Due 12/10 – 6/17)(6) | 30,276 | 30,194 | 6,213 | |||||||||||
| Common Stock (174 shares) | 82,596 | 39 | ||||||||||||
| Total Investment | 115,307 | 6,685 | ||||||||||||
| Guaranty ($900) | ||||||||||||||
|
Direct Capital Corporation
|
Senior Loan (8.0%, Due 1/14)(6) | 8,175 | 8,175 | 8,240 | ||||||||||
|
(Financial Services)
|
Subordinated Debt (16.0%, Due 3/13)(6) | 55,671 | 55,496 | 12,390 | ||||||||||
| Common Stock (2,317,020 shares) | 25,732 | — | ||||||||||||
| Total Investment | 89,403 | 20,630 | ||||||||||||
|
Financial Pacific Company
|
Subordinated Debt (17.4%, Due 2/12 – 8/12) | 68,967 | 68,850 | 57,562 | ||||||||||
|
(Financial Services)
|
Preferred Stock (9,458 shares) | 8,865 | — | |||||||||||
| Common Stock (12,711 shares) | 12,783 | — | ||||||||||||
| Total Investment | 90,498 | 57,562 | ||||||||||||
|
(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. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(8)
|
Crescent Equity Corp. holds investments in Crescent Hotels & Resorts, LLC and affiliates. |
The accompanying notes are an
integral part of these consolidated financial statements.
6
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | $ | — | $ | 895 | |||||||||
|
(Tower Leasing)
|
Total Investment | — | 895 | |||||||||||
|
Global Communications, LLC
|
Senior Loan (10.0%, Due 9/02)(6) | $ | 1,335 | 1,335 | 1,335 | |||||||||
|
(Business Services)
|
Total Investment | 1,335 | 1,335 | |||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan (9.0%, Due 2/11)(6) | 30,572 | 30,572 | 13,443 | ||||||||||
|
(Retail)
|
Common Stock (93,500 shares) | 5,151 | — | |||||||||||
| Total Investment | 35,723 | 13,443 | ||||||||||||
| Standby Letter of Credit ($70) | ||||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan (4.0%, Due 2/11-2/12) | 52,387 | 52,257 | 50,112 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (12.5%, Due 8/12-2/13)(6) | 83,692 | 83,387 | — | ||||||||||
| Common Stock (1,147,453 shares) | 56,187 | — | ||||||||||||
| Total Investment | 191,831 | 50,112 | ||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt (15.0%, Due 12/12) | 57,683 | 57,517 | 57,517 | ||||||||||
|
(Retail)
|
Common Stock (358,428 shares) | 35,828 | 17,455 | |||||||||||
| Total Investment | 93,345 | 74,972 | ||||||||||||
|
IAT Equity, LLC and Affiliates
|
Subordinated Debt (9.0%, Due 6/14) | 6,000 | 6,000 | 6,000 | ||||||||||
|
d/b/a Industrial Air Tool
|
Equity Interests | 7,500 | 9,078 | |||||||||||
|
(Industrial Products)
|
Total Investment | 13,500 | 15,078 | |||||||||||
|
Impact Innovations Group, LLC
|
Equity Interests in Affiliate | — | 322 | |||||||||||
|
(Business Services)
|
Total Investment | — | 322 | |||||||||||
|
Insight Pharmaceuticals Corporation
|
Subordinated Debt (15.0%, Due 9/12) | 46,064 | 45,982 | 46,064 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (19.0%, Due 9/12)(6) | 16,775 | 16,724 | 17,532 | ||||||||||
| Preferred Stock (25,000 shares) | 25,000 | 5,458 | ||||||||||||
| Common Stock (620,000 shares) | 6,325 | — | ||||||||||||
| Total Investment | 94,031 | 69,054 | ||||||||||||
|
Jakel, Inc.
|
Subordinated Debt (15.5%, Due 3/08)(6) | 748 | 748 | 374 | ||||||||||
|
(Industrial Products)
|
Total Investment | 748 | 374 | |||||||||||
|
Knightsbridge CLO 2007-1
Ltd.(4)
|
Class E Notes (10.4%, Due 1/22) | 18,700 | 18,700 | 14,984 | ||||||||||
|
(CLO)
|
Income Notes (0.0%)(11) | 41,747 | 20,431 | |||||||||||
| Total Investment | 60,447 | 35,415 | ||||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
7
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Knightsbridge CLO
2008-1
Ltd.(4)
|
Class C Notes (8.8%, Due 6/18) | $ | 12,800 | $ | 12,800 | $ | 12,181 | |||||||
|
(CLO)
|
Class D Notes (9.8%, Due 6/18) | 8,000 | 8,000 | 7,046 | ||||||||||
| Class E Notes (6.3%, Due 6/18) | 13,200 | 10,635 | 9,195 | |||||||||||
| Income Notes (20.6%)(11) | 20,876 | 19,468 | ||||||||||||
| Total Investment | 52,311 | 47,890 | ||||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt (13.0%, Due 6/12 – 6/13)(6) | 49,841 | 49,633 | — | ||||||||||
|
(Business Services)
|
Preferred Stock (10,000 shares) | — | — | |||||||||||
| Common Stock (20,934 shares) | 20,942 | — | ||||||||||||
| Total Investment | 70,575 | — | ||||||||||||
|
MVL Group, Inc.
|
Senior Loan (12.0%, Due 6/09 – 7/09) | 30,170 | 30,164 | 30,164 | ||||||||||
|
(Business Services)
|
Subordinated Debt (14.5%, Due 6/09 – 7/09) | 41,337 | 41,296 | 31,956 | ||||||||||
| Subordinated Debt (3.0%, Due 6/09)(6) | 144 | 139 | — | |||||||||||
| Common Stock (560,716 shares) | 555 | — | ||||||||||||
| Total Investment | 72,154 | 62,120 | ||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt (15.5%, Due 8/13) | 38,269 | 38,160 | 38,160 | ||||||||||
|
(Business Services)
|
Equity Interests | 18,873 | 20,191 | |||||||||||
| Total Investment | 57,033 | 58,351 | ||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt (15.5%, Due 4/12) | 27,223 | 27,162 | 27,162 | ||||||||||
|
(Business Services)
|
Common Stock (55,112 shares) | 11,785 | 22,829 | |||||||||||
| Total Investment | 38,947 | 49,991 | ||||||||||||
|
Stag-Parkway, Inc.
|
Subordinated Debt (10.0%, Due 7/12) | 18,574 | 18,524 | 18,524 | ||||||||||
|
(Business Services)
|
Common Stock (25,000 shares) | 32,686 | 5,581 | |||||||||||
| Total Investment | 51,210 | 24,105 | ||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 211 | 7 | |||||||||||
|
(Telecommunications)
|
Total Investment | 211 | 7 | |||||||||||
|
Unitranche Fund LLC
|
Subordinated Certificates (9.1%) | 124,521 | 124,521 | |||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | 1 | |||||||||||
| Total Investment | 124,522 | 124,522 | ||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt (14.0%, Due 2/14)(6) | 2,823 | 2,680 | — | ||||||||||
|
(Business Services)
|
Equity Interests | 11,084 | — | |||||||||||
| Warrants | 144 | — | ||||||||||||
| Total Investment | 13,908 | — | ||||||||||||
|
Total
companies more than 25% owned
|
$ | 2,147,724 | $ | 1,039,191 | ||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
8
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||
|
10th
Street, LLC
|
Subordinated Debt (13.0%, Due 11/14) | $ | 21,657 | $ | 21,552 | $ | 21,657 | |||||||
|
(Business Services)
|
Equity Interests | 422 | 511 | |||||||||||
| Option | 25 | 25 | ||||||||||||
| Total Investment | 21,999 | 22,193 | ||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan (4.5%, Due 3/11) | 2,220 | 2,190 | 2,078 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 2,993 | 12,100 | |||||||||||
| Total Investment | 5,183 | 14,178 | ||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock (701 shares) | 701 | — | |||||||||||
|
(Business Services)
|
Common Stock (11,657 shares) | 13 | — | |||||||||||
| Total Investment | 714 | — | ||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt (12.3%, Due 1/13) | 8,789 | 8,785 | 8,785 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 3,508 | 10,505 | |||||||||||
| Total Investment | 12,293 | 19,290 | ||||||||||||
|
BB&T Capital Partners/Windsor
|
Equity Interests | 11,789 | 10,832 | |||||||||||
|
Mezzanine Fund,
LLC(5)
|
||||||||||||||
|
(Private Equity Fund)
|
Total Investment | 11,789 | 10,832 | |||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock (622,555 shares) | 623 | 434 | |||||||||||
|
(Business Services)
|
Common Stock (6,286 shares) | 6 | — | |||||||||||
| Total Investment | 629 | 434 | ||||||||||||
|
Driven Brands, Inc.
|
Subordinated Debt (16.5%, Due 7/15) | 85,872 | 85,480 | 83,568 | ||||||||||
|
(Consumer Services)
|
Common Stock (3,772,098 shares) | 9,516 | 2,500 | |||||||||||
| Total Investment | 94,996 | 86,068 | ||||||||||||
|
Hilden America, Inc.
|
Common Stock (19 shares) | 454 | — | |||||||||||
|
(Consumer Products)
|
Total Investment | 454 | — | |||||||||||
|
Lydall Transport, Ltd.
|
Equity Interests | 432 | 364 | |||||||||||
|
(Business Services)
|
Total Investment | 432 | 364 | |||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt (11.3%, Due 11/11) | 2,524 | 2,503 | 2,471 | ||||||||||
|
(Business Services)
|
Equity Interests | 1,737 | 2,185 | |||||||||||
| Total Investment | 4,240 | 4,656 | ||||||||||||
|
Pendum Acquisition, Inc.
|
Common Stock (8,872 shares) | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
(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. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
9
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Postle Aluminum Company, LLC
|
Senior Loan (6.0%, Due 10/12)(6) | $ | 35,000 | $ | 34,876 | $ | 13,634 | |||||||
|
(Industrial Products)
|
Subordinated Debt (3.0%, Due 10/12)(6) | 23,953 | 23,868 | — | ||||||||||
| Equity Interests | 2,174 | — | ||||||||||||
| Total Investment | 60,918 | 13,634 | ||||||||||||
|
Progressive International
|
Preferred Stock (500 shares) | 500 | 1,147 | |||||||||||
|
Corporation
|
Common Stock (197 shares) | 13 | 3,700 | |||||||||||
|
(Consumer Products)
|
Warrants | — | — | |||||||||||
| Total Investment | 513 | 4,847 | ||||||||||||
|
Regency Healthcare Group, LLC
|
Senior Loan (11.1%, Due 6/12) | 2,000 | 1,989 | 1,906 | ||||||||||
|
(Healthcare Services)
|
Unitranche Debt (11.1%, Due 6/12) | 10,901 | 10,869 | 10,522 | ||||||||||
| Equity Interests | 1,302 | 1,955 | ||||||||||||
| Total Investment | 14,160 | 14,383 | ||||||||||||
|
SGT India Private
Limited(4)
|
Common Stock (150,596 shares) | 4,140 | — | |||||||||||
|
(Business Services)
|
Total Investment | 4,140 | — | |||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt (11.3%, Due 11/10) | 4,250 | 4,180 | 4,071 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,881 | 1,510 | |||||||||||
| Total Investment | 6,061 | 5,581 | ||||||||||||
|
Triax Holdings, LLC
|
Subordinated Debt (21.0%, Due 2/12)(6) | 10,625 | 10,587 | — | ||||||||||
|
(Consumer Products)
|
Equity Interests | 16,528 | — | |||||||||||
| Total Investment | 27,115 | — | ||||||||||||
|
Universal Environmental Services, LLC
|
Equity Interests | 1,599 | — | |||||||||||
|
(Business Services)
|
Total Investment | 1,599 | — | |||||||||||
|
Total
companies 5% to 25% owned
|
$ | 267,235 | $ | 196,460 | ||||||||||
|
Companies Less Than 5% Owned
|
||||||||||||||
|
3SI Security Systems, Inc.
|
Subordinated Debt (14.0%, Due 8/13) | $ | 20,500 | $ | 20,440 | $ | 18,442 | |||||||
| Subordinated Debt (16.0%, Due 8/13)(6) | 9,048 | 9,030 | 3,189 | |||||||||||
|
(Consumer Products)
|
Total Investment | 29,470 | 21,631 | |||||||||||
|
Abraxas Corporation
|
Subordinated Debt (14.6%, Due 4/13) | 36,644 | 36,493 | 35,323 | ||||||||||
|
(Business Services)
|
Total Investment | 36,493 | 35,323 | |||||||||||
|
Advantage Sales & Marketing, Inc.
|
Equity Interests | — | 9,300 | |||||||||||
|
(Business Services)
|
Total Investment | — | 9,300 | |||||||||||
|
Augusta Sportswear Group, Inc.
|
Subordinated Debt (13.0%, Due 1/15) | 53,000 | 52,833 | 51,638 | ||||||||||
|
(Consumer Products)
|
Common Stock (2,500 shares) | 2,500 | 1,500 | |||||||||||
| Total Investment | 55,333 | 53,138 | ||||||||||||
|
Axium Healthcare Pharmacy, Inc.
|
Senior Loan (14.0%, Due 12/12) | 3,750 | 3,726 | 3,749 | ||||||||||
|
(Healthcare Services)
|
Unitranche Debt (14.0%, Due 12/12) | 8,500 | 8,472 | 8,477 | ||||||||||
| Common Stock (22,860 shares) | 2,286 | 155 | ||||||||||||
| Total Investment | 14,484 | 12,381 | ||||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(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.
10
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Baird Capital Partners IV
Limited(5)
|
Limited Partnership Interest | $ | 3,636 | $ | 2,828 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 3,636 | 2,828 | |||||||||||
|
BenefitMall Holdings Inc.
|
Subordinated Debt (18.0%, Due 6/14) | $ | 40,326 | 40,242 | 40,242 | |||||||||
|
(Business Services)
|
Common Stock (39,274,290 shares)(12) | 39,274 | 79,523 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 79,516 | 119,765 | ||||||||||||
|
Broadcast Electronics, Inc.
|
Senior Loan (8.8%, Due 11/11)(6) | 4,890 | 4,862 | 625 | ||||||||||
|
(Business Services)
|
Preferred Stock (2,044 shares) | — | — | |||||||||||
| Total Investment | 4,862 | 625 | ||||||||||||
|
Bushnell, Inc.
|
Subordinated Debt (7.7%, Due 2/14) | 41,325 | 40,053 | 33,836 | ||||||||||
|
(Consumer Products)
|
Total Investment | 40,053 | 33,836 | |||||||||||
|
Callidus Debt Partners
|
Class C Notes (12.9%, Due 12/13)(6) | 18,800 | 18,907 | 11,108 | ||||||||||
|
CDO Fund I,
Ltd.(4)(10)
|
Class D Notes (17.0%, Due 12/13)(6) | 9,400 | 9,454 | — | ||||||||||
|
(CDO)
|
||||||||||||||
| Total Investment | 28,361 | 11,108 | ||||||||||||
|
Callidus Debt Partners
|
Preferred Shares (23,600,000 shares) | 20,138 | 6,360 | |||||||||||
|
CLO Fund III,
Ltd.(4)(10)
|
||||||||||||||
|
(CLO)
|
Total Investment | 20,138 | 6,360 | |||||||||||
|
Callidus Debt Partners
|
Class D Notes (5.7%, Due 4/20) | 3,000 | 2,074 | 1,607 | ||||||||||
|
CLO Fund IV,
Ltd.(4)(10)
|
Income Notes (0.0%)(11) | 15,040 | 5,487 | |||||||||||
|
(CLO)
|
||||||||||||||
| Total Investment | 17,114 | 7,094 | ||||||||||||
|
Callidus Debt Partners
|
Income Notes (6.2%)(11) | 13,631 | 6,924 | |||||||||||
|
CLO Fund V,
Ltd.(4)(10)
|
||||||||||||||
|
(CLO)
|
Total Investment | 13,631 | 6,924 | |||||||||||
|
Callidus Debt Partners
|
Class D Notes (7.1%, Due 10/21) | 9,000 | 7,180 | 4,004 | ||||||||||
|
CLO Fund VI,
Ltd.(4)(10)
|
Income Notes (2.6%)(11) | 28,954 | 8,708 | |||||||||||
|
(CLO)
|
||||||||||||||
| Total Investment | 36,134 | 12,712 | ||||||||||||
|
Callidus Debt Partners
|
Income Notes (2.2%)(11) | 24,688 | 10,520 | |||||||||||
|
CLO Fund VII,
Ltd.(4)(10)
|
||||||||||||||
|
(CLO)
|
Total Investment | 24,688 | 10,520 | |||||||||||
|
(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. | |
|
(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)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value. |
The accompanying notes are an
integral part of these consolidated financial statements.
11
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Callidus MAPS CLO Fund I
LLC(10)
|
Class E Notes (6.7%, Due 12/17) | $ | 17,000 | $ | 17,000 | $ | 11,120 | |||||||
|
(CLO)
|
Income Notes (0.0%)(11) | 43,814 | 13,428 | |||||||||||
| Total Investment | 60,814 | 24,548 | ||||||||||||
|
Callidus MAPS CLO Fund II,
Ltd.(4)(10)
|
Class D Notes (5.4%, Due 7/22) | 7,700 | 3,615 | 3,005 | ||||||||||
| Income Notes (0.0%)(11) | 18,804 | 4,401 | ||||||||||||
|
(CLO)
|
Total Investment | 22,419 | 7,406 | |||||||||||
|
Carlisle Wide Plank Floors, Inc.
|
Senior Loan (6.1%, Due 6/11) | 500 | 498 | 454 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (12.8%, Due 6/11) | 3,161 | 3,141 | 2,894 | ||||||||||
| Preferred Stock (345,056 Shares) | 345 | 93 | ||||||||||||
| Total Investment | 3,984 | 3,441 | ||||||||||||
|
Catterton Partners VI,
L.P.(5)
|
Limited Partnership Interest | 2,951 | 1,773 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,951 | 1,773 | |||||||||||
|
Centre Capital Investors V,
L.P.(5)
|
Limited Partnership Interest | 2,767 | 1,934 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,767 | 1,934 | |||||||||||
|
CK Franchising, Inc.
(Consumer Services) |
Senior Loan (5.5%, Due 7/12) | 1,600 | 1,585 | 1,585 | ||||||||||
| Subordinated Debt (12.3%, Due 7/12 – 7/17) | 21,115 | 21,048 | 21,048 | |||||||||||
| Preferred Stock (1,281,887 shares) | 1,282 | 1,651 | ||||||||||||
| Common Stock (7,585,549 shares) | 7,586 | 11,100 | ||||||||||||
| Total Investment | 31,501 | 35,384 | ||||||||||||
|
Commercial Credit Group, Inc.
|
Subordinated Debt (15.0%, Due 6/15) | 19,000 | 18,970 | 18,970 | ||||||||||
|
(Financial Services)
|
Preferred Stock (64,679 shares) | 15,543 | 9,074 | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 34,513 | 28,044 | ||||||||||||
|
Community Education Centers, Inc.
|
Subordinated Debt (14.5%, Due 11/13) | 35,749 | 35,690 | 33,260 | ||||||||||
|
(Education Services)
|
Total Investment | 35,690 | 33,260 | |||||||||||
|
Component Hardware Group, Inc.
|
Subordinated Debt (13.5%, Due 1/13) | 18,780 | 18,728 | 17,919 | ||||||||||
|
(Industrial Products)
|
Total Investment | 18,728 | 17,919 | |||||||||||
|
Cook Inlet Alternative Risk, LLC
|
Unitranche Debt (10.8%, Due 4/13) | 87,800 | 87,442 | 69,000 | ||||||||||
|
(Business Services)
|
Equity Interests | 552 | — | |||||||||||
| Total Investment | 87,994 | 69,000 | ||||||||||||
|
Cortec Group Fund IV,
L.P.(5)
|
Limited Partnership Interest | 4,727 | 2,941 | |||||||||||
|
(Private Equity)
|
Total Investment | 4,727 | 2,941 | |||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
12
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Diversified Mercury
|
Senior Loan (4.5%, Due 3/13) | $ | 2,966 | $ | 2,953 | $ | 2,688 | |||||||
|
Communications, LLC
|
Total Investment | 2,953 | 2,688 | |||||||||||
|
(Business Services)
|
||||||||||||||
|
Digital VideoStream, LLC
|
Unitranche Debt (11.0%, Due 2/12) | 14,133 | 14,073 | 13,934 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (10.0%, Due 2/16) | 4,659 | 4,647 | 4,647 | ||||||||||
| Total Investment | 18,720 | 18,581 | ||||||||||||
|
DirectBuy Holdings, Inc.
|
Subordinated Debt (14.5%, Due 5/13) | 76,384 | 76,100 | 65,015 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 8,000 | 560 | |||||||||||
| Total Investment | 84,100 | 65,575 | ||||||||||||
|
Distant Lands Trading Co.
|
Senior Loan (7.5%, Due 11/11) | 10,000 | 9,977 | 9,437 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (12.3%, Due 11/11) | 43,337 | 43,236 | 42,361 | ||||||||||
| Common Stock (3,451 shares) | 3,451 | 623 | ||||||||||||
| Total Investment | 56,664 | 52,421 | ||||||||||||
|
Dryden XVIII Leveraged
Loan 2007 Limited(4) |
Class B Notes (5.7%, Due 10/19) Income Notes (8.2%)(11) |
9,000 |
7,780 22,694 |
3,093 8,671 |
||||||||||
|
(CLO)
|
Total Investment | 30,474 | 11,764 | |||||||||||
|
Dynamic India Fund
IV(4)(5)
|
Equity Interests | 9,350 | 8,842 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,350 | 8,842 | |||||||||||
|
EarthColor, Inc.
|
Subordinated Debt (15.0%, Due 11/13)(6) | 123,819 | 123,385 | — | ||||||||||
|
(Business Services)
|
Common Stock (63,438 shares)(12) | 63,438 | — | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 186,823 | — | ||||||||||||
|
eCentury Capital Partners,
L.P.(5)
|
Limited Partnership Interest | 7,274 | 308 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 7,274 | 308 | |||||||||||
|
eInstruction Corporation
|
Subordinated Debt (12.7%, Due 7/14-1/15) | 34,631 | 34,500 | 31,799 | ||||||||||
|
(Education Services)
|
Common Stock (2,406 shares) | 2,500 | 1,100 | |||||||||||
| Total Investment | 37,000 | 32,899 | ||||||||||||
|
Farley’s & Sathers Candy Company, Inc.
|
Subordinated Debt (8.5%, Due 3/11) | 2,500 | 2,494 | 2,374 | ||||||||||
|
(Consumer Products)
|
Total Investment | 2,494 | 2,374 | |||||||||||
|
(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. | |
|
(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)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
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.
13
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
FCP-BHI Holdings, LLC
|
Subordinated Debt (12.0%, Due 9/13) | $ | 28,116 | $ | 28,028 | $ | 26,081 | |||||||
|
d/b/a Bojangles’
|
Equity Interests | 1,029 | 1,800 | |||||||||||
|
(Retail)
|
Total Investment | 29,057 | 27,881 | |||||||||||
|
Fidus Mezzanine Capital,
L.P.(5)
|
Limited Partnership Interest | 12,828 | 7,653 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 12,828 | 7,653 | |||||||||||
|
Freedom Financial Network, LLC
|
Subordinated Debt (13.5%, Due 2/14) | 13,000 | 12,947 | 13,168 | ||||||||||
|
(Financial Services)
|
Total Investment | 12,947 | 13,168 | |||||||||||
|
Geotrace Technologies, Inc.
|
Warrants | 2,027 | 3,000 | |||||||||||
|
(Energy Services)
|
Total Investment | 2,027 | 3,000 | |||||||||||
|
Gilchrist & Soames, Inc.
(Consumer Products) |
Subordinated Debt (13.4%, Due 10/13) | 25,800 | 25,667 | 23,807 | ||||||||||
| Total Investment | 25,667 | 23,807 | ||||||||||||
|
Havco Wood Products LLC
|
Equity Interests | 910 | — | |||||||||||
|
(Industrial Products)
|
Total Investment | 910 | — | |||||||||||
|
Higginbotham Insurance Agency, Inc.
|
Subordinated Debt (13.7%, Due 8/13 – 8/14) | 53,305 | 53,098 | 53,098 | ||||||||||
|
(Business Services)
|
Common Stock (23,695 shares)(12) | 23,695 | 15,881 | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 76,793 | 68,979 | ||||||||||||
|
The Hillman Companies,
Inc.(3)
|
Subordinated Debt (10.0%, Due 9/11) | 44,580 | 44,499 | 43,867 | ||||||||||
|
(Consumer Products)
|
Total Investment | 44,499 | 43,867 | |||||||||||
|
The Homax Group, Inc.
|
Senior Loan (6.7%, Due 10/12) | 11,203 | 11,159 | 10,013 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (14.5%, Due 4/14) | 14,158 | 13,558 | 9,282 | ||||||||||
| Preferred Stock (76 shares) | 76 | — | ||||||||||||
| Common Stock (24 shares) | 5 | — | ||||||||||||
| Warrants | 954 | — | ||||||||||||
| Total Investment | 25,752 | 19,295 | ||||||||||||
|
Ideal Snacks Corporation
|
Senior Loan (7.3%, Due 6/10) | 1,333 | 1,333 | 1,286 | ||||||||||
|
(Consumer Products)
|
Total Investment | 1,333 | 1,286 | |||||||||||
|
(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)
|
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.
14
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Kodiak Fund
LP(5)
|
Equity Interests | $ | 9,368 | $ | 900 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 9,368 | 900 | |||||||||||
|
Market Track Holdings, LLC
|
Senior Loan (8.0%, Due 6/14) | $ | 2,500 | 2,450 | 2,352 | |||||||||
|
(Business Services)
|
Subordinated Debt (15.9%, Due 6/14) | 24,600 | 24,493 | 23,287 | ||||||||||
| Total Investment | 26,943 | 25,639 | ||||||||||||
|
NetShape Technologies, Inc.
|
Senior Loan (5.3%, Due 2/13) | 441 | 441 | 375 | ||||||||||
|
(Industrial Products)
|
Total Investment | 441 | 375 | |||||||||||
|
Network Hardware Resale, Inc.
|
Unitranche Debt (12.0%, Due 12/11) | 16,618 | 16,682 | 16,632 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (9.8%, Due 12/15) | 15,953 | 16,004 | 16,004 | ||||||||||
| Total Investment | 32,686 | 32,636 | ||||||||||||
|
Novak Biddle Venture Partners III,
L.P.(5)
|
Limited Partnership Interest | 2,018 | 1,227 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,018 | 1,227 | |||||||||||
|
Oahu Waste Services, Inc.
|
Stock Appreciation Rights | 206 | 375 | |||||||||||
|
(Business Services)
|
Total Investment | 206 | 375 | |||||||||||
|
Pangaea CLO 2007-1
Ltd.(4)
|
Class D Notes (5.9%, Due 4/09) | 15,000 | 11,864 | 4,554 | ||||||||||
|
(CLO)
|
Total Investment | 11,864 | 4,554 | |||||||||||
|
PC Helps Support, LLC
|
Senior Loan (4.3%, Due 12/13) | 8,610 | 8,520 | 8,573 | ||||||||||
|
(Business Services)
|
Subordinated Debt (12.8%, Due 12/13) | 28,136 | 28,016 | 28,934 | ||||||||||
| Total Investment | 36,536 | 37,507 | ||||||||||||
|
Performant Financial Corporation
|
Common Stock (478,816 shares) | 734 | 400 | |||||||||||
|
(Business Services)
|
Total Investment | 734 | 400 | |||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
15
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
PharMEDium Healthcare Corporation
|
Senior Loan (3.8%, Due 10/13) | $ | 1,910 | $ | 1,910 | $ | 1,747 | |||||||
|
(Healthcare Services)
|
Total Investment | 1,910 | 1,747 | |||||||||||
|
Promo Works, LLC
|
Unitranche Debt (12.3%, Due 12/11) | 23,111 | 22,967 | 21,030 | ||||||||||
|
(Business Services)
|
Total Investment | 22,967 | 21,030 | |||||||||||
|
Reed Group, Ltd.
|
Senior Loan (7.2%, Due 12/13) | 12,865 | 12,732 | 11,429 | ||||||||||
|
(Healthcare Services)
|
Subordinated Debt (15.8%, Due 12/13) | 18,723 | 18,652 | 16,408 | ||||||||||
| Equity Interests | 1,800 | 226 | ||||||||||||
| Total Investment | 33,184 | 28,063 | ||||||||||||
|
S.B. Restaurant Company
|
Unitranche Debt (9.8%, Due 4/11) | 37,327 | 37,142 | 35,682 | ||||||||||
|
(Retail)
|
Preferred Stock (46,690 shares) | 117 | 117 | |||||||||||
| Warrants | 534 | — | ||||||||||||
| Total Investment | 37,793 | 35,799 | ||||||||||||
| Standby Letters of Credit ($2,465) | ||||||||||||||
|
Snow Phipps Group,
L.P.(5)
|
Limited Partnership Interest | 4,962 | 4,256 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 4,962 | 4,256 | |||||||||||
|
SPP Mezzanine Funding II,
L.P.(5)
|
Limited Partnership Interest | 9,118 | 9,018 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,118 | 9,018 | |||||||||||
|
STS Operating, Inc.
|
Subordinated Debt (11.0%, Due 1/13) | 30,386 | 30,301 | 28,829 | ||||||||||
|
(Industrial Products)
|
Total Investment | 30,301 | 28,829 | |||||||||||
|
Summit Energy Services, Inc.
(Business Services) |
Subordinated Debt (11.6%, Due 8/13) | 35,130 | 34,954 | 34,115 | ||||||||||
| Common Stock (415,982 shares) | 1,861 | 2,000 | ||||||||||||
| Total Investment | 36,815 | 36,115 | ||||||||||||
|
Tank Intermediate Holding Corp.
(Industrial Products) |
Senior Loan (6.8%, Due 9/14) | 16,552 | 16,000 | 13,946 | ||||||||||
| Total Investment | 16,000 | 13,946 | ||||||||||||
|
(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. | |
|
(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.
16
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
March 31, 2009 | |||||||||||||
|
Portfolio Company |
(unaudited) | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Tappan Wire & Cable Inc.
|
Unitranche Debt (15.0%, Due 8/14)(6) | $ | 22,346 | $ | 22,247 | $ | 7,464 | |||||||
|
(Business Services)
|
Common Stock (12,940 shares)(12) | 2,043 | — | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 24,290 | 7,464 | ||||||||||||
|
The Step2 Company, LLC
|
Unitranche Debt (11.0%, Due 4/12) | 95,083 | 94,836 | 89,671 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 2,156 | 1,065 | |||||||||||
| Total Investment | 96,992 | 90,736 | ||||||||||||
|
Tradesmen International, Inc.
|
Subordinated Debt (12.0%, Due 12/12) | 40,000 | 39,654 | 35,479 | ||||||||||
|
(Business Services)
|
Total Investment | 39,654 | 35,479 | |||||||||||
|
TransAmerican Auto Parts, LLC
|
Subordinated Debt (16.3%, Due 11/12)(6) | 24,561 | 24,409 | — | ||||||||||
|
(Consumer Products)
|
Equity Interests | 1,034 | — | |||||||||||
| Total Investment | 25,443 | — | ||||||||||||
|
Trover Solutions, Inc.
|
Subordinated Debt (12.0%, Due 11/12) | 60,286 | 60,093 | 56,474 | ||||||||||
|
(Business Services)
|
Total Investment | 60,093 | 56,474 | |||||||||||
|
United Road Towing, Inc.
|
Subordinated Debt (11.8%, Due 1/14) | 20,000 | 19,920 | 19,772 | ||||||||||
|
(Consumer Services)
|
Total Investment | 19,920 | 19,772 | |||||||||||
|
Venturehouse-Cibernet Investors, LLC
|
Equity Interest | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
WMA Equity Corporation and Affiliates
|
Subordinated Debt (16.8%, Due 4/13-4/14)(6) | 139,455 | 138,559 | 46,932 | ||||||||||
|
d/b/a Wear Me Apparel
|
Common Stock (86 shares) | 39,635 | — | |||||||||||
|
(Consumer Products)
|
Total Investment | 178,194 | 46,932 | |||||||||||
|
Webster Capital II,
L.P.(5)
|
Limited Partnership Interest | 1,899 | 1,466 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,899 | 1,466 | |||||||||||
|
Woodstream Corporation
|
Subordinated Debt (12.0%, Due 2/15) | 90,000 | 89,648 | 78,683 | ||||||||||
|
(Consumer Products)
|
Common Stock (6,960 shares) | 6,961 | 1,300 | |||||||||||
| Total Investment | 96,609 | 79,983 | ||||||||||||
|
Other companies
|
Other debt investments | 155 | 81 | 74 | ||||||||||
| Other equity investments | 31 | 8 | ||||||||||||
| Total Investment | 112 | 82 | ||||||||||||
| Standby Letters of Credit ($200) | ||||||||||||||
|
Total companies less than 5% owned
|
$ | 2,234,718 | $ | 1,594,387 | ||||||||||
|
Total private finance (132 portfolio investments)
|
$ | 4,649,677 | $ | 2,830,038 | ||||||||||
|
(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. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
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.
17
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
Commercial
Real Estate Finance
(in thousands, except number of loans)
(in thousands, except number of loans)
| March 31, 2009 | ||||||||||||||||
| (unaudited) | ||||||||||||||||
|
Stated Interest |
Number of |
|||||||||||||||
| Rate Ranges | Loans | Cost | Value | |||||||||||||
|
Commercial Mortgage Loans
|
||||||||||||||||
| Up to 6.99% | 4 | $ | 30,680 | $ | 29,538 | |||||||||||
| 7.00%–8.99% | 2 | 2,003 | 1,940 | |||||||||||||
| 9.00%–10.99% | 1 | 6,469 | 6,469 | |||||||||||||
| 11.00%–12.99% | 1 | 10,472 | 9,316 | |||||||||||||
| 15.00% and above | 2 | 3,970 | 6,670 | |||||||||||||
|
Total commercial mortgage
loans(13)
|
$ | 53,594 | $ | 53,933 | ||||||||||||
|
Real Estate Owned
|
$ | 15,042 | $ | 7,801 | ||||||||||||
|
Equity
Interests(2) —
Companies more than 25% owned
|
$ | 13,705 | $ | 17,296 | ||||||||||||
|
Guarantees ($6,871)
|
||||||||||||||||
|
Standby Letter of Credit ($650)
|
||||||||||||||||
|
Total commercial real estate finance
|
$ | 82,341 | $ | 79,030 | ||||||||||||
|
Total portfolio
|
$ | 4,732,018 | $ | 2,909,068 | ||||||||||||
| Yield | Cost | Value | |||||||||||
|
Investments in Money Market and Other Securities
|
|||||||||||||
|
SEI Daily Income Tr Prime Obligation Money Market Fund
|
0.2 | % | $ | 5 | $ | 5 | |||||||
|
Total
|
$ | 5 | $ | 5 | |||||||||
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(13)
|
Commercial mortgage loans totaling $11.0 million at value were on non-accrual status and therefore were considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
18
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||
|
AGILE Fund I,
LLC(5)
|
Equity Interests | $ | 694 | $ | 497 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 694 | 497 | |||||||||||
|
AllBridge Financial, LLC
|
Equity Interests | 33,294 | 10,960 | |||||||||||
|
(Asset Management)
|
Total Investment | 33,294 | 10,960 | |||||||||||
| Standby Letter of Credit ($15,000) | ||||||||||||||
|
Allied Capital Senior Debt Fund,
L.P.(5)
|
Equity Interests (See Note 3) | 31,800 | 31,800 | |||||||||||
|
(Private Debt Fund)
|
Total Investment | 31,800 | 31,800 | |||||||||||
|
Avborne,
Inc.(7)
|
Preferred Stock (12,500 shares) | — | 942 | |||||||||||
|
(Business Services)
|
Common Stock (27,500 shares) | — | — | |||||||||||
| Total Investment | — | 942 | ||||||||||||
|
Avborne Heavy Maintenance,
Inc.(7)
|
Common Stock (2,750 shares) | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
Aviation Properties Corporation
|
Common Stock (100 shares) | 93 | — | |||||||||||
|
(Business Services)
|
Total Investment | 93 | — | |||||||||||
| Standby Letters of Credit ($1,000) | ||||||||||||||
|
Border Foods, Inc.
|
Senior Loan (12.6%, Due 12/09 – 3/12) | $ | 33,027 | 26,860 | 33,027 | |||||||||
|
(Consumer Products)
|
Preferred Stock (100,000 shares) | 12,721 | 11,851 | |||||||||||
| Common Stock (260,467 shares) | 3,847 | — | ||||||||||||
| Total Investment | 43,428 | 44,878 | ||||||||||||
|
Calder Capital Partners,
LLC(5)
|
Senior Loan (10.5%, Due 5/09)(6) | 4,496 | 4,496 | 953 | ||||||||||
|
(Asset Management)
|
Equity Interests | 2,453 | — | |||||||||||
| Total Investment | 6,949 | 953 | ||||||||||||
|
Callidus Capital Corporation
|
Subordinated Debt (18.0%, Due 8/13 – 2/14) | 16,068 | 16,068 | 16,068 | ||||||||||
|
(Asset Management)
|
Common Stock (100 shares) | — | 34,377 | |||||||||||
| Total Investment | 16,068 | 50,445 | ||||||||||||
| Guaranty ($6,447) | ||||||||||||||
|
(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. | |
|
(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.
19
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Ciena Capital LLC
|
Senior Loan (5.5%, Due 3/09)(6) | $ | 319,031 | $ | 319,031 | $ | 104,883 | |||||||
|
(Financial Services)
|
Class B Equity Interests | 119,436 | — | |||||||||||
| Class C Equity Interests | 109,301 | — | ||||||||||||
| Total Investment | 547,768 | 104,883 | ||||||||||||
| Guaranty ($5,000 — See Note 3) | ||||||||||||||
|
Standby Letters of Credit ($102,600 — See Note 3) |
||||||||||||||
|
CitiPostal Inc.
|
Senior Loan (4.0%, Due 12/13) | 692 | 681 | 681 | ||||||||||
|
(Business Services)
|
Unitranche Debt (12.0%, Due 12/13) | 51,758 | 51,548 | 51,548 | ||||||||||
| Subordinated Debt (16.0%, Due 12/15) | 9,114 | 9,114 | 9,114 | |||||||||||
| Common Stock (37,024 shares) | 12,726 | 8,616 | ||||||||||||
| Total Investment | 74,069 | 69,959 | ||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt (12.0%, Due 7/11) | 32,035 | 31,948 | 31,948 | ||||||||||
|
(Business Services)
|
Subordinated Debt (15.0%, Due 7/11) | 5,563 | 5,549 | 5,549 | ||||||||||
| Common Stock (763,333 shares) | 14,361 | 17,968 | ||||||||||||
| Total Investment | 51,858 | 55,465 | ||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt (16.6%, Due 2/13)(6) | 39,307 | 39,193 | 17,360 | ||||||||||
|
(Consumer Products)
|
Common Stock (32,090,696 shares) | 28,744 | — | |||||||||||
| Total Investment | 67,937 | 17,360 | ||||||||||||
|
Crescent Equity
Corp.(8)
|
Senior Loan (10.0%, Due 1/09) | 433 | 433 | 433 | ||||||||||
|
(Business Services)
|
Subordinated Debt (11.0%, Due 9/11– 6/17) | 22,312 | 22,247 | 14,283 | ||||||||||
| Subordinated Debt (11.0%, Due 1/12 – 9/12)(6) | 10,097 | 10,072 | 4,331 | |||||||||||
| Common Stock (174 shares) | 81,255 | 4,580 | ||||||||||||
| Total Investment | 114,007 | 23,627 | ||||||||||||
| Guaranty ($900) | ||||||||||||||
| Standby Letters of Credit ($200) | ||||||||||||||
|
Direct Capital Corporation
|
Subordinated Debt (16.0%, Due 3/13)(6) | 55,671 | 55,496 | 13,530 | ||||||||||
|
(Financial Services)
|
Common Stock (2,317,020 shares) | 25,732 | — | |||||||||||
| Total Investment | 81,228 | 13,530 | ||||||||||||
|
Financial Pacific Company
|
Subordinated Debt (17.4%, Due 2/12 – 8/12) | 68,967 | 68,840 | 62,189 | ||||||||||
|
(Financial Services)
|
Preferred Stock (9,458 shares) | 8,865 | — | |||||||||||
| Common Stock (12,711 shares) | 12,783 | — | ||||||||||||
| Total Investment | 90,488 | 62,189 | ||||||||||||
|
(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. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(8)
|
Crescent Equity Corp. holds investments in Crescent Hotels & Resorts, LLC and affiliates. |
The accompanying notes are an
integral part of these consolidated financial statements.
20
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | $ | — | $ | 889 | |||||||||
|
(Tower Leasing)
|
Total Investment | — | 889 | |||||||||||
|
Global Communications, LLC
|
Senior Loan (10.0%, Due 9/02)(6) | $ | 1,335 | 1,335 | 1,335 | |||||||||
|
(Business Services)
|
Total Investment | 1,335 | 1,335 | |||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan (9.0%, Due 2/11)(6) | 30,522 | 30,522 | 13,678 | ||||||||||
|
(Retail)
|
Common Stock (93,500 shares) | 5,151 | — | |||||||||||
| Total Investment | 35,673 | 13,678 | ||||||||||||
| Standby Letter of Credit ($105) | ||||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan (4.0%, Due 2/11-2/12) | 53,597 | 53,456 | 42,378 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (12.4%, Due 8/12-2/13)(6) | 83,692 | 83,387 | — | ||||||||||
| Common Stock (1,147,453 shares) | 56,187 | — | ||||||||||||
| Total Investment | 193,030 | 42,378 | ||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt (15.0%, Due 12/12) | 57,244 | 57,067 | 57,067 | ||||||||||
|
(Retail)
|
Common Stock (358,428 shares) | 35,828 | 20,922 | |||||||||||
| Total Investment | 92,895 | 77,989 | ||||||||||||
|
IAT Equity, LLC and Affiliates
|
Subordinated Debt (9.0%, Due 6/14) | 6,000 | 6,000 | 6,000 | ||||||||||
|
d/b/a Industrial Air Tool
|
Equity Interests | 7,500 | 8,860 | |||||||||||
|
(Industrial Products)
|
Total Investment | 13,500 | 14,860 | |||||||||||
|
Impact Innovations Group, LLC
|
Equity Interests in Affiliate | — | 321 | |||||||||||
|
(Business Services)
|
Total Investment | — | 321 | |||||||||||
|
Insight Pharmaceuticals Corporation
|
Subordinated Debt (15.0%, Due 9/12) | 45,827 | 45,738 | 45,827 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (19.0%, Due 9/12)(6) | 16,177 | 16,126 | 17,532 | ||||||||||
| Preferred Stock (25,000 shares) | 25,000 | 4,068 | ||||||||||||
| Common Stock (620,000 shares) | 6,325 | — | ||||||||||||
| Total Investment | 93,189 | 67,427 | ||||||||||||
|
Jakel, Inc.
|
Subordinated Debt (15.5%, Due 3/08)(6) | 748 | 748 | 374 | ||||||||||
|
(Industrial Products)
|
Total Investment | 748 | 374 | |||||||||||
|
Knightsbridge CLO 2007-1
Ltd.(4)
|
Class E Notes (13.8%, Due 1/22) | 18,700 | 18,700 | 14,866 | ||||||||||
|
(CLO)
|
Income Notes (14.9%)(11) | 40,914 | 35,214 | |||||||||||
| Total Investment | 59,614 | 50,080 | ||||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
21
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Knightsbridge CLO
2008-1
Ltd.(4)
|
Class C Notes (9.3%, Due 6/18) | $ | 12,800 | $ | 12,800 | $ | 12,800 | |||||||
|
(CLO)
|
Class D Notes (10.3%, Due 6/18) | 8,000 | 8,000 | 8,000 | ||||||||||
| Class E Notes (6.8%, Due 6/18) | 13,200 | 10,573 | 10,573 | |||||||||||
| Income Notes (16.6%)(11) | 21,315 | 21,315 | ||||||||||||
| Total Investment | 52,688 | 52,688 | ||||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt (13.0%, Due 6/12 – 6/13)(6) | 49,841 | 49,633 | — | ||||||||||
|
(Business Services)
|
Preferred Stock (10,000 shares) | — | — | |||||||||||
| Common Stock (20,934 shares) | 20,942 | — | ||||||||||||
| Total Investment | 70,575 | — | ||||||||||||
|
MVL Group, Inc.
|
Senior Loan (12.0%, Due 6/09 – 7/09) | 30,674 | 30,663 | 30,663 | ||||||||||
|
(Business Services)
|
Subordinated Debt (14.5%, Due 6/09 – 7/09) | 41,074 | 40,994 | 40,994 | ||||||||||
| Subordinated Debt (3.0%, Due 6/09)(6) | 144 | 139 | 86 | |||||||||||
| Common Stock (560,716 shares) | 555 | — | ||||||||||||
| Total Investment | 72,351 | 71,743 | ||||||||||||
|
Old Orchard Brands, LLC
|
Subordinated Debt (18.0%, Due 7/14) | 18,951 | 18,882 | 18,882 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 16,857 | 27,763 | |||||||||||
| Total Investment | 35,739 | 46,645 | ||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt (15.5%, Due 8/13) | 37,984 | 37,869 | 37,869 | ||||||||||
|
(Business Services)
|
Equity Interests | 18,873 | 21,100 | |||||||||||
| Total Investment | 56,742 | 58,969 | ||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt (15.5%, Due 4/12) | 27,050 | 26,984 | 26,984 | ||||||||||
|
(Business Services)
|
Common Stock (55,112 shares) | 11,785 | 21,156 | |||||||||||
| Total Investment | 38,769 | 48,140 | ||||||||||||
|
Stag-Parkway, Inc.
|
Unitranche Debt (14.0%, Due 7/12) | 17,975 | 17,920 | 17,962 | ||||||||||
|
(Business Services)
|
Common Stock (25,000 shares) | 32,686 | 6,968 | |||||||||||
| Total Investment | 50,606 | 24,930 | ||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 211 | 332 | |||||||||||
|
(Telecommunications)
|
Total Investment | 211 | 332 | |||||||||||
|
Unitranche Fund LLC
|
Subordinated Certificates (12.0%) | 125,423 | 125,423 | |||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | 1 | |||||||||||
| Total Investment | 125,424 | 125,424 | ||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt (14.0%, Due 2/14)(6) | 2,865 | 2,722 | 2,032 | ||||||||||
|
(Business Services)
|
Equity Interests | 11,384 | — | |||||||||||
| Warrants | 144 | — | ||||||||||||
| Total Investment | 14,250 | 2,032 | ||||||||||||
|
Total
companies more than 25% owned
|
$ | 2,167,020 | $ | 1,187,722 | ||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
22
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||
|
10th
Street, LLC
|
Subordinated Debt (13.0%, Due 11/14) | $ | 21,439 | $ | 21,329 | $ | 21,439 | |||||||
|
(Business Services)
|
Equity Interests | 422 | 975 | |||||||||||
| Option | 25 | 25 | ||||||||||||
| Total Investment | 21,776 | 22,439 | ||||||||||||
|
Advantage Sales & Marketing, Inc.
|
Subordinated Debt (12.0%, Due 3/14) | 158,617 | 158,132 | 135,000 | ||||||||||
|
(Business Services)
|
Equity Interests | — | 5,000 | |||||||||||
| Total Investment | 158,132 | 140,000 | ||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan (3.3%, Due 3/11) | 3,360 | 3,326 | 3,139 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 2,993 | 10,800 | |||||||||||
| Total Investment | 6,319 | 13,939 | ||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock (701 shares) | 701 | — | |||||||||||
|
(Business Services)
|
Common Stock (11,657 shares) | 13 | — | |||||||||||
| Total Investment | 714 | — | ||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt (12.3%, Due 1/13) | 8,789 | 8,784 | 8,784 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 3,508 | 9,932 | |||||||||||
| Total Investment | 12,292 | 18,716 | ||||||||||||
|
BB&T Capital Partners/Windsor
|
Equity Interests | 11,789 | 11,063 | |||||||||||
|
Mezzanine Fund,
LLC(5)
|
||||||||||||||
|
(Private Equity Fund)
|
Total Investment | 11,789 | 11,063 | |||||||||||
|
Becker Underwood, Inc.
|
Subordinated Debt (14.5%, Due 8/12) | 25,503 | 25,450 | 25,502 | ||||||||||
|
(Industrial Products)
|
Common Stock (4,376 shares) | 5,014 | 2,267 | |||||||||||
| Total Investment | 30,464 | 27,769 | ||||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock (622,555 shares) | 623 | 512 | |||||||||||
|
(Business Services)
|
Common Stock (6,286 shares) | 6 | — | |||||||||||
| Total Investment | 629 | 512 | ||||||||||||
|
Driven Brands, Inc.
|
Subordinated Debt (16.5%, Due 7/15) | 84,106 | 83,698 | 83,698 | ||||||||||
|
(Consumer Services)
|
Common Stock (3,772,098 shares) | 9,516 | 4,855 | |||||||||||
| Total Investment | 93,214 | 88,553 | ||||||||||||
|
Hilden America, Inc.
|
Common Stock (19 shares) | 454 | 76 | |||||||||||
|
(Consumer Products)
|
Total Investment | 454 | 76 | |||||||||||
|
Lydall Transport, Ltd.
|
Equity Interests | 432 | 345 | |||||||||||
|
(Business Services)
|
Total Investment | 432 | 345 | |||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt (11.3%, Due 11/11) | 3,018 | 2,995 | 2,941 | ||||||||||
|
(Business Services)
|
Equity Interests | 1,737 | 1,782 | |||||||||||
| Total Investment | 4,732 | 4,723 | ||||||||||||
|
(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. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
23
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Progressive International
|
Preferred Stock (500 shares) | $ | 500 | $ | 1,125 | |||||||||
|
Corporation
|
Common Stock (197 shares) | 13 | 4,600 | |||||||||||
|
(Consumer Products)
|
Warrants | — | — | |||||||||||
| Total Investment | 513 | 5,725 | ||||||||||||
|
Regency Healthcare Group, LLC
|
Unitranche Debt (11.1%, Due 6/12) | $ | 10,901 | 10,855 | 10,825 | |||||||||
|
(Healthcare Services)
|
Equity Interests | 1,302 | 2,050 | |||||||||||
| Total Investment | 12,157 | 12,875 | ||||||||||||
|
SGT India Private
Limited(4)
|
Common Stock (150,596 shares) | 4,137 | — | |||||||||||
|
(Business Services)
|
Total Investment | 4,137 | — | |||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt (11.3%, Due 11/10) | 4,250 | 4,167 | 4,054 | ||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,881 | 1,971 | |||||||||||
| Total Investment | 6,048 | 6,025 | ||||||||||||
|
Triax Holdings, LLC
|
Subordinated Debt (21.0%, Due 2/12)(6) | 10,625 | 10,587 | — | ||||||||||
|
(Consumer Products)
|
Equity Interests | 16,528 | — | |||||||||||
| Total Investment | 27,115 | — | ||||||||||||
|
Universal Environmental Services, LLC
|
Equity Interests | 1,599 | — | |||||||||||
|
(Business Services)
|
Total Investment | 1,599 | — | |||||||||||
|
Total
companies 5% to 25% owned
|
$ | 392,516 | $ | 352,760 | ||||||||||
|
Companies Less Than 5% Owned
|
||||||||||||||
|
3SI Security Systems, Inc.
|
Subordinated Debt (14.6%, Due 8/13) | $ | 29,200 | $ | 29,118 | $ | 28,170 | |||||||
|
(Consumer Products)
|
Total Investment | 29,118 | 28,170 | |||||||||||
|
Abraxas Corporation
|
Subordinated Debt (14.6%, Due 4/13) | 36,822 | 36,662 | 36,170 | ||||||||||
|
(Business Services)
|
Total Investment | 36,662 | 36,170 | |||||||||||
|
Augusta Sportswear Group, Inc.
|
Subordinated Debt (13.0%, Due 1/15) | 53,000 | 52,825 | 52,406 | ||||||||||
|
(Consumer Products)
|
Common Stock (2,500 shares) | 2,500 | 1,400 | |||||||||||
| Total Investment | 55,325 | 53,806 | ||||||||||||
|
Axium Healthcare Pharmacy, Inc.
|
Senior Loan (14.0%, Due 12/12) | 3,750 | 3,724 | 3,654 | ||||||||||
|
(Healthcare Services)
|
Unitranche Debt (14.0%, Due 12/12) | 8,500 | 8,471 | 7,908 | ||||||||||
| Common Stock (22,860 shares) | 2,286 | 100 | ||||||||||||
| Total Investment | 14,481 | 11,662 | ||||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(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.
24
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Baird Capital Partners IV
Limited(5)
|
Limited Partnership Interest | $ | 3,636 | $ | 2,978 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 3,636 | 2,978 | |||||||||||
|
BenefitMall Holdings Inc.
|
Subordinated Debt (18.0%, Due 6/14) | $ | 40,326 | 40,238 | 40,238 | |||||||||
|
(Business Services)
|
Common Stock (39,274,290 shares)(12) | 39,274 | 91,149 | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 79,512 | 131,387 | ||||||||||||
|
Broadcast Electronics, Inc.
|
Senior Loan (8.8%, Due 11/11)(6) | 4,912 | 4,884 | 773 | ||||||||||
|
(Business Services)
|
Preferred Stock (2,044 shares) | — | — | |||||||||||
| Total Investment | 4,884 | 773 | ||||||||||||
|
Bushnell, Inc.
|
Subordinated Debt (8.0%, Due 2/14) | 41,325 | 40,003 | 35,794 | ||||||||||
|
(Consumer Products)
|
Total Investment | 40,003 | 35,794 | |||||||||||
|
Callidus Debt Partners
|
Class C Notes (12.9%, Due 12/13) | 18,800 | 18,907 | 10,116 | ||||||||||
|
CDO Fund I,
Ltd.(4)(10)
|
Class D Notes (17.0%, Due 12/13) | 9,400 | 9,454 | — | ||||||||||
|
(CDO)
|
||||||||||||||
| Total Investment | 28,361 | 10,116 | ||||||||||||
|
Callidus Debt Partners
|
Preferred Shares (23,600,000 shares) | 20,138 | 5,402 | |||||||||||
|
CLO Fund III,
Ltd.(4)(10)
|
||||||||||||||
|
(CLO)
|
Total Investment | 20,138 | 5,402 | |||||||||||
|
Callidus Debt Partners
|
Class D Notes (9.1%, Due 4/20) | 3,000 | 2,045 | 1,445 | ||||||||||
|
CLO Fund IV,
Ltd.(4)(10)
|
Income Notes (13.2%)(11) | 14,591 | 10,628 | |||||||||||
|
(CLO)
|
||||||||||||||
| Total Investment | 16,636 | 12,073 | ||||||||||||
|
Callidus Debt Partners
|
Income Notes (16.4%)(11) | 13,388 | 10,331 | |||||||||||
|
CLO Fund V,
Ltd.(4)(10)
|
||||||||||||||
|
(CLO)
|
Total Investment | 13,388 | 10,331 | |||||||||||
|
Callidus Debt Partners
|
Class D Notes (9.8%, Due 10/21) | 9,000 | 7,144 | 3,929 | ||||||||||
|
CLO Fund VI,
Ltd.(4)(10)
|
Income Notes (17.8%)(11) | 28,314 | 23,090 | |||||||||||
|
(CLO)
|
||||||||||||||
| Total Investment | 35,458 | 27,019 | ||||||||||||
|
Callidus Debt Partners
|
Income Notes (11.4%)(11) | 24,026 | 15,361 | |||||||||||
|
CLO Fund VII,
Ltd.(4)(10)
|
||||||||||||||
|
(CLO)
|
Total Investment | 24,026 | 15,361 | |||||||||||
|
(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. | |
|
(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)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
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.
25
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Callidus MAPS CLO Fund I
LLC(10)
|
Class E Notes (7.0%, Due 12/17) | $ | 17,000 | $ | 17,000 | $ | 9,813 | |||||||
|
(CLO)
|
Income Notes (4.0%)(11) | 45,053 | 27,678 | |||||||||||
| Total Investment | 62,053 | 37,491 | ||||||||||||
|
Callidus MAPS CLO Fund II,
Ltd.(4)(10)
|
Class D Notes (8.8%, Due 7/22) | 7,700 | 3,555 | 2,948 | ||||||||||
| Income Notes (13.3%)(11) | 18,393 | 12,626 | ||||||||||||
|
(CLO)
|
Total Investment | 21,948 | 15,574 | |||||||||||
|
Carlisle Wide Plank Floors, Inc.
|
Senior Loan (6.1%, Due 6/11) | 1,000 | 998 | 953 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (14.5%, Due 6/11) | 3,161 | 3,139 | 3,047 | ||||||||||
| Preferred Stock (345,056 Shares) | 345 | 82 | ||||||||||||
| Total Investment | 4,482 | 4,082 | ||||||||||||
|
Catterton Partners VI,
L.P.(5)
|
Limited Partnership Interest | 2,812 | 2,356 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,812 | 2,356 | |||||||||||
|
Centre Capital Investors V,
L.P.(5)
|
Limited Partnership Interest | 3,049 | 2,344 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 3,049 | 2,344 | |||||||||||
|
CK Franchising, Inc.
(Consumer Services) |
Subordinated Debt (12.3%, Due 7/12 – 7/17) | 21,000 | 20,912 | 20,912 | ||||||||||
| Preferred Stock (1,281,887 shares) | 1,282 | 1,592 | ||||||||||||
| Common Stock (7,585,549 shares) | 7,586 | 10,600 | ||||||||||||
| Total Investment | 29,780 | 33,104 | ||||||||||||
|
Commercial Credit Group, Inc.
|
Subordinated Debt (15.0%, Due 6/15) | 19,000 | 18,970 | 18,970 | ||||||||||
|
(Financial Services)
|
Preferred Stock (64,679 shares) | 15,543 | 9,073 | |||||||||||
| Warrants | — | — | ||||||||||||
| Total Investment | 34,513 | 28,043 | ||||||||||||
|
Community Education Centers, Inc.
|
Subordinated Debt (14.5%, Due 11/13) | 35,548 | 35,486 | 34,056 | ||||||||||
|
(Education Services)
|
Total Investment | 35,486 | 34,056 | |||||||||||
|
Component Hardware Group, Inc.
|
Subordinated Debt (13.5%, Due 1/13) | 18,710 | 18,654 | 18,261 | ||||||||||
|
(Industrial Products)
|
Total Investment | 18,654 | 18,261 | |||||||||||
|
Cook Inlet Alternative Risk, LLC
|
Unitranche Debt (10.8%, Due 4/13) | 90,000 | 89,619 | 82,839 | ||||||||||
|
(Business Services)
|
Equity Interests | 552 | — | |||||||||||
| Total Investment | 90,171 | 82,839 | ||||||||||||
|
Cortec Group Fund IV,
L.P.(5)
|
Limited Partnership Interest | 4,647 | 3,445 | |||||||||||
|
(Private Equity)
|
Total Investment | 4,647 | 3,445 | |||||||||||
|
(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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. | |
|
(10)
|
The fund is managed by Callidus Capital, a portfolio company of Allied Capital. | |
|
(11)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. |
The accompanying notes are an
integral part of these consolidated financial statements.
26
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Diversified Mercury
Communications, LLC |
Senior Loan (4.5%, Due 3/13) | $ | 2,972 | $ | 2,958 | $ | 2,692 | |||||||
|
(Business Services)
|
Total Investment | 2,958 | 2,692 | |||||||||||
|
Digital VideoStream, LLC
|
Unitranche Debt (11.0%, Due 2/12) | 14,097 | 14,032 | 14,003 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (10.0%, Due 2/16) | 4,545 | 4,533 | 4,700 | ||||||||||
| Total Investment | 18,565 | 18,703 | ||||||||||||
|
DirectBuy Holdings, Inc.
|
Subordinated Debt (14.5%, Due 5/13) | 75,909 | 75,609 | 71,703 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 8,000 | 3,200 | |||||||||||
| Total Investment | 83,609 | 74,903 | ||||||||||||
|
Distant Lands Trading Co.
|
Senior Loan (7.5%, Due 11/11) | 4,825 | 4,800 | 4,501 | ||||||||||
|
(Consumer Products)
|
Unitranche Debt (12.3%, Due 11/11) | 43,133 | 43,022 | 42,340 | ||||||||||
| Common Stock (3,451 shares) | 3,451 | 984 | ||||||||||||
| Total Investment | 51,273 | 47,825 | ||||||||||||
|
Dryden XVIII Leveraged
Loan 2007 Limited(4) |
Class B Notes (8.0%, Due 10/19) Income Notes (16.0%)(11) |
9,000 |
7,728 22,080 |
4,535 17,477 |
||||||||||
|
(CLO)
|
Total Investment | 29,808 | 22,012 | |||||||||||
|
Dynamic India Fund
IV(4)(5)
|
Equity Interests | 9,350 | 8,966 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,350 | 8,966 | |||||||||||
|
EarthColor, Inc.
|
Subordinated Debt (15.0%, Due 11/13)(6) | 123,819 | 123,385 | 77,243 | ||||||||||
|
(Business Services)
|
Common Stock (63,438 shares)(12) | 63,438 | — | |||||||||||
| Warrants(12) | — | — | ||||||||||||
| Total Investment | 186,823 | 77,243 | ||||||||||||
|
eCentury Capital Partners,
L.P.(5)
|
Limited Partnership Interest | 7,274 | 1,431 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 7,274 | 1,431 | |||||||||||
|
eInstruction Corporation
|
Subordinated Debt (12.6%, Due 7/14-1/15) | 33,931 | 33,795 | 31,670 | ||||||||||
|
(Education Services)
|
Common Stock (2,406 shares) | 2,500 | 1,700 | |||||||||||
| Total Investment | 36,295 | 33,370 | ||||||||||||
|
Farley’s & Sathers Candy Company, Inc.
|
Subordinated Debt (10.1%, Due 3/11) | 2,500 | 2,493 | 2,365 | ||||||||||
|
(Consumer Products)
|
Total Investment | 2,493 | 2,365 | |||||||||||
|
(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. | |
|
(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)
|
Represents the effective interest yield earned on the cost basis of these preferred equity investments and income notes. The yield is included in interest income in the consolidated statement of operations. | |
|
(12)
|
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.
27
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
FCP-BHI Holdings, LLC
|
Subordinated Debt (12.0%, Due 9/13) | $ | 27,284 | $ | 27,191 | $ | 25,640 | |||||||
|
d/b/a Bojangles’
|
Equity Interests | 1,029 | 1,700 | |||||||||||
|
(Retail)
|
Total Investment | 28,220 | 27,340 | |||||||||||
|
Fidus Mezzanine Capital,
L.P.(5)
|
Limited Partnership Interest | 9,597 | 6,754 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,597 | 6,754 | |||||||||||
|
Freedom Financial Network, LLC
|
Subordinated Debt (13.5%, Due 2/14) | 13,000 | 12,945 | 12,811 | ||||||||||
|
(Financial Services)
|
Total Investment | 12,945 | 12,811 | |||||||||||
|
Geotrace Technologies, Inc.
|
Warrants | 2,027 | 3,000 | |||||||||||
|
(Energy Services)
|
Total Investment | 2,027 | 3,000 | |||||||||||
|
Gilchrist & Soames, Inc.
(Consumer Products) |
Subordinated Debt (13.4%, Due 10/13) | 25,800 | 25,660 | 24,692 | ||||||||||
| Total Investment | 25,660 | 24,692 | ||||||||||||
|
Havco Wood Products LLC
|
Equity Interests | 910 | 400 | |||||||||||
|
(Industrial Products)
|
Total Investment | 910 | 400 | |||||||||||
|
Higginbotham Insurance Agency, Inc.
|
Subordinated Debt (13.7%, Due 8/13 – 8/14) | 53,305 | 53,088 | 53,088 | ||||||||||
|
(Business Services)
|
Common Stock (23,695 shares)(12) | 23,695 | 27,335 | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 76,783 | 80,423 | ||||||||||||
|
The Hillman Companies,
Inc.(3)
|
Subordinated Debt (10.0%, Due 9/11) | 44,580 | 44,491 | 44,345 | ||||||||||
|
(Consumer Products)
|
Total Investment | 44,491 | 44,345 | |||||||||||
|
The Homax Group, Inc.
|
Senior Loan (7.2%, Due 10/12) | 11,785 | 11,742 | 10,689 | ||||||||||
|
(Consumer Products)
|
Subordinated Debt (14.5%, Due 4/14) | 14,000 | 13,371 | 12,859 | ||||||||||
| Preferred Stock (76 shares) | 76 | — | ||||||||||||
| Common Stock (24 shares) | 5 | — | ||||||||||||
| Warrants | 954 | — | ||||||||||||
| Total Investment | 26,148 | 23,548 | ||||||||||||
|
Ideal Snacks Corporation
|
Senior Loan (5.3%, Due 6/10) | 1,496 | 1,496 | 1,438 | ||||||||||
|
(Consumer Products)
|
Total Investment | 1,496 | 1,438 | |||||||||||
|
(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)
|
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.
28
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Kodiak Fund
LP(5)
|
Equity Interests | $ | 9,422 | $ | 900 | |||||||||
|
(Private Equity Fund)
|
Total Investment | 9,422 | 900 | |||||||||||
|
Market Track Holdings, LLC
|
Senior Loan (8.0%, Due 6/14) | $ | 2,500 | 2,450 | 2,352 | |||||||||
|
(Business Services)
|
Subordinated Debt (15.9%, Due 6/14) | 24,600 | 24,488 | 23,785 | ||||||||||
| Total Investment | 26,938 | 26,137 | ||||||||||||
|
NetShape Technologies, Inc.
|
Senior Loan (5.3%, Due 2/13) | 382 | 382 | 346 | ||||||||||
|
(Industrial Products)
|
Total Investment | 382 | 346 | |||||||||||
|
Network Hardware Resale, Inc.
|
Unitranche Debt (12.5%, Due 12/11) | 18,734 | 18,809 | 18,703 | ||||||||||
|
(Business Services)
|
Convertible Subordinated Debt (9.8%, Due 12/15) | 14,533 | 14,585 | 14,585 | ||||||||||
| Total Investment | 33,394 | 33,288 | ||||||||||||
|
Novak Biddle Venture Partners III,
L.P.(5)
|
Limited Partnership Interest | 2,018 | 1,349 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 2,018 | 1,349 | |||||||||||
|
Oahu Waste Services, Inc.
|
Stock Appreciation Rights | 206 | 750 | |||||||||||
|
(Business Services)
|
Total Investment | 206 | 750 | |||||||||||
|
Pangaea CLO 2007-1
Ltd.(4)
|
Class D Notes (9.2%, Due 10/21) | 15,000 | 11,761 | 7,114 | ||||||||||
|
(CLO)
|
Total Investment | 11,761 | 7,114 | |||||||||||
|
PC Helps Support, LLC
|
Senior Loan (4.8%, Due 12/13) | 8,610 | 8,520 | 8,587 | ||||||||||
|
(Business Services)
|
Subordinated Debt (13.3%, Due 12/13) | 28,136 | 28,009 | 28,974 | ||||||||||
| Total Investment | 36,529 | 37,561 | ||||||||||||
|
Performant Financial Corporation
|
Common Stock (478,816 shares) | 734 | 200 | |||||||||||
|
(Business Services)
|
Total Investment | 734 | 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. | |
|
(4)
|
Non-U.S. company or principal place of business outside the U.S. | |
|
(5)
|
Non-registered investment company. |
The accompanying notes are an
integral part of these consolidated financial statements.
29
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Peter Brasseler Holdings, LLC
|
Equity Interests | $ | 3,451 | $ | 2,900 | |||||||||
|
(Business Services)
|
Total Investment | 3,451 | 2,900 | |||||||||||
|
PharMEDium Healthcare Corporation
|
Senior Loan (4.3%, Due 10/13) | $ | 1,910 | 1,910 | 1,747 | |||||||||
|
(Healthcare Services)
|
Total Investment | 1,910 | 1,747 | |||||||||||
|
Postle Aluminum Company, LLC
|
Unitranche Debt (13.0%, Due 10/12)(6) | 58,953 | 58,744 | 9,978 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 2,174 | — | |||||||||||
| Total Investment | 60,918 | 9,978 | ||||||||||||
|
Pro Mach, Inc.
|
Subordinated Debt (12.5%, Due 6/12) | 14,616 | 14,573 | 14,089 | ||||||||||
|
(Industrial Products)
|
Equity Interests | 1,294 | 1,900 | |||||||||||
| Total Investment | 15,867 | 15,989 | ||||||||||||
|
Promo Works, LLC
|
Unitranche Debt (12.3%, Due 12/11) | 23,111 | 22,954 | 21,266 | ||||||||||
|
(Business Services)
|
Total Investment | 22,954 | 21,266 | |||||||||||
|
Reed Group, Ltd.
|
Senior Loan (7.6%, Due 12/13) | 12,893 | 12,758 | 11,502 | ||||||||||
|
(Healthcare Services)
|
Subordinated Debt (13.8%, Due 12/13) | 18,543 | 18,469 | 16,683 | ||||||||||
| Equity Interests | 1,800 | 300 | ||||||||||||
| Total Investment | 33,027 | 28,485 | ||||||||||||
|
S.B. Restaurant Company
|
Unitranche Debt (9.8%, Due 4/11) | 36,501 | 36,295 | 34,914 | ||||||||||
|
(Retail)
|
Preferred Stock (46,690 shares) | 117 | 117 | |||||||||||
| Warrants | 534 | — | ||||||||||||
| Total Investment | 36,946 | 35,031 | ||||||||||||
| Standby Letters of Credit ($2,465) | ||||||||||||||
|
Snow Phipps Group,
L.P.(5)
|
Limited Partnership Interest | 4,785 | 4,374 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 4,785 | 4,374 | |||||||||||
|
SPP Mezzanine Funding II,
L.P.(5)
|
Limited Partnership Interest | 9,362 | 9,269 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 9,362 | 9,269 | |||||||||||
|
STS Operating, Inc.
|
Subordinated Debt (11.0%, Due 1/13) | 30,386 | 30,296 | 29,745 | ||||||||||
|
(Industrial Products)
|
Total Investment | 30,296 | 29,745 | |||||||||||
|
Summit Energy Services, Inc.
(Business Services) |
Subordinated Debt (11.6%, Due 8/13) | 35,730 | 35,547 | 32,113 | ||||||||||
| Common Stock (415,982 shares) | 1,861 | 1,900 | ||||||||||||
| Total Investment | 37,408 | 34,013 | ||||||||||||
|
Tank Intermediate Holding Corp.
(Industrial Products) |
Senior Loan (7.1%, Due 9/14) | 30,514 | 29,539 | 25,937 | ||||||||||
| Total Investment | 29,539 | 25,937 | ||||||||||||
|
(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. | |
|
(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.
30
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
|
Private Finance |
||||||||||||||
|
Portfolio Company |
December 31, 2008 | |||||||||||||
| (in thousands, except number of shares) | Investment(1)(2) | Principal | Cost | Value | ||||||||||
|
Tappan Wire & Cable Inc.
|
Unitranche Debt (15.0%, Due 8/14) | $ | 22,346 | $ | 22,248 | $ | 15,625 | |||||||
|
(Business Services)
|
Common Stock (12,940 shares)(12) | 2,043 | — | |||||||||||
| Warrant(12) | — | — | ||||||||||||
| Total Investment | 24,291 | 15,625 | ||||||||||||
|
The Step2 Company, LLC
|
Unitranche Debt (11.0%, Due 4/12) | 95,083 | 94,816 | 90,474 | ||||||||||
|
(Consumer Products)
|
Equity Interests | 2,156 | 1,161 | |||||||||||
| Total Investment | 96,972 | 91,635 | ||||||||||||
|
Tradesmen International, Inc.
|
Subordinated Debt (12.0%, Due 12/12) | 40,000 | 39,586 | 37,840 | ||||||||||
|
(Business Services)
|
Total Investment | 39,586 | 37,840 | |||||||||||
|
TransAmerican Auto Parts, LLC
|
Subordinated Debt (16.3%, Due 11/12)(6) | 24,561 | 24,409 | — | ||||||||||
|
(Consumer Products)
|
Equity Interests | 1,034 | — | |||||||||||
| Total Investment | 25,443 | — | ||||||||||||
|
Trover Solutions, Inc.
|
Subordinated Debt (12.0%, Due 11/12) | 60,054 | 59,847 | 57,362 | ||||||||||
|
(Business Services)
|
Total Investment | 59,847 | 57,362 | |||||||||||
|
United Road Towing, Inc.
|
Subordinated Debt (12.1%, Due 1/14) | 20,000 | 19,915 | 20,000 | ||||||||||
|
(Consumer Services)
|
Total Investment | 19,915 | 20,000 | |||||||||||
|
Venturehouse-Cibernet Investors, LLC
|
Equity Interest | — | — | |||||||||||
|
(Business Services)
|
Total Investment | — | — | |||||||||||
|
VICORP Restaurants, Inc.
|
Warrants | 33 | — | |||||||||||
|
(Retail)
|
Total Investment | 33 | — | |||||||||||
|
WMA Equity Corporation and Affiliates
|
Subordinated Debt (16.8%, Due 4/13-4/14)(6) | 139,455 | 138,559 | 63,823 | ||||||||||
|
d/b/a Wear Me Apparel
|
Common Stock (86 shares) | 39,721 | — | |||||||||||
|
(Consumer Products)
|
Total Investment | 178,280 | 63,823 | |||||||||||
|
Webster Capital II,
L.P.(5)
|
Limited Partnership Interest | 1,702 | 1,481 | |||||||||||
|
(Private Equity Fund)
|
Total Investment | 1,702 | 1,481 | |||||||||||
|
Woodstream Corporation
|
Subordinated Debt (12.0%, Due 2/15) | 90,000 | 89,633 | 83,258 | ||||||||||
|
(Consumer Products)
|
Common Stock (6,960 shares) | 6,961 | 2,500 | |||||||||||
| Total Investment | 96,594 | 85,758 | ||||||||||||
|
York Insurance Services Group, Inc.
|
Common Stock (12,939 shares) | 1,294 | 1,700 | |||||||||||
|
(Business Services)
|
Total Investment | 1,294 | 1,700 | |||||||||||
|
Other companies
|
Other debt investments | 155 | 74 | 72 | ||||||||||
| Other equity investments | 30 | 8 | ||||||||||||
| Total Investment | 104 | 80 | ||||||||||||
|
Total companies less than 5% owned
|
$ | 2,317,856 | $ | 1,858,581 | ||||||||||
|
Total private finance (138 portfolio investments)
|
$ | 4,877,392 | $ | 3,399,063 | ||||||||||
|
(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. | |
|
(5)
|
Non-registered investment company. | |
|
(6)
|
Loan or debt security is on non-accrual status and therefore is considered non-income producing. | |
|
(12)
|
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.
31
ALLIED CAPITAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF
INVESTMENTS — (Continued)
Commercial
Real Estate Finance
(in thousands, except number of loans)
(in thousands, except number of loans)
| December 31, 2008 | ||||||||||||||||
| (unaudited) | ||||||||||||||||
|
Stated Interest |
Number of |
|||||||||||||||
| Rate Ranges | Loans | Cost | Value | |||||||||||||
|
Commercial Mortgage Loans
|
||||||||||||||||
| Up to 6.99% | 4 | $ | 30,999 | $ | 30,537 | |||||||||||
| 7.00%–8.99% | 1 | 644 | 580 | |||||||||||||
| 9.00%–10.99% | 1 | 6,465 | 6,465 | |||||||||||||
| 11.00%–12.99% | 1 | 10,469 | 9,391 | |||||||||||||
| 15.00% and above | 2 | 3,970 | 6,529 | |||||||||||||
|
Total commercial mortgage
loans(13)
|
$ | 52,547 | $ | 53,502 | ||||||||||||
|
Real Estate Owned
|
$ | 18,201 | $ | 20,823 | ||||||||||||
|
Equity
Interests(2) —
Companies more than 25% owned
|
$ | 14,755 | $ | 19,562 | ||||||||||||
|
Guarantees ($6,871)
|
||||||||||||||||
|
Standby Letter of Credit ($650)
|
||||||||||||||||
|
Total commercial real estate finance
|
$ | 85,503 | $ | 93,887 | ||||||||||||
|
Total portfolio
|
$ | 4,962,895 | $ | 3,492,950 | ||||||||||||
| Yield | Cost | Value | ||||||||||
|
Investments in Money Market and Other Securities
|
||||||||||||
|
SEI Daily Income Tr Prime Obligation Money Market Fund
|
0.9% | $ | 5 | $ | 5 | |||||||
|
Columbia Treasury Reserves Fund
|
— | 12 | 12 | |||||||||
|
Other Money Market Funds
|
— | 270 | 270 | |||||||||
|
Total
|
$ | 287 | $ | 287 | ||||||||
|
(2)
|
Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted. | |
|
(13)
|
Commercial mortgage loans totaling $7.7 million at value were on non-accrual status and therefore were considered non-income producing. |
The accompanying notes are an
integral part of these consolidated financial statements.
32
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
(Information at and for the three months ended March 31,
2009 and 2008 is unaudited)
Note 1. Organization
Allied Capital Corporation, a Maryland corporation, is a
closed-end, non-diversified 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 real estate investment trust subsidiary,
Allied Capital REIT, Inc. (“Allied REIT”), and several
subsidiaries that are single member limited liability companies
established for specific purposes including holding real estate
properties. ACC also has a subsidiary, A.C. Corporation
(“AC Corp”), that generally provides diligence and
structuring services, as well as transaction, management,
consulting, and other services, including underwriting and
arranging senior loans, to the Company, its portfolio companies
and its managed funds.
ACC and its subsidiaries, collectively, are referred to as the
“Company.” The Company consolidates the results of its
subsidiaries for financial reporting purposes.
Pursuant to Article 6 of
Regulation S-X,
the financial results of the Company’s portfolio
investments are not consolidated in the Company’s financial
statements. Portfolio investments are held for purposes of
deriving investment income and future capital gains.
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 debt and equity securities
of private companies in a variety of industries.
Events
of Default, Liquidity and Operations
The Company experienced a significant reduction in its net worth
during the second half of 2008, primarily resulting from net
unrealized depreciation on its portfolio, which reflected market
conditions. As a result, on December 30, 2008, the Company
entered into amendments relating to its private notes and
revolving line of credit, including amendments which added new
covenants. The amendments are more fully described in
Note 4 to the consolidated financial statements.
In January 2009 the Company re-opened discussions with the
revolving line of credit lenders (the “Lenders”) and
the private noteholders (the “Noteholders”) to seek
relief under certain terms of both the revolving credit facility
and the private notes due to a then-expected covenant default.
As of December 31, 2008, the Company’s asset coverage
was less than the 200% required by the revolving credit facility
and the private notes. The Company continued to experience
additional net unrealized depreciation on its portfolio in the
first quarter of 2009 and as a result, as of March 31,
2009, the Company’s asset coverage remained less than 200%.
Asset coverage generally refers to the percentage resulting from
assets less accounts payable and other liabilities, divided by
total debt. In addition, the Company has not completed the
documents contemplated by the December 30, 2008 amendments
to the revolving credit facility and private notes, which were
to include a grant of a first lien security interest on
substantially all of the Company’s assets. Under these debt
agreements, events of default have occurred and are continuing
related to these covenants and certain financial and other
covenants. Discussions with the Lenders and the Noteholders are
continuing and the discussions encompass a more comprehensive
restructuring of these debt agreements to provide
long-term
operational flexibility.
Pursuant to the 1940 Act, the Company is not permitted to issue
indebtedness unless immediately after such issuance the Company
has asset coverage of all outstanding indebtedness of at least
200%. The Company’s publicly issued unsecured notes payable
require the Company to comply with this provision of the 1940
Act. At March 31, 2009, the Company’s asset coverage
ratio was 171%, which is
33
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
less than the 200% requirement. As a result under the publicly
issued unsecured notes payable, the Company will not be able to
issue additional indebtedness until such time as its asset
coverage returns to at least 200%. The Company has not
experienced any default or cross default with respect to the
publicly issued unsecured notes payable.
The existence of an event of default under the revolving credit
facility and private notes restricts the Company from additional
borrowing or obtaining letters of credit under its revolving
credit facility, and from declaring dividends or other
distributions to the Company’s shareholders. Pursuant to
the terms of the revolving credit facility, during the
continuance of an event of default, the applicable spread on any
borrowings outstanding and fees on any letters of credit
outstanding under the revolving credit facility increase by up
to 200 basis points. Pursuant to the terms of the private
notes, during the continuance of an event of default, the rate
of interest borne by the private notes increases by
200 basis points.
On March 27, 2009, pursuant to the terms of the revolving
line of credit, the administrative agent for the lenders
terminated substantially all of the unused commitments under the
revolving line of credit. As a result, the aggregate commitments
under the Company’s revolving line of credit have been
reduced to $165.0 million. As of March 31, 2009, the
Company had $50 million in outstanding borrowings and
$113.5 million in outstanding letters of credit issued
under the revolving line of credit.
Neither the Lenders nor the Noteholders have accelerated
repayment of the Company’s obligations; however, the
occurrence of an event of default permits the administrative
agent for the Lenders, or the holders of more than 51% of the
commitments under the revolving credit facility, to accelerate
repayment of all amounts due, to terminate commitments
thereunder, and to require the Company to provide cash
collateral equal to the face amount of all outstanding letters
of credit. Pursuant to the terms of the private notes, the
occurrence of an event of default permits the holders of 51% or
more of any issue of outstanding private notes to accelerate
repayment of all amounts due thereunder.
The Company’s consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company does not have available cash resources
sufficient to satisfy all of the obligations under these debt
agreements should the lenders accelerate these obligations.
These factors raise substantial doubt about the Company’s
ability to continue as a going concern. The Company continues to
seek a comprehensive restructuring of these debt agreements to
provide long-term operational flexibility. In addition, the
Company continues to sell assets to generate capital to repay
debt. There can be no assurance that the Company’s plans
will be successful in addressing the liquidity uncertainties
discussed above. In the event there is an acceleration of the
amounts outstanding under the revolving credit facility or any
issue of the private notes, it would cause the Company to
evaluate other alternatives and would have a material adverse
effect on the Company’s operations. The accompanying
consolidated financial statements do not include any adjustments
that might result from these uncertainties.
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 2008 balances to conform
with the 2009 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)
34
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
necessary to present fairly the financial position of the
Company as of March 31, 2009, the results of operations,
and changes in net assets and cash flows for the three months
ended March 31, 2009 and 2008. The results of operations
for the three months ended March 31, 2009, 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 25% of the
outstanding voting securities of such portfolio company or where
the Company controls the portfolio company’s board of
directors 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 company’s 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, including
investments in money market and other securities, 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.
The Company, as a BDC, has invested in illiquid securities
including debt and equity securities of portfolio companies, CLO
bonds and preferred shares/income notes, CDO bonds and
investment funds. The Company’s 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 Company’s
valuation policy and the provisions of the 1940 Act and FASB
Statement No. 157, Fair Value Measurements
(“SFAS 157” or the “Statement”) and
related interpretations. The Company determines fair value to be
the price that would be received for an investment in a current
sale, which assumes an orderly transaction between market
participants on the measurement date. The Company’s
valuation policy considers the fact that no ready market exists
for substantially all of the securities in which it invests and
that fair value for its investments must typically be determined
using unobservable inputs. The Company’s valuation policy
is intended to provide a consistent basis for determining the
fair value of the portfolio.
The Company adopted SFAS 157 on a prospective basis in the
first quarter of 2008. SFAS 157 requires the Company to
assume that the portfolio investment is assumed to be sold in
the principal market to market participants, or in the absence
of a principal market, the most advantageous market, which may
be a hypothetical market. Market participants are defined as
buyers and sellers in the principal or most advantageous market
that are independent, knowledgeable, and willing and able to
transact. In accordance with the Statement, the Company has
considered its principal market, or the market in which the
Company exits its portfolio investments with the greatest volume
and level of activity.
The Company has determined that for its buyout investments,
where the Company has control or could gain control through an
option or warrant security, both the debt and equity securities
of the portfolio investment would exit in the merger and
acquisition (“M&A”) market as the principal
market
35
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
generally through a sale or recapitalization of the portfolio
company. The Company believes that the in-use premise of value
(as defined in SFAS 157), which assumes the debt and equity
securities are sold together, is appropriate as this would
provide maximum proceeds to the seller. As a result, the Company
uses the enterprise value methodology to determine the fair
value of these investments under SFAS 157. Enterprise value
means the entire value of the company to a market participant,
including the sum of the values of debt and equity securities
used to capitalize the enterprise at a point in time. Enterprise
value is determined using various factors, including cash flow
from operations of the portfolio company, multiples at which
private companies are bought and sold, and other pertinent
factors, such as recent offers to purchase a portfolio company,
recent transactions involving the purchase or sale
of the portfolio company’s
equity securities, liquidation events, or other events. The
Company allocates the enterprise value to these securities in
order of the legal priority of the securities.
While the Company typically exits its securities upon the sale
or recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where the Company
does not have control or the ability to gain control through an
option or warrant security, the Company cannot typically control
the exit of its investment into its principal market (the
M&A market). As a result, in accordance with SFAS 157,
the Company is required to determine the fair value of these
investments assuming a sale of the individual investment (the
in-exchange premise of value) in a hypothetical market to a
hypothetical market participant. The Company continues to
perform an enterprise value analysis for the investments in this
category to assess the credit risk of the loan or debt security
and to determine the fair value of its equity investment in
these portfolio companies. The determined equity values are
generally discounted when the Company has a minority ownership
position, restrictions on resale, specific concerns about the
receptivity of the capital markets to a specific company at a
certain time, or other factors. For loan and debt securities,
the Company performs a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires the
Company to estimate the expected repayment date of the
instrument and a market participant’s required yield. The
Company’s estimate of the expected repayment date of a loan
or debt security is generally shorter than the legal maturity of
the instruments as the Company’s loans have historically
been repaid prior to the maturity date. The yield analysis
considers changes in interest rates and changes in leverage
levels of the loan or debt security as compared to market
interest rates and leverage levels. Assuming the credit quality
of the loan or debt security remains stable, the Company will
use the value determined by the yield analysis as the fair value
for that security. A change in the assumptions that the Company
uses to estimate the fair value of its loans and debt securities
using the yield analysis could have a material impact on the
determination of fair value. If there is deterioration in credit
quality or a loan or debt security is in workout status, the
Company may consider other factors in determining the fair value
of a loan or debt security, including the value attributable to
the loan or debt security from the enterprise value of the
portfolio company or the proceeds that would be received in a
liquidation analysis.
The Company’s equity investments in private debt and equity
funds generally are valued at the fund’s net asset value,
unless other factors lead to a determination of fair value at a
different amount. The value of the Company’s equity
securities in public companies for which quoted prices in an
active market are readily available is based on the closing
public market price on the measurement date.
The fair value of the Company’s CLO bonds and preferred
shares/income notes and CDO bonds (“CLO/CDO Assets”)
is generally based on a discounted cash flow model that utilizes
prepayment, re-investment 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
36
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
preferred shares/ income notes, when available. The Company
recognizes unrealized appreciation or depreciation on its
CLO/CDO Assets as comparable yields in the market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment or loss assumptions in the underlying
collateral pool or changes in redemption assumptions for the
CLO/CDO Assets, if applicable. The Company determines the fair
value of its CLO/CDO Assets on an individual
security-by-security
basis.
The Company will record unrealized depreciation on investments
when it determines that the fair value of a security is less
than its cost basis, and will record unrealized appreciation
when it determines that the fair value is greater than its cost
basis. Because of the inherent uncertainty of valuation, the
values determined at the measurement date 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. Additionally, changes in the market
environment and other events that may occur over the life of the
investments may cause the gains or losses ultimately realized on
these investments to be different than the values determined at
the measurement date. In accordance with
FSP 157-4
(discussed below), the Company does not consider a transaction
price that is associated with a transaction that is not orderly
to be indicative of fair value or market participant risk
premiums, and accordingly would place little, if any, weight on
transactions that are not orderly in determining fair value.
When considering recent potential or completed transactions, the
Company uses judgment in determining if such offers or
transactions were pursuant to an orderly process for purposes of
determining how much weight is placed on these data points in
accordance with the applicable guidelines in SFAS 157 and
FSP 157-4.
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 period, 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, when
applicable, and depreciation on accrued interest and dividends
receivable and other assets where collection is doubtful.
Interest
and Dividend Income
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
generally 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
company’s capital requirements.
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
37
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
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. 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.
The weighted average yield on loans and debt securities is
computed as the (a) annual stated interest on accruing
loans and debt securities 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 Company recognizes interest income on the CLO preferred
shares/income notes using the effective interest method, based
on the anticipated yield that is determined using the estimated
cash flows over the projected life of the investment. Yields are
revised when there are changes in actual or estimated cash flows
due to changes in prepayments and/or re-investments, credit
losses or asset pricing. Changes in estimated yield are
recognized as an adjustment to the estimated yield over the
remaining life of the preferred shares/income notes from the
date the estimated yield was changed. CLO and CDO bonds have
stated interest rates. The weighted average yield on the CLO/CDO
Assets is calculated as the (a) annual stated interest or
the effective interest yield on the accruing bonds or the
effective yield on the preferred shares/income notes, divided by
(b) CLO/CDO Assets at value. The weighted average yields
are computed as of the balance sheet date.
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.
| Fee Income |
Fee income includes fees for loan prepayment premiums,
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. Loan prepayment premiums are
recognized at the time of prepayment. 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 generally are recognized as income as the
services are rendered. Fees are not accrued if the Company has
doubt about collection of those fees.
Guarantees
Guarantees meeting the characteristics described in FASB
Interpretation No. 45, Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others and issued or modified
after December 31, 2002, are recognized at fair value at
inception.
38
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
Guarantees made on behalf of portfolio companies are considered
in determining the fair value of the Company’s investments.
See Note 5.
Financing
Costs
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 are recorded
as a reduction to the proceeds from the sale of common stock.
Financing costs generally include underwriting, accounting and
legal fees, and printing costs.
Dividends
to Shareholders
Dividends to shareholders are recorded on the ex-dividend date.
Stock
Compensation Plans
The Company has a stock-based employee compensation plan. See
Note 9. Effective January 1, 2006, the Company adopted
the provisions of FASB Statement No. 123 (Revised 2004),
Share-Based Payment (“SFAS 123R”). SFAS 123R
was adopted using the modified prospective method of
application, which required the Company to recognize
compensation costs on a prospective basis beginning
January 1, 2006. Accordingly, the Company did not restate
prior year financial statements. 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, using the fair value amounts determined for
pro forma disclosure under SFAS 123R. With respect to
options granted on or after January 1, 2006, compensation
cost based on estimated grant date fair value is recognized over
the related service period in the statement of operations. The
stock option expense for the three months ended March 31,
2009 and 2008, was as follows:
| ($ in millions, except per share amounts) | 2009 | 2008 | ||||||
|
Employee Stock Option Expense:
|
||||||||
|
Previously awarded, unvested options as of January 1, 2006
|
$ | — | $ | 1.7 | ||||
|
Options granted on or after January 1, 2006
|
0.8 | 2.5 | ||||||
|
Total employee stock option expense
|
$ | 0.8 | $ | 4.2 | ||||
|
Per basic share
|
$ | 0.00 | $ | 0.03 | ||||
|
Per diluted share
|
$ | 0.00 | $ | 0.03 | ||||
39
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
Options Granted. The stock option
expense shown in the table above was 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 weighted average assumptions were used to
calculate the fair value of options granted during the three
months ended March 31, 2009 and 2008:
| 2009 | 2008 | |||||||
|
Expected term (in years)
|
3.0 | 5.0 | ||||||
|
Risk-free interest rate
|
1.3 | % | 2.7 | % | ||||
|
Expected volatility
|
103.8 | % | 27.6 | % | ||||
|
Dividend yield
|
34.4 | % | 8.5 | % | ||||
|
Weighted average fair value per option
|
$ | 0.12 | $ | 2.19 | ||||
The expected term of the options granted represents the period
of time that such options are expected to be outstanding. To
determine the expected term of the options, the Company used
historical and other data to estimate option exercise time
frames, including considering employee terminations. The risk
free rate was based on the U.S. Treasury bond yield curve at the
date of grant consistent with the expected term. Expected
volatilities were determined based on the historical volatility
of the Company’s common stock over a historical time period
consistent with the expected term. The dividend yield was
determined based on an estimate of the Company’s future
dividends over the expected term, relative to the option price.
The estimate of future dividends takes into consideration the
Company’s estimate of future taxable income required to be
distributed in order to maintain its status as a registered
investment company (see “Federal and State Income Taxes and
Excise Tax” below). The Company currently is not paying a
dividend and may or may not be able to pay a dividend during the
expected term. In addition, actual future taxable income and
dividends may significantly differ from these estimates.
To determine the stock options expense for options granted, the
calculated fair value of the options granted is applied to the
options granted, net of assumed future option forfeitures. The
Company estimates that the employee-related stock option expense
for outstanding unvested options as of March 31, 2009, will
be $3.7 million, $4.1 million, and $3.7 million
for the years ended December 31, 2009, 2010, and 2011,
respectively. This estimate may change if the Company’s
assumptions related to future option forfeitures change. This
estimate does not include any expense related to stock option
grants after March 31, 2009, 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
March 31, 2009, is expected to be recognized over an
estimated weighted-average period of 1.55 years.
Federal
and State Income Taxes and Excise Tax
The Company has complied with the requirements of the 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
exclusive of excise taxes for these entities.
If the Company does not distribute at least 98% of its annual
taxable income in the year earned, the Company generally will be
required to pay an excise tax equal to 4% of the amount by which
98% of the Company’s annual taxable income exceeds the
distributions from such taxable income during the year earned.
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
40
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
accrues excise taxes 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.
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.
Per
Share Information
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. Common stock equivalents
of 1,268,614 and 6,305 were not included in the calculation of
diluted earnings (loss) per common share for the three months
ended March 31, 2009 and 2008, respectively, as the effect
would have been antidilutive.
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 $2.9 billion and $3.5 billion
at March 31, 2009, and December 31, 2008,
respectively. At March 31, 2009, and December 31,
2008, 86% and 94%, respectively, of the Company’s total
assets represented portfolio investments whose fair values have
been determined by the Board of Directors in good faith in the
absence of readily available market values. Because of the
inherent uncertainty of valuation, the Board of Directors’
determined values may differ significantly from the values that
would have been used had a ready market existed for the
investments, and the differences could be material.
Recent
Accounting Pronouncements
Fair Value Measurements. In September 2006, the FASB
issued Statement No. 157, which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. This statement was effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years.
The Company adopted this statement on a prospective basis
beginning in the quarter ended March 31, 2008. The initial
adoption of this statement did not have a material effect on the
Company’s consolidated financial statements.
41
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 2. Summary of Significant Accounting Policies,
continued
The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement
No. 115. In February 2007, the FASB issued Statement
No. 159, which permits an entity to choose to measure many
financial instruments and certain other items at fair value.
This statement applies to all reporting entities, and contains
financial statement presentation and disclosure requirements for
assets and liabilities reported at fair value as a consequence
of the election. This statement was effective for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years.
The Company did not elect fair value measurement for assets or
liabilities other than portfolio investments, which already were
required to be measured at fair value, therefore, the adoption
of this statement did not impact the Company’s consolidated
financial position or its results of operations.
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(“FSP 157-3”). In October 2008, the FASB issued
FSP 157-3, which applies to financial assets within the
scope of accounting pronouncements that require or permit fair
value measurements in accordance with Statement 157.
FSP 157-3 clarifies the application of Statement 157
in a market that is not active and provides an example to
illustrate key considerations in determining the fair value.
The Company has applied the provisions of FSP 157-3 in
determining the fair value of its portfolio investments at
December 31, 2008. The application of FSP 157-3 did
not have a material impact on the Company’s consolidated
financial position or its results of operations.
Determining Fair Value When the Volume and Level of Activity
for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
(“FSP 157-4”). In April 2009, the FASB issued
FSP 157-4,
which provides guidance on how to determine the fair value of
assets under SFAS 157 in the current economic environment
and reemphasizes that the objective of a fair value measurement
remains an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at
the measurement date under current market conditions.
FSP 157-4 states that a transaction price that is
associated with a transaction that is not orderly is not
determinative of fair value or market-participant risk premiums
and companies should place little, if any, weight (compared with
other indications of fair value) on transactions that are not
orderly when estimating fair value or market risk premiums.
The Company adopted the provisions of FSP 157-4 on a
prospective basis beginning in the quarter ending March 31,
2009. The adoption of the provisions of FSP 157-4 did not
have a material effect on the Company’s consolidated
financial statements.
42
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio
Private
Finance
At March 31, 2009, and December 31, 2008, the private
finance portfolio consisted of the following:
| 2009 | 2008 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 592.3 | $ | 289.1 | 5.9% | $ | 556.9 | $ | 306.3 | 5.6% | ||||||||||||||
|
Unitranche
debt(2)
|
447.3 | 403.8 | 12.1% | 527.5 | 456.4 | 12.0% | ||||||||||||||||||
|
Subordinated
debt(3)
|
2,134.7 | 1,492.7 | 13.5% | 2,300.1 | 1,829.1 | 12.9% | ||||||||||||||||||
|
Total loans and debt
securities(4)
|
3,174.3 | 2,185.6 | 12.3% | 3,384.5 | 2,591.8 | 11.9% | ||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred shares/income notes of
CLOs(5)
|
250.4 | 104.4 | 8.0% | 248.2 | 179.2 | 16.4% | ||||||||||||||||||
|
Subordinated certificates in Unitranche Fund
LLC(5)
|
124.5 | 124.5 | 9.2% | 125.4 | 125.4 | 12.0% | ||||||||||||||||||
|
Other equity securities
|
1,100.5 | 415.5 | 1,119.3 | 502.7 | ||||||||||||||||||||
|
Total equity securities
|
1,475.4 | 644.4 | 1,492.9 | 807.3 | ||||||||||||||||||||
|
Total
|
$ | 4,649.7 | $ | 2,830.0 | $ | 4,877.4 | $ | 3,399.1 | ||||||||||||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities 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, 2009, senior loans included the senior secured loan to Ciena totaling $319.0 million at cost and $64.1 million at value, which was placed on non-accrual status on the purchase date. |
The weighted average yield on the
preferred shares/income notes of CLOs is calculated as the
(a) effective interest yield on the preferred shares/income
notes of CLOs, divided by (b) total preferred shares/income
notes of CLOs at value. The weighted average yields are computed
as of the balance sheet date. The yield on the CLO assets
represents the yield used for recording interest income. The
market yield used in the valuation of the CLO assets may be
different than the interest yields.
The weighted average yield on the
subordinated certificates in the Unitranche Fund LLC is
computed as the (a) annual stated interest divided by
(b) total investment at value.
| (2) | Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position. |
| (3) | Subordinated debt includes bonds in CLOs and in a CDO. |
| (4) | The total principal balance outstanding on loans and debt securities was $3,205.6 million and $3,418.0 million at March 31, 2009, and December 31, 2008, respectively. The difference between principal and cost is represented by unamortized loan origination fees and costs, original issue discounts, and market discounts totaling $31.3 million and $33.5 million at March 31, 2009, and December 31, 2008, respectively. |
| (5) | Investments in the preferred shares/income notes of CLOs and the subordinated certificates in Unitranche Fund LLC earn a current return that is included in interest income in the accompanying consolidated statement of operations. |
The Company’s private finance investment activity
principally involves providing financing through privately
negotiated long-term debt and equity investments. The
Company’s private finance debt and equity investments
generally are issued by private companies and generally are
illiquid and may be subject to certain restrictions on resale.
The Company’s 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 company’s
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 Company’s rights and priority in
the portfolio company’s 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
43
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
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, 2009, 84% of the private finance loans and
debt securities had a fixed rate of interest and 16% had a
floating rate of interest. At December 31, 2008, 85% of the
private finance loans and debt securities had a fixed rate of
interest and 15% had a floating rate of interest. Senior loans
may carry a fixed rate of interest or a floating rate of
interest, usually set as a spread over prime or LIBOR, and may
require payments of both principal and interest throughout the
life of the loan. Senior loans generally have contractual
maturities of three to six years and interest is generally paid
to the Company monthly or quarterly. Unitranche debt generally
carries a fixed rate of interest and generally requires payments
of both principal and interest throughout the life of the loan.
Unitranche debt generally has contractual maturities of five to
six years and interest generally is paid to the Company
quarterly. Subordinated debt generally carries a fixed rate of
interest generally with contractual maturities of five to ten
years and generally has 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 on subordinated debt generally is paid to the
Company quarterly.
Equity securities primarily consist 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 or
may receive equity features, such as nominal cost warrants. The
Company also may invest in the equity (preferred and/or voting
or non-voting common) of a portfolio company where the
Company’s 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 Company’s 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.
Ciena Capital LLC. Ciena Capital LLC
(f/k/a Business Loan Express, LLC) (“Ciena”) has
provided loans to commercial real estate owners and operators.
Ciena has been a participant in the Small Business
Administration’s 7(a) Guaranteed Loan Program and its
wholly-owned subsidiary is licensed by the SBA as a Small
Business Lending Company (“SBLC”). Ciena is
headquartered in New York, NY.
On September 30, 2008, Ciena voluntarily filed for
bankruptcy protection under Chapter 11 of Title 11 of
the United States Code (the “Bankruptcy Code”) in the
United States Bankruptcy Court for the Southern District of New
York (the “Court”). Ciena continues to operate its
servicing business and manage its assets as a
“debtor-in-possession”
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and the orders of
the Court.
At March 31, 2009 and December 31, 2008, the
Company’s investment in Ciena was as follows:
| March 31, 2009 | December 31, 2008 | |||||||||||||||
|
($ in millions)
|
Cost | Value | Cost | Value | ||||||||||||
|
Senior Loan
|
$ | 319.0 | $ | 64.1 | $ | 319.0 | $ | 104.9 | ||||||||
|
Class B Equity
Interests(1)
|
119.5 | — | 119.5 | — | ||||||||||||
|
Class C Equity
Interests(1)
|
112.6 | — | 109.3 | — | ||||||||||||
|
Total
|
$ | 551.1 | $ | 64.1 | $ | 547.8 | $ | 104.9 | ||||||||
| (1) | At March 31, 2009 and December 31, 2008, the Company held 100% of the Class B equity interests and 94.9% of the Class C equity interests. |
44
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
At March 31, 2009 and December 31, 2008, other assets
includes amounts receivable from or related to Ciena totaling
$15.5 million and $15.4 million at cost and
$2.1 million and $2.1 million at value, respectively.
Net change in unrealized appreciation or depreciation included a
net decrease in the Company’s investment in Ciena of
$44.1 million and $39.3 million for the three months
ended March 31, 2009 and 2008, respectively.
In addition, at March 31, 2009, the Company had standby
letters of credit issued under the Company’s line of credit
of $94.1 million in connection with term securitization
transactions completed by Ciena. The term securitizations have
experienced increasing defaults as a result of the economic
environment, which may require the Company to fund a portion of
the standby letters of credit in 2009. The Company’s asset
coverage ratio is currently less than 200% and the Company
currently is in default under its revolving line of credit. In
addition, the financial institution that has issued these
letters of credit has experienced a ratings downgrade. As a
result of these factors, the Company may need to use cash to
provide credit enhancement to these term securitizations if
these letters of credit cannot be maintained through the
revolving credit facility or if the issuer of these letters of
credit is further downgraded. During the three months ended
March 31, 2009, the Company contributed $3.3 million
to Ciena in exchange for additional Class C equity
interests, which was used to support Ciena’s term
securitizations in lieu of a draw under the letters of credit.
This investment was required as a result of the downgrade of the
issuer of the letters of credit. The Company has considered any
funding under the letters of credit in the valuation of Ciena at
March 31, 2009 and December 31, 2008.
As a result of Ciena’s decision to file for bankruptcy
protection, the Company’s unconditional guaranty of the
obligations outstanding under Ciena’s revolving credit
facility became due. As of March 31, 2009, the senior
secured loan to Ciena had a cost basis of $319.0 million
and a value of $64.1 million. The Company continues to
guarantee the remaining principal balance of $5 million,
plus related interest, fees and expenses payable to a third
party bank. In connection with the Company’s continuing
guaranty of the amounts held by this bank, the Company has
agreed that the amounts owing to the bank under the Ciena
revolving credit facility will be paid before any of the secured
obligations of Ciena now owed to the Company.
The Company’s investment in Ciena was on non-accrual
status, therefore the Company did not earn any interest and
related portfolio income from its investment in Ciena for each
of the three months ended March 31, 2009 and 2008.
At March 31, 2009, Ciena had two non-recourse
securitization warehouse facilities, both of which have matured.
In order to pay down debt under the conventional loan warehouse
facility, Ciena is in the process of selling loans on behalf of
the conventional loan warehouse facility providers. Ciena is
also working with the providers of the SBA loan warehouse
facility with regard to the repayment of that facility. The
Company has issued performance guaranties whereby the Company
agreed to indemnify the warehouse providers for any damages,
losses, liabilities and related costs and expenses that they may
incur as a result of Ciena’s failure to perform any of its
obligations as loan originator, loan seller or loan servicer
under the warehouse securitizations.
The Office of the Inspector General of the SBA (OIG) and the
United States Secret Service are conducting ongoing
investigations of allegedly fraudulently obtained SBA-guaranteed
loans issued by Ciena. Ciena also is subject to other SBA and
OIG audits, investigations, and reviews. In addition, the Office
of the Inspector General of the U.S. Department of
Agriculture is conducting an investigation of Ciena’s
lending practices under the Business and Industry Loan
(B&I) program. The OIG and the
45
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
U.S. Department of Justice are also conducting a civil
investigation of Ciena’s lending practices in various
jurisdictions. The Company is unable to predict the outcome of
these inquiries, and it is possible that third parties could try
to seek to impose liability against the Company in connection
with certain defaulted loans in Ciena’s portfolio. These
investigations, audits and reviews are ongoing.
These investigations, audits, reviews, and litigation have had
and may continue to have a material adverse impact on Ciena and,
as a result, could continue to negatively affect the
Company’s financial results. The Company has considered
Ciena’s voluntary filing for bankruptcy protection, any
funding under the letters of credit, current regulatory issues,
ongoing investigations and litigation in performing the
valuation of Ciena at March 31, 2009 and at
December 31, 2008.
Collateralized Loan Obligations (“CLOs”) and
Collateralized Debt Obligations
(“CDOs”). At March 31, 2009,
and December 31, 2008, the Company owned bonds and
preferred shares/income notes in CLOs and bonds in a CDO as
follows:
| 2009 | 2008 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
Bonds(2):
|
||||||||||||||||||||||||
|
Callidus Debt Partners CDO Fund I, Ltd.
|
$ | 28.4 | $ | 11.1 | —% | $ | 28.4 | $ | 10.1 | 39.4% | ||||||||||||||
|
Callidus Debt Partners CLO Fund IV, Ltd.
|
2.0 | 1.6 | 21.6% | 2.0 | 1.4 | 26.9% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VI, Ltd.
|
7.2 | 4.0 | 20.9% | 7.1 | 3.9 | 26.1% | ||||||||||||||||||
|
Callidus MAPS CLO Fund I LLC
|
17.0 | 11.1 | 10.3% | 17.0 | 9.8 | 12.2% | ||||||||||||||||||
|
Callidus MAPS CLO Fund II LLC
|
3.6 | 3.0 | 25.6% | 3.6 | 3.0 | 30.2% | ||||||||||||||||||
|
Dryden XVIII Leveraged Loan 2007 Limited
|
7.8 | 3.1 | 19.3% | 7.7 | 4.5 | 20.5% | ||||||||||||||||||
|
Knightsbridge CLO 2007-1
Ltd.(3)
|
18.7 | 15.0 | 12.9% | 18.7 | 14.9 | 17.4% | ||||||||||||||||||
|
Knightsbridge CLO 2008-1
Ltd.(3)
|
31.4 | 28.4 | 13.3% | 31.4 | 31.4 | 10.2% | ||||||||||||||||||
|
Pangaea CLO 2007-1 Ltd.
|
11.9 | 4.6 | 24.4% | 11.8 | 7.1 | 25.0% | ||||||||||||||||||
|
Total bonds
|
128.0 | 81.9 | 12.9% | 127.7 | 86.1 | 18.5% | ||||||||||||||||||
|
Preferred Shares/Income Notes:
|
||||||||||||||||||||||||
|
Callidus Debt Partners CLO Fund III, Ltd.
|
20.1 | 6.4 | —% | 20.1 | 5.4 | —% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund IV, Ltd.
|
15.0 | 5.5 | —% | 14.6 | 10.6 | 18.1% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund V, Ltd.
|
13.6 | 6.9 | 12.1% | 13.4 | 10.3 | 21.3% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VI, Ltd.
|
29.0 | 8.7 | 8.7% | 28.3 | 23.1 | 21.8% | ||||||||||||||||||
|
Callidus Debt Partners CLO Fund VII, Ltd.
|
24.7 | 10.5 | 5.1% | 24.0 | 15.4 | 17.9% | ||||||||||||||||||
|
Callidus MAPS CLO Fund I LLC
|
43.8 | 13.4 | —% | 45.1 | 27.8 | 6.5% | ||||||||||||||||||
|
Callidus MAPS CLO Fund II, Ltd.
|
18.8 | 4.4 | —% | 18.4 | 12.6 | 19.3% | ||||||||||||||||||
|
Dryden XVIII Leveraged Loan 2007 Limited
|
22.7 | 8.7 | 21.5% | 22.1 | 17.5 | 20.2% | ||||||||||||||||||
|
Knightsbridge CLO
2007-1
Ltd.(3)
|
41.8 | 20.4 | —% | 40.9 | 35.2 | 17.4% | ||||||||||||||||||
|
Knightsbridge CLO 2008-1
Ltd.(3)
|
20.9 | 19.5 | 22.1% | 21.3 | 21.3 | 16.6% | ||||||||||||||||||
|
Total preferred shares/income notes
|
250.4 | 104.4 | 7.9% | 248.2 | 179.2 | 16.4% | ||||||||||||||||||
|
Total
|
$ | 378.4 | $ | 186.3 | $ | 375.9 | $ | 265.3 | ||||||||||||||||
| (1) | The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The yield on these debt and equity securities is included in interest income in the accompanying consolidated statement of operations. |
The market yield used in the
valuation of the CLO and CDO assets may be different than the
interest yields shown above.
| (2) | These securities are included in private finance subordinated debt. |
| (3) | These funds are managed by the Company through a wholly-owned subsidiary. |
46
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
The initial yields on the cost basis of the CLO preferred shares
and income notes are based on the estimated future cash flows
expected to be paid to these CLO classes from the underlying
collateral assets. As each CLO preferred share or income note
ages, the estimated future cash flows are updated based on the
estimated performance of the underlying collateral assets, and
the respective yield on the cost basis 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.
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
ratings downgrades, 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 both March 31, 2009, and
December 31, 2008, the face value of the CLO and CDO assets
held by the Company was subordinate to as much as 94% of the
face value of the securities outstanding in these CLOs and CDO.
At March 31, 2009, and December 31, 2008, the
underlying collateral assets of these CLO and CDO issuances,
consisting primarily of senior corporate loans, were issued by
646 issuers and 658 issuers, respectively, and had balances
as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Bonds
|
$ | 240.7 | $ | 268.3 | ||||
|
Syndicated loans
|
4,428.8 | 4,477.3 | ||||||
|
Cash(1)
|
130.6 | 89.6 | ||||||
|
Total underlying collateral assets at
cost(2)
|
$ | 4,800.1 | $ | 4,835.2 | ||||
| (1) | Includes undrawn liability amounts. |
| (2) | At March 31, 2009, and December 31, 2008, the total cost basis of defaulted obligations was $134.0 million and $95.0 million, respectively, or approximately 2.8% and 2.0% respectively, of the total underlying collateral assets. |
Loans and Debt Securities on Non-Accrual
Status. At March 31, 2009, and
December 31, 2008, private finance loans and debt
securities at value not accruing interest were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Loans and debt securities
|
||||||||
|
Companies more than 25% owned
|
$ | 134.5 | $ | 176.1 | ||||
|
Companies 5% to 25% owned
|
13.6 | — | ||||||
|
Companies less than 5% owned
|
69.3 | 151.8 | ||||||
|
Total
|
$ | 217.4 | $ | 327.9 | ||||
47
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, 2009, and December 31, 2008, were as follows:
| 2009 | 2008 | |||||||
|
Industry
|
||||||||
|
Business services
|
33 | % | 36 | % | ||||
|
Consumer products
|
26 | 24 | ||||||
|
CLO/CDO(1)
|
7 | 8 | ||||||
|
Financial services
|
6 | 6 | ||||||
|
Private debt funds
|
5 | 5 | ||||||
|
Consumer services
|
5 | 5 | ||||||
|
Retail
|
5 | 5 | ||||||
|
Industrial products
|
4 | 5 | ||||||
|
Healthcare services
|
3 | 2 | ||||||
|
Other
|
6 | 4 | ||||||
|
Total
|
100 | % | 100 | % | ||||
|
Geographic
Region(2)
|
||||||||
|
Mid-Atlantic
|
39 | % | 41 | % | ||||
|
Midwest
|
29 | 28 | ||||||
|
Southeast
|
20 | 17 | ||||||
|
West
|
11 | 13 | ||||||
|
Northeast
|
1 | 1 | ||||||
|
Total
|
100 | % | 100 | % | ||||
| (1) | These funds primarily invest in senior corporate loans. Certain of these funds are managed by Callidus Capital, a portfolio company of Allied Capital. |
| (2) | The geographic region for the private finance portfolio depicts the location of the headquarters for the Company’s portfolio companies. The portfolio companies may have a number of other locations in other geographic regions. |
Commercial
Real Estate Finance
At March 31, 2009, and December 31, 2008, the
commercial real estate finance portfolio consisted of the
following:
| 2009 | 2008 | |||||||||||||||||||||||
| Cost | Value | Yield(1) | Cost | Value | Yield(1) | |||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||
|
Commercial mortgage loans
|
$ | 53.6 | $ | 53.9 | 6.7% | $ | 52.5 | $ | 53.5 | 7.4% | ||||||||||||||
|
Real estate owned
|
15.0 | 7.8 | 18.2 | 20.8 | ||||||||||||||||||||
|
Equity interests
|
13.7 | 17.3 | 14.8 | 19.6 | ||||||||||||||||||||
|
Total
|
$ | 82.3 | $ | 79.0 | $ | 85.5 | $ | 93.9 | ||||||||||||||||
| (1) | The weighted average yield on the commercial mortgage loans is computed as the (a) annual stated interest on accruing loans plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans 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 March 31,
48
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
2009, and December 31, 2008, approximately 68% and 69% of
the Company’s commercial mortgage loan portfolio was
composed of fixed interest rate loans, respectively, and 32% and
31% of the Company’s commercial loan portfolio was composed
of adjustable interest rate loans, respectively. At
March 31, 2009, and December 31, 2008, loans with a
value of $11.0 million and $7.7 million, respectively,
were not accruing interest. Loans greater than 120 days
delinquent generally do not accrue interest.
Equity interests primarily consist 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 real estate finance portfolio at value at
March 31, 2009, and December 31, 2008, were as follows:
| 2009 | 2008 | |||||||
|
Property Type
|
||||||||
|
Hospitality
|
57 | % | 52 | % | ||||
|
Recreation
|
28 | 22 | ||||||
|
Office
|
13 | 15 | ||||||
|
Retail
|
— | 9 | ||||||
|
Other
|
2 | 2 | ||||||
|
Total
|
100 | % | 100 | % | ||||
|
Geographic Region
|
||||||||
|
Southeast
|
42 | % | 43 | % | ||||
|
West
|
30 | 26 | ||||||
|
Midwest
|
19 | 22 | ||||||
|
Northeast
|
9 | 9 | ||||||
|
Mid-Atlantic
|
— | — | ||||||
|
Total
|
100 | % | 100 | % | ||||
Fair
Value Measurements
The Company, as a BDC, has invested in illiquid securities
including debt and equity securities of portfolio companies, CLO
bonds and preferred shares/income notes, CDO bonds and
investment funds. The Company’s 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 Company’s
valuation policy and the provisions of the 1940 Act and
SFAS 157. The Company determines fair value to be the price
that would be received for an investment in a current sale,
which assumes an orderly transaction between market participants
on the measurement date. The Company’s valuation policy
considers the fact that no ready market exists for substantially
all of the securities in which it invests and that fair value
for its investments must typically be determined using
unobservable inputs.
SFAS 157 establishes a fair value hierarchy that encourages
the use of observable inputs, but allows for unobservable inputs
when observable inputs do not exist. Inputs are classified into
one of three categories:
| • | Level 1 — Quoted prices (unadjusted) in active markets for identical assets |
49
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
| • | Level 2 — Inputs other than quoted prices that are observable to the market participant for the asset or quoted prices in a market that is not active | |
| • | Level 3 — Unobservable inputs |
When there are multiple inputs for determining the fair value of
an investment, the Company classifies the investment in total
based on the lowest level input that is significant to the fair
value measurement.
Assets measured at fair value on a recurring basis by level
within the fair value hierarchy at March 31, 2009, were as
follows:
|
Fair Value |
Quoted Prices in |
Significant Other |
Significant |
|||||||||||||
|
Measurement |
Active Markets for |
Observable |
Unobservable |
|||||||||||||
|
as of March 31, |
Identical Assets |
Inputs |
Inputs |
|||||||||||||
| ($ in millions) | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Assets at Fair Value:
|
||||||||||||||||
|
Portfolio
|
||||||||||||||||
|
Private finance:
|
||||||||||||||||
|
Loans and debt securities
|
$ | 2,185.6 | $ | — | $ | — | $ | 2,185.6 | ||||||||
|
Preferred shares/income notes of CLOs
|
104.4 | — | — | 104.4 | ||||||||||||
|
Subordinated certificates in Unitranche Fund LLC
|
124.5 | — | — | 124.5 | ||||||||||||
|
Other equity securities
|
415.5 | — | — | 415.5 | ||||||||||||
|
Commercial real estate finance
|
79.0 | — | — | 79.0 | ||||||||||||
|
Total portfolio
|
$ | 2,909.0 | $ | — | $ | — | $ | 2,909.0 | ||||||||
The table below sets forth a summary of changes in the
Company’s assets measured at fair value using level 3
inputs.
| Private Finance | ||||||||||||||||||||||||
|
Preferred |
Subordinated |
|||||||||||||||||||||||
|
Loans and |
Shares/ |
Certificates |
Other |
Commercial |
||||||||||||||||||||
|
Debt |
Income Notes |
in Unitranche |
Equity |
Real Estate |
||||||||||||||||||||
| ($ in millions) | Securities | of CLOs | Fund LLC | Securities | Finance | Total | ||||||||||||||||||
|
Balance at December 31, 2008
|
$ | 2,591.8 | $ | 179.2 | $ | 125.4 | $ | 502.7 | $ | 93.9 | $ | 3,493.0 | ||||||||||||
|
Total gains or losses
|
||||||||||||||||||||||||
|
Net realized gains
(losses)(1)
|
(30.4 | ) | 7.3 | — | (6.8 | ) | 4.1 | (25.8 | ) | |||||||||||||||
|
Net change in unrealized appreciation or
depreciation(2)
|
(196.0 | ) | (76.9 | ) | — | (68.4 | ) | (11.7 | ) | (353.0 | ) | |||||||||||||
|
Purchases, issuances, repayments and exits,
net(3)
|
(179.8 | ) | (5.2 | ) | (0.9 | ) | (12.0 | ) | (7.3 | ) | (205.2 | ) | ||||||||||||
|
Transfers in and/or out of level 3
|
— | — | — | — | — | — | ||||||||||||||||||
|
Balance at March 31, 2009
|
$ | 2,185.6 | $ | 104.4 | $ | 124.5 | $ | 415.5 | $ | 79.0 | $ | 2,909.0 | ||||||||||||
|
Net unrealized appreciation (depreciation) during the period
relating to assets still held at the reporting
date(2)
|
$ | (221.1 | ) | $ | (76.9 | ) | $ | — | $ | (57.7 | ) | $ | (5.2 | ) | $ | (360.9 | ) | |||||||
| (1) | Includes net realized gains (losses) (recorded as realized gains or losses in the accompanying consolidated statement of operations), and amortization of discounts and closing points (recorded as interest income in the accompanying consolidated statement of operations). |
| (2) | Included in change in net unrealized appreciation or depreciation in the accompanying consolidated statement of operations. |
Net change in unrealized
appreciation or depreciation includes net unrealized
appreciation (depreciation) resulting from changes in portfolio
investment values during the reporting period and the reversal
of previously recorded unrealized appreciation or depreciation
when gains or losses are realized.
| (3) | Includes interest and dividend income reinvested through the receipt of a debt or equity security (payment-in-kind income) (recorded as interest and dividend income in the accompanying consolidated statement of operations). |
50
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
Managed
Funds
In addition to managing its own assets, the Company manages
certain funds that also invest in the debt and equity securities
of primarily private middle market companies in a variety of
industries. At March 31, 2009, the Company had eight
separate funds under its management (together, the “Managed
Funds”) for which the Company may earn management or other
fees for its services. The Company may invest in the equity of
these funds, along with other third parties, from which the
Company may earn a current return
and/or a
future incentive allocation.
On March 3, 2009, the Company announced the completion of
the acquisition of the management contracts of three middle
market senior debt CLOs (together, the “Emporia
Funds”) and certain other related assets for approximately
$11 million (subject to post-closing adjustments). The
acquired assets are included in other assets in the accompanying
consolidated balance sheet and the cost will be amortized over
the life of the contracts. The Emporia Funds primarily invest in
middle market and broadly syndicated senior secured loans. The
Company is not an investor in the Emporia Funds.
The assets of the Managed Funds at March 31, 2009 and
December 31, 2008, and the Company’s management fees
as of March 31, 2009 were as follows:
| Assets of Managed Funds | ||||||||||||
|
($ in millions) |
March 31, |
December 31, |
Management |
|||||||||
|
Name of Fund
|
2009 | 2008 | Fee(2) | |||||||||
|
Unitranche Fund LLC
|
$ | 781.3 | $ | 789.8 | 0.375 | % | ||||||
|
Allied Capital Senior Debt Fund, L.P.
|
397.7 | 412.9 | 1.625 | %(1)(2) | ||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
502.0 | 500.6 | 0.600 | % | ||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
304.6 | 304.8 | 0.600 | % | ||||||||
|
AGILE Fund I, LLC
|
83.2 | 99.3 | — | (1) | ||||||||
|
Emporia Preferred Funding I, Ltd.
|
414.2 | — | 0.625 | %(1) | ||||||||
|
Emporia Preferred Funding II, Ltd.
|
352.5 | — | 0.650 | %(1) | ||||||||
|
Emporia Preferred Funding III, Ltd.
|
406.2 | — | 0.650 | %(1) | ||||||||
|
Total Assets
|
$ | 3,241.7 | $ | 2,107.4 | ||||||||
| (1) | The Company is entitled to an incentive allocation subject to certain performance benchmarks. There can be no assurance that the incentive allocation will be earned. |
| (2) | Management fees are stated as a percent of assets except for the Allied Capital Senior Debt Fund, L.P. (“ACSDF”) which is stated as a percent of equity capital. The management fee paid by ACSDF was 2.000% at December 31, 2008 and reduced to 1.625% effective January 1, 2009. |
A portion of the management fees earned by the Company may be
deferred under certain circumstances. Collection of the fees
earned may be dependent in part on the performance of the
Managed Fund. The Company may pay a portion of management fees
it receives to Callidus Capital Corporation, a portfolio
investment controlled by the Company, for services provided as
special manager to the Allied Capital Senior Debt Fund, L.P.,
Knightsbridge CLO
2007-1 Ltd.,
Knightsbridge CLO
2008-1 Ltd.
and the Emporia Funds.
The Company’s responsibilities to the Managed Funds may
include investment origination, underwriting, and portfolio
monitoring services. Each of the Managed Funds may separately
invest in the debt or equity of companies in the Company’s
portfolio, and these investments may be senior, pari passu or
51
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 3. Portfolio, continued
junior to the debt and equity investments held by the Company.
The Company may or may not participate in investments made by
the Managed Funds.
No assets were sold to any of the Managed Funds during the three
months ended March 31, 2009. During the three months ended
March 31, 2008, the Company sold $166.7 million of
assets to the AGILE Fund I, LLC, for which the Company
recognized a realized gain of $8.8 million and dividend
income of $5.4 million.
The Company accounts for the sale of securities to funds with
which it has continuing involvement as sales pursuant to
SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement 125, when the securities have been
legally isolated from the Company, the Company has no ability to
restrict or constrain the ability of the Managed Funds to pledge
or exchange the transferred securities, and the Company does not
have either the entitlement and the obligation to repurchase the
securities or the ability to unilaterally cause the Managed Fund
to put the securities back to the Company.
In addition to managing these funds, the Company holds certain
investments in the Managed Funds as follows:
|
($ in millions) |
March 31, 2009 | December 31, 2008 | ||||||||||||||||
|
Name of Fund
|
Investment Description | Cost | Value | Cost | Value | |||||||||||||
|
Unitranche
Fund LLC(1)
|
Subordinated Certificates and Equity Interests | $ | 124.5 | $ | 124.5 | $ | 125.4 | $ | 125.4 | |||||||||
|
Allied Capital Senior Debt Fund, L.P.
|
Equity interests | 31.8 | 32.9 | 31.8 | 31.8 | |||||||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
Class E Notes and Income Notes | 60.4 | 35.4 | 59.6 | 50.1 | |||||||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
Class C Notes, Class D Notes, Class E Notes and Income Notes | 52.3 | 47.9 | 52.7 | 52.7 | |||||||||||||
|
AGILE Fund I, LLC
|
Equity Interests | 0.7 | 0.4 | 0.7 | 0.5 | |||||||||||||
|
Total
|
$ | 269.7 | $ | 241.1 | $ | 270.2 | $ | 260.5 | ||||||||||
| (1) | The Company has committed up to $525.0 million of subordinated certificates to the Unitranche Fund. The Unitranche Fund will be capitalized as investment transactions are completed. Investments made by the Unitranche Fund must be approved by the investment committee of the Unitranche Fund, which includes a representative from the Company. Therefore, this commitment to the Unitranche Fund cannot be drawn without the Company’s approval. |
52
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 4. Debt
At March 31, 2009, and December 31, 2008, the Company
had the following debt:
| 2009 | 2008 | |||||||||||||||||
|
Annual |
Annual |
|||||||||||||||||
|
Facility |
Amount |
Interest |
Facility |
Amount |
Interest |
|||||||||||||
| Amount | Drawn | Cost(1) | Amount | Drawn | Cost(1) | |||||||||||||
| ($ in millions) | ||||||||||||||||||
|
Notes payable:
|
||||||||||||||||||
|
Privately issued unsecured notes payable
|
$1,015.0 | $1,015.0 | 9.8 | %(5) | $1,015.0 | $1,015.0 | 7.8 | % | ||||||||||
|
Publicly issued unsecured notes payable
|
877.5 | 877.5 | 6.7 | % | 880.0 | 880.0 | 6.7 | % | ||||||||||
|
Total notes payable
|
1,892.5 | 1,892.5 | 8.3 | % | 1,895.0 | 1,895.0 | 7.3 | % | ||||||||||
|
Revolving line of
credit(4)
|
165.0 | 50.0 | 6.3 | %(2)(5) | 632.5 | 50.0 | 4.3 | %(2) | ||||||||||
|
Total debt
|
$2,057.5 | $1,942.5 | 8.6 | %(3)(5) | $2,527.5 | $1,945.0 | 7.7 | %(3) | ||||||||||
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest on the debt plus any applicable default interest, 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 effect at the balance sheet date. In addition to the current interest payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $6.0 million at March 31, 2009, and $8.5 million at December 31, 2008. |
| (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. The annual interest cost reflects the facilities in place on the balance sheet date. |
| (4) | At March 31, 2009, $1.5 million remained unused on the revolving line of credit, net of amounts committed for standby letters of credit of $113.5 million issued under the credit facility. See discussion below. |
| (5) | Events of default have occurred and are continuing under the Revolving Line of Credit and Private Notes which have increased the interest rates by 2.00% during the continuance of such events of default. Excluding this default interest, the annual interest cost on total debt would have been 7.5%. |
Notes
Payable
Revolving Line of Credit. The Company
has a three-year unsecured revolving line of credit with total
commitments of $165.0 million that expires on
April 11, 2011 (the “Revolving Line of Credit”).
At March 31, 2009, there was $50.0 million outstanding
under the Company’s Revolving Line of Credit and standby
letters of credit of $113.5 million were issued under the
credit facility.
Borrowings under the Revolving Line of Credit generally bear
interest at a rate per annum equal to (i) LIBOR (for the
period selected by the Company) plus 3.00% or (ii) the
higher of (a) the Federal Funds rate plus 1.50% or
(b) the Bank of America N.A. prime rate plus 1.00%. The
Revolving Line of Credit requires the payment of an annual
commitment fee equal to 0.50% 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 Revolving Line of Credit provides for a swingline
sub-facility. The swingline sub-facility bears interest at the
Bank of America N.A. cost of funds plus 2.00%. The Revolving
Line of Credit also provides for a sub-facility for the issuance
of letters of credit for up to an aggregate amount of
$115.0 million. The letter of credit fee is 3.00% per annum
on letters of credit issued, which is payable quarterly. Events
of default have increased the interest rate and fees on letters
of credit by up to 2.00% during the continuance of such events
of default. See Note 1.
Privately Issued Unsecured
Notes Payable. The Company has privately
issued notes (the “Private Notes”) to institutional
investors, primarily insurance companies. The Private Notes have
five- or seven-year maturities and stated fixed rates of
interest ranging from 6.53% to 9.14% at March 31, 2009.
Events of default have occurred which have increased these
interest rates by 2.00% during the continuance of such events of
default. See Note 1. The Private Notes generally require
payment of interest only semi-annually, and all principal is due
upon maturity. At March 31, 2009, the Private Notes had
maturities from November 2009 to June 2015. The Private Notes
may be prepaid in whole or in part, together with an interest
premium, if any, as stipulated in the private note agreements.
53
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 4. Debt, continued
The Revolving Line of Credit and the Private Notes have similar
financial and operating covenants. These covenants require the
Company to maintain certain financial ratios, including asset
coverage, debt to equity and interest coverage, and a minimum
net worth. These debt agreements 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 its 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. These debt agreements
limit the Company’s ability to declare dividends or
repurchase its common stock during the existence of certain
defaults and events of default.
Amendments to Revolving Line of Credit and Privately
Issued Unsecured Notes Payable. On
December 30, 2008, the Company entered into amendments
relating to the Company’s Private Notes and Revolving Line
of Credit. The amendments reduced the Company’s capital
maintenance covenant to the greater of $1.5 billion and 85%
of consolidated adjusted debt, and reduced the Company’s
interest charges coverage ratio covenant, determined as of the
last day of each fiscal quarter for the period of four
consecutive fiscal quarters ending on such day, to 1.4 to 1 for
the fiscal quarter ending December 31, 2008 and each fiscal
quarter thereafter to and including the fiscal quarter ending
December 31, 2009, to 1.6 to 1 for the fiscal quarter
ending March 31, 2010 and each fiscal quarter thereafter to
and including the fiscal quarter ending December 31, 2010,
and to 1.7 to 1 for the fiscal quarter ending March 31,
2011 and each fiscal quarter thereafter. The amendments did not
modify the Company’s obligation to maintain a minimum 200%
asset coverage ratio.
The amendments added new covenants that required the Company to
grant to the Noteholders and the Lenders a first priority lien
on substantially all of the Company’s assets no later than
January 30, 2009, and to maintain a ratio of consolidated
total adjusted assets to secured debt of not less than 2.25 to
1. Also, prior to December 31, 2010, the Company is
(i) required to limit the payment of dividends to a maximum
of $0.20 per share per fiscal quarter (or such greater amount
required for the Company to maintain its regulated investment
company status), and (ii) restricted from purchasing,
redeeming or retiring any shares of the Company’s common
stock or any warrants, rights or options to purchase or acquire
any shares of the Company’s common stock for an aggregate
consideration in excess of $60 million. In addition, the
amendments restricted the Company from prepaying, redeeming,
purchasing or otherwise acquiring any of its currently
outstanding public notes prior to their stated maturity. The
amendments also made certain other modifications. The amendments
increased the rate of interest on the instruments by
100 basis points. In addition, these amendments required a
50 basis point amendment fee.
Events of default have occurred and are continuing under the
Revolving Line of Credit and Private Notes related to certain
financial and other covenants. See Note 1.
Publicly Issued Unsecured Notes
Payable. At March 31, 2009, the Company
had outstanding publicly issued unsecured notes as follows:
| ($ in millions) | Amount | Maturity Date | ||
|
6.625% Notes due 2011
|
$397.5 | July 15, 2011 | ||
|
6.000% Notes due 2012
|
250.0 | April 1, 2012 | ||
|
6.875% Notes due 2047
|
230.0 | April 15, 2047 | ||
|
Total
|
$877.5 | |||
54
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 4. Debt, continued
The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require
payment of interest only semi-annually, and all principal is due
upon maturity. The Company has the option to redeem these notes
in whole or in part, together with a redemption premium, as
stipulated in the notes. In addition, the Company may purchase
these notes in the market at par or at a discount to the extent
permitted by the 1940 Act. During the three months ended
March 31, 2009, the Company paid $0.5 million to
repurchase certain of the 6.625% Notes due 2011 which had a face
value of $2.5 million.
The 6.875% Notes due 2047 require payment of interest only
quarterly, and all principal is due upon maturity. These notes
are redeemable in whole or in part at any time or from time to
time on or after April 15, 2012, at par and upon the
occurrence of certain tax events as stipulated in the notes.
The Company has certain financial and operating covenants that
are required by the publicly issued unsecured notes payable. The
Company is not permitted to issue indebtedness unless
immediately after such issuance the Company has asset coverage
of all outstanding indebtedness of at least 200% as required by
the 1940 Act, as amended. At March 31, 2009, the
Company’s asset coverage ratio was 171%, which is less than
the 200% requirement. As a result, under the publicly issued
unsecured notes payable, the Company will not be able to issue
indebtedness until such time as the Company’s asset
coverage returns to at least 200%. The Company has not
experienced any default or cross default with respect to the
publicly issued unsecured notes payable.
Scheduled Maturities. Scheduled future
maturities of notes payable at March 31, 2009, were as
follows:
| Amount Maturing | ||||||||||||
|
Privately Issued |
Publicly Issued |
|||||||||||
|
($ in millions) |
Unsecured Notes |
Unsecured Notes |
||||||||||
|
Year
|
Payable(1) | Payable | Total | |||||||||
|
2009
|
$ | 1,015.0 | $ | — | $ | 1,015.0 | ||||||
|
2010
|
— | — | — | |||||||||
|
2011
|
— | 397.5 | 397.5 | |||||||||
|
2012
|
— | 250.0 | 250.0 | |||||||||
|
2013
|
— | — | — | |||||||||
|
Thereafter
|
— | 230.0 | 230.0 | |||||||||
|
Total
|
$ | 1,015.0 | $ | 877.5 | $ | 1,892.5 | ||||||
| (1) | The private notes have stated contractual maturities as follows: 2009 — $252.5 million, 2010 — $408.0 million, 2011 — $72.5 million, 2012 — $89.0 million, 2013 — $140.5 million, and thereafter — $52.5 million. |
As discussed above and in Note 1, events of default have
occurred and are continuing under the Revolving Line of Credit
and Private Notes. Neither the Lenders nor Noteholders have
accelerated repayment; however, if the administrative agent for
the Lenders under the Revolving Line of Credit or the required
percentage of Lenders under the Revolving Line of Credit or
Noteholders under the Private Notes, respectively, were to
accelerate repayment, these obligations would become immediately
due and payable. Therefore, in the table above, the Private
Notes are shown as payable in 2009.
55
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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, 2009, and
December 31, 2008, the Company had issued guarantees of
debt and rental obligations aggregating $19.2 million and
$19.2 million, respectively, and had extended standby
letters of credit aggregating $113.5 million and
$122.3 million, respectively. Under these arrangements, the
Company would be required to make payments to third parties if
the portfolio companies were to default on their related payment
obligations or if the expiration dates of the letters of credit
are not extended. The maximum amount of potential future
payments was $132.7 million and $141.5 million at
March 31, 2009, and December 31, 2008, respectively.
As of March 31, 2009, the guarantees and standby letters of
credit expired as follows:
| (in millions) | Total | 2009 | 2010 | 2011 | 2012 | 2013 | After 2013 | |||||||||||||||||||||
|
Guarantees
|
$ | 19.2 | $ | 7.5 | $ | 6.4 | $ | 4.4 | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
|
Standby letters of credit
|
113.5 | 113.5 | — | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 132.7 | $ | 121.0 | $ | 6.4 | $ | 4.4 | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
Standby letters of credit have been issued under the Revolving
Line of Credit. The Company’s asset coverage ratio is
currently less than 200% and events of default have occurred and
are continuing under the Revolving Line of Credit. Therefore,
the Company is precluded from borrowing under its Revolving Line
of Credit to fund these standby letters of credit and the
Company may need to fund these standby letter of credit draws
with cash in lieu of a borrowing. As a result, in the table
above the Company has assumed that these standby letters of
credit may not be able to be extended and may mature in 2009.
During the existence of an event of default, the administrative
agent is (i) permitted to require the Company to provide cash
collateral equal to the face amount of all outstanding standby
letters of credit and (ii) not required to extend the
existing letters of credit beyond their maturity dates, all of
which expire during the course of 2009.
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 and guaranty
certain minimum fees to such parties under certain circumstances.
At March 31, 2009, the Company had outstanding commitments
to fund investments totaling $651.6 million, including
$619.3 million related to private finance investments and
$32.3 million related to commercial real estate finance
investments. Total outstanding commitments related to private
finance investments included $399.6 million to the
Unitranche Fund LLC. Investments made by the Unitranche Fund
must be approved by the investment committee of the Unitranche
Fund, which includes a representative from the Company.
Therefore, the Company’s commitment to the Unitranche Fund
cannot be drawn without the Company’s approval. See
Note 3.
56
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,
2009 and 2008, were as follows:
| (in millions) | 2009 | 2008 | ||||||
|
Number of common shares
|
— | 8.3 | ||||||
|
Gross proceeds
|
$ | — | $ | 175.5 | ||||
|
Less costs, including underwriting fees
|
— | 4.6 | ||||||
|
Net proceeds
|
$ | — | $ | 170.9 | ||||
There were no stock options exercised during the three months
ended March 31, 2009 and 2008.
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
Company’s common stock for the five consecutive trading
days immediately prior to the dividend payment date. The Company
may not issue new shares below net asset value. Dividend
reinvestment plan activity for the three months ended
March 31, 2009 and 2008, was as follows:
| 2009 | 2008 | |||||||
| (in millions, except per share amounts) | ||||||||
|
Shares issued
|
— | 0.2 | ||||||
|
Average price per share
|
$ | — | $ | 19.49 | ||||
|
Shares purchased by plan agent for shareholders
|
— | — | ||||||
|
Average price per share
|
— | — | ||||||
Note 7. Earnings
Per Common Share
Earnings per common share for the three months ended
March 31, 2009 and 2008, were as follows:
| (in millions, except per share amounts) | 2009 | 2008 | ||||||
|
Net increase (decrease) in net assets resulting from operations
|
$ | (347.7 | ) | $ | (40.7 | ) | ||
|
Weighted average common shares
outstanding — basic |
178.7 | 161.5 | ||||||
|
Dilutive options outstanding
|
— | — | ||||||
|
Weighted average common shares outstanding — diluted
|
178.7 | 161.5 | ||||||
|
Basic earnings (loss) per common share
|
$ | (1.95 | ) | $ | (0.25 | ) | ||
|
Diluted earnings (loss) per common share
|
$ | (1.95 | ) | $ | (0.25 | ) | ||
Note 8. Employee
Compensation Plans
The Company has an Individual Performance Award plan
(“IPA”), and an Individual Performance Bonus plan
(“IPB”, each individually a “Plan,” or
collectively, the “Plans”). These Plans generally are
determined annually at the beginning of each year but may be
adjusted throughout the year. In 2008, the
57
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 8. Employee Compensation Plans, continued
IPA was paid in cash in two equal installments during the year.
Through December 31, 2007, the IPA amounts were contributed
into a trust and invested in the Company’s common stock.
The IPB was distributed in cash to award recipients throughout
the year (beginning in February of each respective year) as long
as the recipient remained employed by the Company. The Company
currently has not established an IPA or IPB for 2009; however,
depending upon the Company’s need to retain and motivate
its employees, the Company may determine in conjunction with the
Compensation Committee of the Board of Directors that some form
of 2009 retention compensation or additional individual
performance compensation may be in the best interests of the
Company.
The trusts for the IPA payments were consolidated with the
Company’s accounts. The common stock was classified as
common stock held in deferred compensation trust in the
accompanying financial statements and the deferred compensation
obligation, which represented the amount owed to the employees,
was included in other liabilities. Changes in the value of the
Company’s common stock held in the deferred compensation
trust were not recognized. However, the liability was marked to
market with a corresponding charge or credit to employee
compensation expense.
In December 2007, the Company’s Board of Directors made a
determination that it was in the best interests of the Company
to terminate its deferred compensation arrangements. The Board
of Directors’ decision primarily was in response to
increased complexity resulting from recent changes in the
regulation of deferred compensation arrangements. The Board of
Directors resolved that the accounts under these Plans would be
distributed to participants in full on March 18, 2008, the
termination and distribution date, or as soon as was reasonably
practicable thereafter, in accordance with the provisions of
each of these Plans.
The accounts under the deferred compensation arrangements
totaled $52.5 million at December 31, 2007. The
balances on the termination date were distributed to
participants in March 2008 subsequent to the termination date in
accordance with the transition rule for payment elections under
Section 409A of the Code. Distributions from the plans were
made in cash or shares of the Company’s common stock, net
of required withholding taxes.
The IPA and IPB expenses are included in employee expenses and
for the three months ended March 31, 2009 and 2008, were as
follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
IPA
|
$ | — | $ | 2.4 | ||||
|
IPA mark to market expense (benefit)
|
— | (4.1 | ) | |||||
|
Total IPA expense (benefit)
|
$ | — | $ | (1.7 | ) | |||
|
Total IPB expense
|
$ | — | $ | 1.7 | ||||
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
58
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 9. Stock Option Plan, continued
the option is granted. The options granted to officers generally
vest ratably over up to a three 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.
At March 31, 2009, and December 31, 2008, there were
37.2 million shares authorized under the Option Plan and
the number of shares available to be granted under the Option
Plan was 2.6 million and 9.5 million, respectively.
Information with respect to options granted, exercised and
forfeited under the Option Plan for the three months ended
March 31, 2009, was as follows:
|
Weighted |
Aggregate |
||||||||||
|
Weighted |
Average |
Intrinsic |
|||||||||
|
Average |
Contractual |
Value at |
|||||||||
|
Exercise Price |
Remaining |
March 31, |
|||||||||
| (in millions, except per share amounts) | Shares | Per Share | Term (Years) | 2009(1) | |||||||
|
Options outstanding at January 1, 2009
|
19.7 | $ | 26.56 | ||||||||
|
Granted
|
10.6 | $ | 0.73 | ||||||||
|
Exercised
|
— | $ | — | ||||||||
|
Forfeited
|
(3.6 | ) | $ | 26.73 | |||||||
|
Options outstanding at March 31, 2009
|
26.7 | $ | 16.28 | 5.98 | $9.1 | ||||||
|
Exercisable at March 31,
2009(2)
|
9.8 | $ | 28.23 | 5.14 | $— | ||||||
|
Exercisable and expected to be exercisable at March 31,
2009(3)
|
23.2 | $ | 16.37 | 5.95 | $8.2 | ||||||
| (1) | Represents the difference between the market value of the options at March 31, 2009, and the cost for the option holders to exercise the options. |
| (2) | Represents vested options. |
| (3) | The amount of options expected to be exercisable at March 31, 2009, is calculated based on an estimate of expected forfeitures. |
During the three months ended March 31, 2008,
7.1 million options were granted, no options were exercised
and 0.3 million options were forfeited. No options vested
during the three months ended March 31, 2009 and 2008.
Note 10. Dividends
and Distributions and Taxes
At December 31, 2008, the Company estimated that it did not
have excess taxable income available for distribution to
shareholders in 2009, and the Company’s Board of Directors
did not declare a dividend for the first quarter of 2009. The
Company’s Board of Directors declared and the Company paid
a dividend of $0.65 per common share for the first quarter
of 2008, totaling $108.1 million.
59
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 10. Dividends and Distributions and Taxes,
continued
The Company generally will be required to pay an excise tax
equal to 4% of the amount by which 98% of the Company’s
annual taxable income exceeds the distributions for the year.
The Company records an excise tax based on the Company’s
estimated excess taxable income for the period. Such estimates
may change from period to period. The Company did not record an
excise tax for the three months ended March 31, 2009. The
Company recorded an excise tax of $2.3 million for the
three months ended March 31, 2008.
In certain circumstances, the Company is restricted in its
ability to pay dividends. Each of the Company’s Private
Notes and the Company’s Revolving Line of Credit contain
provisions that limit the amount of dividends the Company can
pay, and have a covenant that requires a minimum 200% asset
coverage ratio at all times. At March 31, 2009, the Company
was in default of that covenant (see Note 1). During the
continuance of an event of default, the Company is precluded
from declaring dividends or other distributions to its
shareholders. In addition, pursuant to the 1940 Act, the Company
may be precluded from declaring dividends or other distributions
to its shareholders unless the Company’s asset coverage is
at least 200%.
The Company currently estimates that it had cumulative deferred
taxable income related to installment sale gains of
approximately $217.4 million as of December 31, 2008.
These gains have been recognized for financial reporting
purposes in the respective years they were realized, but are
generally deferred for tax purposes until the notes or other
amounts received from the sale of the related investments are
collected in cash. The recognition of installment sales gains as
of December 31, 2008 are estimates and will not be finally
determined until the Company files its 2008 tax return in
September 2009. Certain of these installment gains as of
December 31, 2008 will be recognized for tax purposes in
2009 as certain notes received from the sale of the related
investments have been sold.
The Company’s undistributed book earnings of
$184.7 million as of December 31, 2008 resulted from
undistributed ordinary income and 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.
The Company’s consolidated subsidiary, AC Corp, is subject
to federal and state income taxes. For the three months ended
March 31, 2009 and 2008, AC Corp’s income tax benefit
was $0.4 million and $0.3 million, respectively. For
the three months ended March 31, 2009, paid in capital was
decreased by $2.4 million primarily for the reduction of
the deferred tax asset related to stock options that expired
unexercised.
Note 11. Supplemental
Disclosure of Cash Flow Information
The Company paid interest of $33.2 million and
$31.1 million, respectively, for the three months ended
March 31, 2009 and 2008. The Company paid income taxes,
including excise taxes (net of refunds), of $3.0 million
and $13.0 million the three months ended March 31,
2009 and 2008, respectively.
Non-cash operating activities for the three months ended
March 31, 2009 and 2008, totaled $58.7 million and
$132.0 million, respectively. Non-cash operating activities
for the three months ended March 31, 2009 and 2008, included the
exchange of existing debt securities and accrued interest with a
60
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 11. Supplemental Disclosure of Cash Flow
Information, continued
cost basis of $58.7 million and $99.6 million,
respectively, for new debt and equity securities, and non-cash
operating activities for the three months ended March 31,
2008, included consideration received in connection with the
sale of securities of $32.4 million, which was received in
cash in April 2008.
Non-cash financing activities included the issuance of common
stock in lieu of cash distributions totaling $3.8 million
for the three months ended March 31, 2008.
61
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 12. Financial
Highlights
|
At and |
||||||||||||
|
At and for the |
for the |
|||||||||||
|
Three Months Ended |
Year Ended |
|||||||||||
| March 31, | December 31, | |||||||||||
| 2009(1) | 2008 | 2008 | ||||||||||
|
Per Common Share Data
|
||||||||||||
|
Net asset value, beginning of period
|
$ | 9.62 | $ | 17.54 | $ | 17.54 | ||||||
|
Net investment
income(2)
|
0.16 | 0.43 | 1.23 | |||||||||
|
Net realized gains
(losses)(2)(3)
|
(0.15 | ) | 0.02 | (0.75 | ) | |||||||
|
Net investment income plus net realized gains
(losses)(2)
|
0.01 | 0.45 | 0.48 | |||||||||
|
Net change in unrealized appreciation or
depreciation(2)(3)
|
(1.96 | ) | (0.70 | ) | (6.49 | ) | ||||||
|
Net increase (decrease) in net assets resulting from
operations(2)
|
(1.95 | ) | (0.25 | ) | (6.01 | ) | ||||||
|
Net decrease in net assets from shareholder distributions
|
— | (0.65 | ) | (2.60 | ) | |||||||
|
Net increase in net assets from capital share
transactions(2)
|
— | 0.35 | 0.69 | |||||||||
|
Net asset value, end of period
|
$ | 7.67 | $ | 16.99 | $ | 9.62 | ||||||
|
Market value, end of period
|
$ | 1.59 | $ | 18.43 | $ | 2.69 | ||||||
|
Total
return(4)
|
(40.9 | )% | (11.4 | )% | (82.5 | )% | ||||||
|
Ratios and Supplemental Data
($ and shares in millions, except per share amounts) |
||||||||||||
|
Ending net assets
|
$ | 1,369.8 | $ | 2,828.4 | $ | 1,718.4 | ||||||
|
Common shares outstanding at end of period
|
178.7 | 166.5 | 178.7 | |||||||||
|
Diluted weighted average common shares outstanding
|
178.7 | 161.5 | 173.0 | |||||||||
|
Employee, employee stock option and administrative
expenses/average net
assets(5)
|
1.40 | % | 1.28 | % | 5.47 | % | ||||||
|
Total operating expenses/average net
assets(5)(6)
|
4.41 | % | 2.62 | % | 11.39 | % | ||||||
|
Income tax expense (benefit), including excise tax/average net
assets(5)
|
(0.02 | )% | 0.07 | % | 0.10 | % | ||||||
|
Net investment income/average net
assets(5)
|
1.91 | % | 2.48 | % | 8.47 | % | ||||||
|
Net increase (decrease) in net assets resulting from
operations/average net
assets(5)
|
(22.52 | )% | (1.45 | )% | (41.34 | )% | ||||||
|
Portfolio turnover
rate(5)
|
1.25 | % | 5.62 | % | 24.00 | % | ||||||
|
Average debt outstanding
|
$ | 1,945.0 | $ | 2,209.5 | $ | 2,091.6 | ||||||
|
Average debt per
share(2)
|
$ | 10.88 | $ | 13.68 | $ | 12.09 | ||||||
| (1) | The results for the three months ended March 31, 2009, 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 (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. |
| (4) | Total return assumes the reinvestment of all dividends paid for the periods presented. |
| (5) | The ratios for the three months ended March 31, 2009 and 2008, do not represent annualized results. |
| (6) | Includes 0.19% for the effect of the impairment of long-lived asset during the three months ended March 31, 2009. |
62
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 13. Litigation
On June 23, 2004, the Company was notified by the SEC that
the SEC was conducting an informal investigation of the Company.
The investigation related to the valuation of securities in the
Company’s private finance portfolio and other matters. On
June 20, 2007, the Company announced that it entered into a
settlement with the SEC that resolved the SEC’s informal
investigation. As part of the settlement and without admitting
or denying the SEC’s allegations, the Company agreed to the
entry of an administrative order. In the order the SEC alleged
that, between June 30, 2001, and March 31, 2003, the
Company did not maintain books, records and accounts which, in
reasonable detail, supported or accurately and fairly reflected
valuations of certain securities in the Company’s private
finance portfolio and, as a result, did not meet certain
recordkeeping and internal controls provisions of the federal
securities laws. In the administrative order, the SEC ordered
the Company to continue to maintain certain of its current
valuation-related controls. Specifically, for a period of two
years, the Company has undertaken to: (1) continue to
employ a Chief Valuation Officer, or a similarly structured
officer-level employee, to oversee its quarterly valuation
processes; and (2) continue to employ third-party valuation
consultants to assist in its quarterly valuation processes.
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 (currently known as Ciena Capital
LLC) in connection with a criminal investigation relating to
matters similar to those investigated by and settled with the
SEC as discussed above. The Company produced materials in
response to the requests from the U.S. Attorney’s office
and certain current and former employees were interviewed by the
U.S. Attorney’s Office. The Company has voluntarily
cooperated with the investigation.
In late December 2006, the Company received a subpoena from the
U.S. Attorney for the District of Columbia requesting,
among other things, the production of records regarding the use
of private investigators by the Company or its agents. The Board
established a committee, which was advised by its own counsel,
to review this matter. In the course of gathering documents
responsive to the subpoena, the Company became aware that an
agent of the Company obtained what were represented to be
telephone records of David Einhorn and which purport to be
records of calls from Greenlight Capital during a period of time
in 2005. Also, while the Company was gathering documents
responsive to the subpoena, allegations were made that the
Company’s management had authorized the acquisition of
these records and that management was subsequently advised that
these records had been obtained. The Company’s management
has stated that these allegations are not true. The Company has
cooperated fully with the inquiry by the U.S. Attorney’s
Office.
On February 26, 2007, Dana Ross filed a class action
complaint in the U.S. District Court for the District of
Columbia in which she alleges that Allied Capital Corporation
and certain members of management violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5
thereunder. Thereafter, the court appointed new lead counsel and
approved new lead plaintiffs. On July 30, 2007, plaintiffs
served an amended complaint. Plaintiffs claim that, between
November 7, 2005, and January 22, 2007, Allied Capital
either failed to disclose or misrepresented information about
its portfolio company, Business Loan Express, LLC. Plaintiffs
seek unspecified compensatory and other damages, as well as
other relief. The Company believes the lawsuit is without merit,
and intends to defend the lawsuit vigorously. On
September 13, 2007, the Company filed a motion to dismiss
the lawsuit. The motion is pending.
63
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 13. Litigation,
continued
On October 6, 2008, Rena Nadoff filed a shareholder
derivative action in the Superior Court of the District of
Columbia, captioned Rena Nadoff v. Walton, et al., 2008 CA
007108, seeking unspecified compensatory and other damages, as
well as equitable relief on behalf of Allied Capital
Corporation. Ms. Nadoff’s suit is substantially
similar to a derivative action she filed in February 2007, which
the Court dismissed in July 2007. On November 26, 2008, the
Company filed a motion to dismiss the second Nadoff lawsuit. On
February 3, 2009, the Court denied the motion to dismiss
but ordered Ms. Nadoff to file an amended complaint that
clearly identifies and sets forth the breaches of fiduciary
duty, if any, that are alleged to have occurred after the filing
(or dismissal) of the first Nadoff derivative lawsuit.
Ms. Nadoff filed an amended complaint alleging breaches of
fiduciary duty by the Board of Directors. The Company filed a
motion to dismiss the amended complaint. In response, Ms. Nadoff
requested that she be allowed to voluntarily dismiss the amended
complaint without prejudice. The court denied her request and
the motion to dismiss is pending.
In addition, the Company is party to certain lawsuits in the
normal course of business. Furthermore, third parties may try to
seek to impose liability on the Company in connection with the
activities of its portfolio companies. For a discussion of civil
investigations being conducted regarding the lending practice of
Ciena Capital LLC, a portfolio company of the Company, see
“Note 3, Portfolio — Ciena Capital LLC.”
While the outcome of any of the open legal proceedings described
above cannot at this time be predicted with certainty, the
Company does not expect these matters will materially affect its
financial condition or results of operations.
Note 14.
Subsequent Events
Subsequent to March 31, 2009, the Company sold portfolio
investments and received $78.4 million of cash proceeds, as
compared to their aggregate carrying value of $83.1 million
at March 31, 2009. The assets were sold primarily in
transactions the Company does not consider orderly in accordance
with
FSP 157-4.
The Company will record any realized gains or losses on these
sales during the three months ending June 30, 2009.
Subsequent to March 31, 2009, the Company purchased
publicly issued notes in the market with a total par value of
$56.8 million, which consisted of $34.6 million of its
6.625% Notes due 2011 and $22.2 million of its 6.000% Notes
due 2012, for a total cost of $17.7 million, resulting in a
gain of $39.1 million which will be reflected in the
Company’s results of operations for the three months ending
June 30, 2009.
64
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 (the Company),
including the consolidated statement of investments, as of
March 31, 2009, the related consolidated statements of
operations, changes in net assets and cash flows and the
financial highlights (included in Note 12) for the
three-month periods ended March 31, 2009 and 2008. These
consolidated financial statements and financial highlights are
the responsibility of the Company’s 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, 2008, 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 2,
2009, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet
including the consolidated statement of investments as of
December 31, 2008, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
Note 1 of the Company’s audited financial statements
as of December 31, 2008, and for the year then ended,
discloses that the Company was in default on provisions of
certain credit agreements at December 31, 2008. Our
auditors’ report on those financial statements dated
March 2, 2009, includes an explanatory paragraph referring
to the matters in Note 1 of those financial statements, and
indicating that these matters raised substantial doubt about the
Company’s ability to continue as a going concern. As
indicated in Note 1 of the Company’s unaudited interim
financial statements as of March 31, 2009, and for the
three-months then ended, the Company was still in default on
provisions of certain credit agreements as of March 31,
2009. The accompanying interim financial information does not
include any adjustments that might result from the outcome of
this uncertainty.
Washington, D.C.
May 11, 2009
65
Schedule 12-14
ALLIED
CAPITAL CORPORATION AND SUBSIDIARIES
SCHEDULE OF INVESTMENTS IN AND ADVANCES TO AFFILIATES
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
March 31, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2008 |
Gross |
Gross |
2009 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Companies More Than 25% Owned
|
||||||||||||||||||||||||||
|
AGILE Fund I, LLC
|
Equity Interests | $ | 497 | $ | — | $ | (81 | ) | $ | 416 | ||||||||||||||||
|
(Private Equity Fund)
|
||||||||||||||||||||||||||
|
AllBridge Financial, LLC
|
Equity Interests | 10,960 | 1,673 | (1,562 | ) | 11,071 | ||||||||||||||||||||
|
(Asset Management)
|
||||||||||||||||||||||||||
|
Allied Capital Senior Debt Fund, L.P.
|
Equity Interests | 31,800 | 1,077 | — | 32,877 | |||||||||||||||||||||
|
(Private Debt Fund)
|
||||||||||||||||||||||||||
|
Avborne, Inc.
|
Preferred Stock | 942 | — | (4 | ) | 938 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
| Avborne Heavy Maintenance, Inc. | Common Stock | — | 660 | — | 660 | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
| Aviation Properties Corporation | Common Stock | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
| Border Foods, Inc. | Senior Loan | $ | 1,315 | 33,027 | 1,102 | (229 | ) | 33,900 | ||||||||||||||||||
|
(Consumer Products)
|
Preferred Stock | 11,851 | — | (2,636 | ) | 9,215 | ||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Calder Capital Partners, LLC
|
Senior Loan(5) | 953 | — | (72 | ) | 881 | ||||||||||||||||||||
|
(Asset Management)
|
Equity Interests | — | — | — | — | |||||||||||||||||||||
|
Callidus Capital Corporation
|
Subordinated Debt | 720 | 16,068 | 135 | — | 16,203 | ||||||||||||||||||||
|
(Asset Management)
|
Common Stock | 34,377 | — | (6,672 | ) | 27,705 | ||||||||||||||||||||
| Ciena Capital LLC | Senior Loan(5) | 104,883 | — | (40,795 | ) | 64,088 | ||||||||||||||||||||
|
(Financial Services)
|
Class B Equity Interests | — | — | — | — | |||||||||||||||||||||
| Class C Equity Interests | — | 3,300 | (3,300 | ) | — | |||||||||||||||||||||
|
CitiPostal Inc.
|
Senior Loan | 8 | 681 | 1 | — | 682 | ||||||||||||||||||||
|
(Business Services)
|
Unitranche Debt | 1,567 | 51,548 | 144 | — | 51,692 | ||||||||||||||||||||
| Subordinated Debt | 379 | 9,114 | 377 | — | 9,491 | |||||||||||||||||||||
| Common Stock | 8,616 | — | (8,616 | ) | — | |||||||||||||||||||||
|
Coverall North America, Inc.
|
Unitranche Debt | 969 | 31,948 | 8 | — | 31,956 | ||||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 210 | 5,549 | 1 | — | 5,550 | ||||||||||||||||||||
| Common Stock | 17,968 | 1,043 | — | 19,011 | ||||||||||||||||||||||
|
CR Holding, Inc.
|
Subordinated Debt(5) | 17,360 | — | (7,368 | ) | 9,992 | ||||||||||||||||||||
|
(Consumer Products)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
Crescent Equity Corp.
|
Senior Loan | 11 | 433 | — | — | 433 | ||||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 58 | 1,135 | — | (1,135 | ) | — | |||||||||||||||||||
| Subordinated Debt(5) | 17,479 | — | (11,266 | ) | 6,213 | |||||||||||||||||||||
| Common Stock | 4,580 | 1,341 | (5,882 | ) | 39 | |||||||||||||||||||||
|
Direct Capital Corporation
|
Senior Loan(5) | — | 8,240 | — | 8,240 | |||||||||||||||||||||
|
(Financial Services)
|
Subordinated Debt(5) | 13,530 | — | (1,140 | ) | 12,390 | ||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Financial Pacific Company
|
Subordinated Debt | 2,683 | 62,189 | 10 | (4,637 | ) | 57,562 | |||||||||||||||||||
|
(Financial Services)
|
Preferred Stock | — | — | — | — | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
ForeSite Towers, LLC
|
Equity Interest | 889 | 6 | — | 895 | |||||||||||||||||||||
|
(Tower Leasing)
|
||||||||||||||||||||||||||
|
Global Communications, LLC
|
Senior Loan(5) | 1,335 | — | — | 1,335 | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Hot Light Brands, Inc.
|
Senior Loan(5) | 13,678 | 50 | (285 | ) | 13,443 | ||||||||||||||||||||
|
(Retail)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
Hot Stuff Foods, LLC
|
Senior Loan | 539 | 42,378 | 8,944 | (1,210 | ) | 50,112 | |||||||||||||||||||
|
(Consumer Products)
|
Subordinated Debt(5) | — | — | — | — | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
See related footnotes at the end of
this schedule.
66
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
March 31, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2008 |
Gross |
Gross |
2009 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Huddle House, Inc.
|
Subordinated Debt | $ | 2,168 | $ | 57,067 | $ | 450 | $ | — | $ | 57,517 | |||||||||||||||
|
(Retail)
|
Common Stock | 20,922 | — | (3,467 | ) | 17,455 | ||||||||||||||||||||
|
IAT Equity, LLC and Affiliates
|
Subordinated Debt | 135 | 6,000 | — | — | 6,000 | ||||||||||||||||||||
|
d/b/a Industrial Air Tool
|
Equity Interests | 8,860 | 218 | — | 9,078 | |||||||||||||||||||||
|
(Industrial Products)
|
||||||||||||||||||||||||||
| Impact Innovations Group, LLC | Equity Interests in | |||||||||||||||||||||||||
|
(Business Services)
|
Affiliate | 321 | 1 | — | 322 | |||||||||||||||||||||
|
Insight Pharmaceuticals
|
Subordinated Debt | 1,731 | 45,827 | 244 | (7 | ) | 46,064 | |||||||||||||||||||
|
Corporation
|
Subordinated Debt(5) | 17,532 | 598 | (598 | ) | 17,532 | ||||||||||||||||||||
|
(Consumer Products)
|
Preferred Stock | 4,068 | 1,390 | — | 5,458 | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Jakel, Inc.
|
Subordinated Debt(5) | 374 | — | — | 374 | |||||||||||||||||||||
|
(Industrial Products)
|
||||||||||||||||||||||||||
|
Knightsbridge CLO 2007-1 Ltd.
|
Class E Notes | 503 | 14,866 | 118 | — | 14,984 | ||||||||||||||||||||
|
(CLO)
|
Income Notes | 1,530 | 35,214 | 1,529 | (16,312 | ) | 20,431 | |||||||||||||||||||
|
Knightsbridge CLO
2008-1 Ltd.
|
Class C Notes | 296 | 12,800 | — | (619 | ) | 12,181 | |||||||||||||||||||
|
(CLO)
|
Class D Notes | 205 | 8,000 | — | (954 | ) | 7,046 | |||||||||||||||||||
| Class E Notes | 286 | 10,573 | 63 | (1,441 | ) | 9,195 | ||||||||||||||||||||
| Income Notes | 898 | 21,315 | 898 | (2,745 | ) | 19,468 | ||||||||||||||||||||
|
MHF Logistical Solutions, Inc.
|
Subordinated Debt(5) | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
Preferred Stock | — | — | — | — | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
MVL Group, Inc.
|
Senior Loan | 901 | 30,663 | 6 | (505 | ) | 30,164 | |||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 1,282 | 40,994 | 302 | (9,340 | ) | 31,956 | |||||||||||||||||||
| Subordinated Debt(5) | 86 | — | (86 | ) | — | |||||||||||||||||||||
| Common Stock | — | — | — | — | ||||||||||||||||||||||
|
Old Orchard Brands, LLC
|
Subordinated Debt | 917 | 18,882 | 262 | (19,144 | ) | — | |||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | 27,763 | — | (27,763 | ) | — | ||||||||||||||||||||
|
Penn Detroit Diesel Allison, LLC
|
Subordinated Debt | 1,489 | 37,869 | 291 | — | 38,160 | ||||||||||||||||||||
|
(Business Services)
|
Equity Interests | 21,100 | — | (909 | ) | 20,191 | ||||||||||||||||||||
|
Service Champ, Inc.
|
Subordinated Debt | 1,060 | 26,984 | 178 | — | 27,162 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | 21,156 | 1,673 | — | 22,829 | |||||||||||||||||||||
|
Stag-Parkway, Inc.
|
Unitranche Debt | 169 | 17,962 | 418 | (18,380 | ) | — | |||||||||||||||||||
|
(Business Services)
|
Subordinated Debt | 395 | — | 18,524 | — | 18,524 | ||||||||||||||||||||
| Common Stock | 6,968 | — | (1,387 | ) | 5,581 | |||||||||||||||||||||
|
Startec Equity, LLC
|
Equity Interests | 332 | — | (325 | ) | 7 | ||||||||||||||||||||
|
(Telecommunications)
|
||||||||||||||||||||||||||
|
Unitranche Fund LLC
|
Subordinated Certificates | 2,929 | 125,423 | — | (902 | ) | 124,521 | |||||||||||||||||||
|
(Private Debt Fund)
|
Equity Interests | 1 | — | — | 1 | |||||||||||||||||||||
|
Worldwide Express Operations, LLC
|
Subordinated Debt(5) | $ | 41 | 2,032 | — | (2,032 | ) | — | ||||||||||||||||||
|
(Business Services)
|
Equity Interests | — | 300 | (300 | ) | — | ||||||||||||||||||||
| Warrants | — | — | — | — | ||||||||||||||||||||||
|
Total companies more than 25% owned
|
$ | 25,353 | $ | 1,187,722 | $ | 1,039,191 | ||||||||||||||||||||
|
Companies 5% to 25% Owned
|
||||||||||||||||||||||||||
|
10th Street, LLC
|
Subordinated Debt | $ | 708 | $ | 21,439 | $ | 223 | $ | (5 | ) | $ | 21,657 | ||||||||||||||
|
(Business Services)
|
Equity Interests | 975 | — | (464 | ) | 511 | ||||||||||||||||||||
| Option | 25 | — | — | 25 | ||||||||||||||||||||||
|
Advantage Sales &
|
Subordinated Debt | 2,286 | 135,000 | — | (135,000 | ) | — | |||||||||||||||||||
|
Marketing, Inc.
|
Equity Interests | 5,000 | — | 5,000 | — | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Air Medical Group Holdings LLC
|
Senior Loan | 33 | 3,139 | 5,344 | (6,405 | ) | 2,078 | |||||||||||||||||||
|
(Healthcare Services)
|
Equity Interests | 10,800 | 1,300 | — | 12,100 | |||||||||||||||||||||
|
Alpine ESP Holdings, Inc.
|
Preferred Stock | — | — | — | — | |||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
|
Amerex Group, LLC
|
Subordinated Debt | 1,772 | 8,784 | 1 | — | 8,785 | ||||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | 1,800 | 9,932 | 573 | — | 10,505 | ||||||||||||||||||||
|
BB&T Capital
|
Equity Interests | 11,063 | — | (231 | ) | 10,832 | ||||||||||||||||||||
|
Partners/Windsor
|
||||||||||||||||||||||||||
|
Mezzanine Fund, LLC
|
||||||||||||||||||||||||||
|
(Private Equity Fund)
|
||||||||||||||||||||||||||
|
Becker Underwood, Inc.
|
Subordinated Debt | 425 | 25,502 | 216 | (25,718 | ) | — | |||||||||||||||||||
|
(Industrial Products)
|
Common Stock | 2,267 | 2,748 | (5,015 | ) | — | ||||||||||||||||||||
|
Drew Foam Companies, Inc.
|
Preferred Stock | 512 | — | (78 | ) | 434 | ||||||||||||||||||||
|
(Business Services)
|
Common Stock | — | — | — | — | |||||||||||||||||||||
See related footnotes at the end of
this schedule.
67
|
PRIVATE FINANCE |
Amount of Interest or Dividends |
December 31, |
March 31, |
|||||||||||||||||||||||
|
Portfolio Company |
Credited |
2008 |
Gross |
Gross |
2009 |
|||||||||||||||||||||
| (in thousands) | Investment(1) | to Income(6) | Other(2) | Value | Additions(3) | Reductions(4) | Value | |||||||||||||||||||
|
Driven Brands, Inc.
|
Subordinated Debt | $ | 3,545 | $ | 83,698 | $ | 1,783 | $ | (1,913 | ) | $ | 83,568 | ||||||||||||||
|
(Consumer Services)
|
Common Stock | 4,855 | — | (2,355 | ) | 2,500 | ||||||||||||||||||||
|
Hilden America, Inc.
|
Common Stock | 76 | — | 76 | — | |||||||||||||||||||||
|
(Consumer Products)
|
||||||||||||||||||||||||||
|
Lydall Transport, Ltd.
|
Equity Interests | 345 | 19 | — | 364 | |||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Multi-Ad Services, Inc.
|
Unitranche Debt | 86 | 2,941 | 23 | (493 | ) | 2,471 | |||||||||||||||||||
|
(Business Services)
|
Equity Interests | 1,782 | 403 | — | 2,185 | |||||||||||||||||||||
|
Pendum Acquisition, Inc.
|
— | — | — | — | ||||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Postle Aluminum Company, LLC
|
Senior Loan | — | 34,876 | (21,242 | ) | 13,634 | ||||||||||||||||||||
|
(Industrial Products)
|
Subordinated Debt(5) | — | 23,868 | (23,868 | ) | — | ||||||||||||||||||||
| Equity Interest | — | — | — | — | ||||||||||||||||||||||
|
Progressive International Corporation
|
Preferred Stock | 1,125 | 22 | — | 1,147 | |||||||||||||||||||||
|
(Consumer Products)
|
Common Stock | 4,600 | — | (900 | ) | 3,700 | ||||||||||||||||||||
| Warrants | — | — | — | — | ||||||||||||||||||||||
|
Regency Healthcare Group, LLC
|
Senior Loan | 44 | — | 4,001 | (2,095 | ) | 1,906 | |||||||||||||||||||
|
(Healthcare Services)
|
Unitranche Debt | 305 | 10,825 | 2 | (305 | ) | 10,522 | |||||||||||||||||||
| Equity Interests | 2,050 | — | (95 | ) | 1,955 | |||||||||||||||||||||
|
SGT India Private Limited
|
Common Stock | — | 3 | (3 | ) | — | ||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Soteria Imaging Services, LLC
|
Subordinated Debt | 4,054 | 17 | — | 4,071 | |||||||||||||||||||||
|
(Healthcare Services)
|
Equity Interests | 1,971 | — | (461 | ) | 1,510 | ||||||||||||||||||||
|
Triax Holdings, LLC
|
Subordinated Debt(5) | 132 | — | — | — | — | ||||||||||||||||||||
|
(Consumer Products)
|
Equity Interests | — | — | — | — | |||||||||||||||||||||
|
Universal Environmental
|
Equity Interests | — | — | — | — | |||||||||||||||||||||
|
Services, LLC
|
||||||||||||||||||||||||||
|
(Business Services)
|
||||||||||||||||||||||||||
|
Total companies 5% to 25% owned
|
$ | 11,136 | $ | 352,760 | $ | 196,460 | ||||||||||||||||||||
This schedule should be read in
conjunction with the Company’s 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, 2009. |
| (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, 2009, 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. |
68
| Item 2. | Management’s 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 Company’s Consolidated Financial Statements and the
Notes thereto included herein and in the Company’s annual
report on
Form 10-K
for the year ended December 31, 2008. In addition, this
quarterly report on Form 10-Q contains certain forward-looking
statements. These statements include the plans and objectives of
management for future operations and financial objectives and
can be identified by the use of forward-looking terminology such
as “may,” “will,” “expect,”
“intend,” “anticipate,”
“estimate,” or “continue” or the negative
thereof or other variations thereon or comparable terminology.
These forward-looking statements are subject to the inherent
uncertainties in predicting future results and conditions.
Certain factors that could cause actual results and conditions
to differ materially from those projected in these
forward-looking statements are set forth below in the Risk
Factors section. Other factors that could cause actual results
to differ materially include:
| • | changes in the economy, including economic downturns or recessions; | |
| • | risks associated with possible disruption in our operations due to terrorism; | |
| • | future changes in laws or regulations or changes in accounting principles; 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 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 company’s 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
We are a business development company, or BDC, in the private
equity business and we are internally managed. Specifically, we
primarily invest in private middle market companies in a variety
of industries through long-term debt and equity capital
instruments. Our financing generally is used to fund buyouts,
acquisitions, growth, recapitalizations, note purchases, and
other types of financings. Our investment objective is to
achieve current income and capital gains.
The United States and the global economies continue to operate
in an unprecedented economic recession and the U.S. capital
markets continue to experience volatility and a severe lack of
liquidity. In addition, events of default have occurred and are
continuing under our revolving line of credit and private notes
related to certain financial and other covenants.
See“— Financial Condition, Liquidity and Capital
Resources.” Our strategy in these difficult economic times
has been focused on reducing costs and streamlining our
organization; building liquidity through selected asset sales;
retaining capital by limiting new investment activity and
suspending dividend payments; and working with portfolio
companies to help them position for growth when the economy
recovers.
Our portfolio composition at March 31, 2009 and 2008, and
December 31, 2008, was as follows:
| March 31, | December 31, | ||||||||||||
| 2009 | 2008 | 2008 | |||||||||||
|
Private finance
|
97 | % | 98% | 97% | |||||||||
|
Commercial real estate finance
|
3 | % | 2% | 3% | |||||||||
69
Our earnings primarily depend 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
primarily 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. The level of fee income is primarily related to the
level of new investment activity and the level of fees earned
from portfolio companies and managed funds. The level of
investment activity can vary substantially from period to period
depending on many factors, including the general economic
environment, the amount of debt and equity capital available to
middle market companies, the level of merger and acquisition
activity for such companies, the competitive environment for the
types of investments we make and our ability to secure debt and
equity capital for our investment activities.
In addition to managing our own assets, we manage certain funds
that also invest in the debt and equity securities of primarily
private middle market companies in a variety of industries. At
March 31, 2009, we had eight separate funds under our
management (together, the Managed Funds) for which we may earn
management or other fees for our services. We may invest in the
equity of these funds, along with other third parties, from
which we may earn a current return
and/or a
future incentive allocation. At March 31, 2009, the Managed
Funds had total assets of approximately $3.2 billion. See
“Managed Funds” below for further discussion.
In aggregate, including the total assets on our balance sheet
and assets under management in our Managed Funds, we had
$6.6 billion in managed assets at March 31, 2009.
In addition to the funds we already manage or co-manage, we may
pursue additional managed fund opportunities including the
potential acquisition of asset managers. These potential funds
are focused on all levels of a middle market company’s
capital structure, from senior debt through equity capital. By
growing our privately managed capital base, we seek to diversify
our sources of capital, leverage our core investment expertise
and increase fees and other income from asset management
activities. There can be no assurance that these new fund
raising initiatives will result in additional funds under
management.
PORTFOLIO AND
INVESTMENT ACTIVITY
The total portfolio at value, investment activity, and the yield
on interest-bearing investments at and for the three months
ended March 31, 2009 and 2008, and at and for the year
ended December 31, 2008, were as follows:
|
At and for the |
At and for the |
|||||||||||
|
Three Months Ended |
Year Ended |
|||||||||||
| March 31, | December 31, | |||||||||||
| ($ in millions) | 2009 | 2008 | 2008 | |||||||||
|
Portfolio at value
|
$ | 2,909.1 | $ | 4,635.6 | $ | 3,493.0 | ||||||
|
Investments funded
|
$ | 39.9 | $ | 275.1 | $ | 1,078.2 | ||||||
|
Payment-in-kind interest and dividends, net of cash collections
|
$ | 7.7 | $ | 13.4 | $ | 53.4 | ||||||
|
Principal collections related to investment repayments
or sales(1)
|
$ | 241.8 | $ | 264.8 | $ | 1,037.3 | ||||||
|
Yield on interest-bearing portfolio
investments(2)
|
11.8 | % | 12.3 | % | 12.1 | % | ||||||
| (1) | Principal collections related to investment repayments or sales for the three months ended March 31, 2009, included $132.2 million of cash collections related to notes and other receivables received from the sale of investments in one portfolio company in prior periods. Principal collections related to investment repayments or sales for the three months ended March 31, 2008, and year ended December 31, 2008, included collections of $30.0 million and $216.3 million, respectively, related to the sale of loans to certain of our Managed Funds. |
| (2) | The weighted average yield on interest-bearing investments is computed as the (a) annual stated interest on accruing loans and debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities less the annual amortization of loan origination costs, plus the effective interest yield on the preferred shares/income notes of CLOs, plus the annual stated interest on the subordinated certificates in the Unitranche Fund LLC divided by (b) total interest-bearing investments at value. The weighted average yield is computed as of the balance sheet date. |
70
Private
Finance
The private finance portfolio at value, investment activity, and
the yield on interest bearing investments at and for the three
months ended March 31, 2009 and 2008, and at and for the
year ended December 31, 2008, were as follows:
|
At and for |
At and for the |
|||||||||||||||||||||||
| Three Months Ended March 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | ||||||||||||||||||
|
Portfolio at value:
|
||||||||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 289.1 | 5.9% | $ | 325.7 | 7.0% | $ | 306.3 | 5.6% | |||||||||||||||
|
Unitranche debt
|
403.8 | 12.1% | 655.7 | 11.8% | 456.4 | 12.0% | ||||||||||||||||||
|
Subordinated debt
|
1,492.7 | 13.5% | 2,430.4 | 13.0% | 1,829.1 | 12.9% | ||||||||||||||||||
|
Total loans and debt securities
|
2,185.6 | 12.3% | 3,411.8 | 12.2% | 2,591.8 | 11.9% | ||||||||||||||||||
|
Equity securities:
|
||||||||||||||||||||||||
|
Preferred shares/income notes of
CLOs(2)
|
104.4 | 8.0% | 197.4 | 15.8% | 179.2 | 16.4% | ||||||||||||||||||
|
Subordinated certificates in Unitranche
Fund LLC(2)
|
124.5 | 9.2% | 31.5 | 12.4% | 125.4 | 12.0% | ||||||||||||||||||
|
Other equity securities
|
415.5 | 879.1 | 502.7 | |||||||||||||||||||||
|
Total equity securities
|
644.4 | 1,108.0 | 807.3 | |||||||||||||||||||||
|
Total portfolio
|
$ | 2,830.0 | $ | 4,519.8 | $ | 3,399.1 | ||||||||||||||||||
|
Investments funded
|
$ | 38.9 | (4) | $ | 274.6 | $ | 1,068.1 | |||||||||||||||||
|
Payment-in-kind interest and dividends, net of cash collections
|
$ | 7.7 | $ | 13.2 | $ | 53.2 | ||||||||||||||||||
|
Principal collections related to investment repayments or
sales(3)
|
$ | 240.7 | $ | 256.4 | $ | 1,020.5 | ||||||||||||||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities 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 on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs at value. The weighted average yield on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest divided by (b) total investment at value. The weighted average yields are computed as of the balance sheet date. |
| (2) | Investments in the preferred shares/income notes of CLOs and the subordinated certificates in the Unitranche Fund LLC earn a current return that is included in interest income in the consolidated statement of operations. |
| (3) | Includes $132.2 million of cash collections during the three months ended March 31, 2009, related to notes and other receivables received from the sale of investments in prior periods. Also includes collections from the sale or repayment of senior loans totaling $25.2 million, $48.6 million, and $285.3 million for the three months ended March 31, 2009 and 2008, and for the year ended December 31, 2008, respectively. |
| (4) | Includes $20.5 million funded under pre-existing commitments under revolving lines of credit. During the three months ended March 31, 2009, a total of $15.8 million was repaid under these arrangements, which is included in principal collections related to investment repayments or sales. |
Our private finance portfolio primarily is composed of debt and
equity investments. Debt investments include senior loans,
unitranche debt (an instrument that combines both senior and
subordinated financing, generally in a first lien position), or
subordinated debt (with or without equity features). The junior
debt that we have in the portfolio is lower in repayment
priority than senior debt and is also known as mezzanine debt.
Our portfolio contains equity investments for a minority equity
stake in portfolio companies and includes equity features such
as nominal cost warrants received in conjunction with our debt
investments. In a buyout transaction, we generally invest in
senior
and/or
subordinated debt and equity (preferred
and/or
voting or non-voting common) where our equity ownership
represents a significant portion of the equity, but may or may
not represent a controlling interest.
71
Investment Activity. Investments funded
and the weighted average yield on interest-bearing investments
funded for the three months ended March 31, 2009 and 2008,
and for the year ended December 31, 2008, consisted of the
following:
| For the Three Months Ended March 31, 2009 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 20.4 | 7.0% | $ | 8.3 | 8.0% | $ | 28.7 | 7.3% | |||||||||||||||
|
Total loans and debt securities
|
20.4 | 7.0% | 8.3 | 8.0% | 28.7 | 7.3% | ||||||||||||||||||
|
Equity
|
3.9 | 6.3 | 10.2 | |||||||||||||||||||||
|
Total
|
$ | 24.3 | $ | 14.6 | $ | 38.9 | ||||||||||||||||||
| For the Three Months Ended March 31, 2008 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 26.8 | 7.4% | $ | 10.4 | 6.7% | $ | 37.2 | 7.2% | |||||||||||||||
|
Unitranche
debt(2)
|
4.5 | 10.3% | 0.5 | 6.6% | 5.0 | 9.9% | ||||||||||||||||||
|
Subordinated debt
|
129.9 | (3) | 12.0% | 31.3 | 14.2% | 161.2 | 12.4% | |||||||||||||||||
|
Total loans and debt securities
|
161.2 | 11.2% | 42.2 | 12.3% | 203.4 | 11.4% | ||||||||||||||||||
|
Preferred shares/income notes of
CLOs(4)
|
3.0 | 27.6% | — | 3.0 | 27.6% | |||||||||||||||||||
|
Subordinated certificates in Unitranche Fund LLC
|
30.7 | 12.4% | — | 30.7 | 12.4% | |||||||||||||||||||
|
Equity
|
13.6 | 23.9 | 37.5 | |||||||||||||||||||||
|
Total
|
$ | 208.5 | $ | 66.1 | $ | 274.6 | ||||||||||||||||||
| For the Year Ended December 31, 2008 | ||||||||||||||||||||||||
| Debt Investments | Buyout Investments | Total | ||||||||||||||||||||||
|
Weighted |
Weighted |
Weighted |
||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||
| ($ in millions) | Amount | Yield(1) | Amount | Yield(1) | Amount | Yield(1) | ||||||||||||||||||
|
Loans and debt securities:
|
||||||||||||||||||||||||
|
Senior loans
|
$ | 175.9 | 7.4% | $ | 13.9 | 5.4 | % | $ | 189.8 | 7.2 | % | |||||||||||||
|
Senior secured loan to Ciena Capital LLC
|
— | 319.0 | 0.0 | %(5) | 319.0 | 0.0 | %(5) | |||||||||||||||||
|
Unitranche
debt(2)
|
15.3 | 10.5% | 0.5 | 6.6 | % | 15.8 | 10.4 | % | ||||||||||||||||
|
Subordinated debt
|
246.4 | (3) | 12.6% | 54.8 | 15.4 | % | 301.2 | 13.1 | % | |||||||||||||||
|
Total loans and debt securities
|
437.6 | 10.4% | 388.2 | 2.4 | % | 825.8 | 6.6 | %(6) | ||||||||||||||||
|
Preferred shares/income notes of
CLOs(4)
|
35.6 | 18.6% | — | 35.6 | 18.6 | % | ||||||||||||||||||
|
Subordinated certificates in Unitranche Fund LLC
|
124.7 | 10.9% | — | 124.7 | 10.9 | % | ||||||||||||||||||
|
Equity
|
40.5 | 41.5 | 82.0 | |||||||||||||||||||||
|
Total
|
$ | 638.4 | $ | 429.7 | $ | 1,068.1 | ||||||||||||||||||
| (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. The weighted average yield on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs funded. The weighted average yield on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest divided by (b) total investment at value. The weighted average yield is calculated using yields as of the date an investment is funded. |
| (2) | Unitranche debt is an investment that combines both senior and subordinated financing, generally in a first lien position. The yield on a unitranche investment reflects the blended yield of senior and subordinated debt. |
| (3) | Subordinated debt investments for the three months ended March 31, 2008, and year ended December 31, 2008, included $2.0 million and $43.8 million, respectively, in investments in the bonds of collateralized loan obligations (CLOs). Certain of these CLOs are managed by Callidus Capital Corporation (Callidus), a portfolio company controlled by us. These CLOs primarily invest in senior corporate loans. |
| (4) | CLO equity investments included preferred shares/income notes of CLOs that primarily invest in senior corporate loans. Certain of these CLOs are managed by us or by Callidus. |
| (5) | The senior secured loan to Ciena Capital LLC was acquired on September 30, 2008, and was placed on non-accrual status on the purchase date. |
| (6) | Excluding the senior secured loan to Ciena, the weighted average yield on new investments for the year ended December 31, 2008 was 10.8%. |
72
For the three months ended March 31, 2009, we made private
finance investments totaling $38.9 million. Investments in
the first quarter arose primarily from fundings under
pre-existing investment commitments, including fundings under
revolving line of credit instruments.
Historically, our focus for investments generally has been on
higher return junior debt capital investments. Senior loans
funded by us generally were funded with the intent to sell the
loan or for the portfolio company to refinance the loan at some
point in the future as discussed below. We have made fewer
direct unitranche debt investments since the establishment of
the Unitranche Fund LLC (Unitranche Fund) in the fourth
quarter of 2007. Unitranche loans sourced by us generally are
referred to the Unitranche Fund. Since its inception, we have
invested $125.4 million in the Unitranche Fund, which
supported its closing of investments totaling
$789.3 million. The 9.2% yield on the subordinated
certificates in the Unitranche Fund at March 31, 2009,
represents the contractual coupon on the subordinated
certificates and excludes any return from potential future
excess cash flows from portfolio earnings available to the
subordinated certificate holders and from related structuring
fees and management and sourcing fees. See “Managed
Funds” below.
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.
We may underwrite or arrange senior loans related to our
portfolio investments or for other companies that are not in our
portfolio. When we underwrite or arrange senior loans, we may
earn a fee for such activities. Senior loans underwritten or
arranged by us may 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 the Managed Funds or
funds managed by Callidus Capital Corporation (Callidus), a
portfolio company controlled by us. After completing loan sales,
we may retain a position in these senior loans. We generally
earn a fee on the senior loans we underwrite or arrange whether
or not we fund the underwritten commitment. 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.
We have focused our efforts on selling assets in our portfolio
to generate capital. Principal collections related to private
finance investment repayments or sales were $240.7 million
for the three months ended March 31, 2009, including
$132.2 million of cash collections related to notes and
other receivables received from the sale of investments in one
portfolio company in prior periods. Principal collections
include repayments of senior debt funded by us that was
subsequently sold by us or refinanced or repaid by the portfolio
companies.
73
Outstanding Investment Commitments. At
March 31, 2009, we had outstanding private finance
investment commitments as follows:
|
Companies |
Companies |
|||||||||||||||
|
More Than |
Companies 5% |
Less Than |
||||||||||||||
| ($ in millions) | 25% Owned(1) | to 25% Owned | 5% Owned | Total | ||||||||||||
|
Senior loans
|
$ | 11.2 | $ | 11.8 | $ | 84.8 | $ | 107.8 | (2) | |||||||
|
Unitranche debt
|
3.0 | — | 15.6 | 18.6 | ||||||||||||
|
Subordinated debt
|
19.5 | 4.3 | 3.0 | 26.8 | ||||||||||||
|
Total loans and debt securities
|
33.7 | 16.1 | 103.4 | 153.2 | ||||||||||||
|
Unitranche Fund
|
399.6 | — | — | 399.6 | ||||||||||||
|
Equity securities
|
20.2 | 10.3 | 36.0 | 66.5 | (3) | |||||||||||
|
Total
|
$ | 453.5 | $ | 26.4 | $ | 139.4 | $ | 619.3 | ||||||||
| (1) | Includes a $4.0 million revolving line of credit commitment for working capital to Callidus Capital Corporation (Callidus), a portfolio company controlled by us, which owns 100% of Callidus Capital Management, LLC, an asset management company that structures and manages collateralized loan obligations (CLOs), collateralized debt obligations (CDOs), and other related investments. | |
| (2) | Includes $105.1 million in the form of revolving senior debt facilities to 27 companies. | |
| (3) | Includes $45.2 million to 11 private equity and venture capital funds, including $3.3 million in co-investment commitments to one private equity fund. These fund commitments are generally drawn over a multi-year period of time as the funds make investments. |
Total commitments were $619.3 million at March 31,
2009, which included $399.6 million in commitments to the
Unitranche Fund (see “Managed Funds”). Investments
made by the Unitranche Fund must be approved by the investment
committee of the Unitranche Fund, which includes a
representative from us and GE. Therefore, our commitment to the
Unitranche Fund cannot be drawn without our approval.
In addition to these outstanding investment commitments at
March 31, 2009, we also had commitments to private finance
portfolio companies in the form of standby letters of credit and
guarantees. See “Financial Condition, Liquidity and Capital
Resources” below. We intend to fund these commitments with
existing cash and through cash flows from operations before new
investments, although there can be no assurance that we will
generate sufficient cash flows to satisfy these commitments.
Investments in Collateralized Loan Obligations and
Collateralized Debt Obligations (CLO/CDO
Assets). At both March 31, 2009, and
December 31, 2008, we had investments in CLO issuances and
a CDO bond, which totaled as follows:
| 2009 | 2008 | |||||||||||||||||||||||
| ($ in millions) | Cost | Value | Yield(1) | Cost | Value | Yield(1) | ||||||||||||||||||
|
CLO/CDO
bonds(2)
|
$ | 128.0 | $ | 81.9 | 12.9% | $ | 127.7 | $ | 86.1 | 18.5% | ||||||||||||||
|
Preferred shares/income notes of CLOs
|
250.4 | 104.4 | 7.9% | 248.2 | 179.2 | 16.4% | ||||||||||||||||||
|
Total
|
$ | 378.4 | $ | 186.3 | $ | 375.9 | $ | 265.3 | ||||||||||||||||
|
Percentage of total assets
|
5.5% | 7.1% | ||||||||||||||||||||||
| (1) | The weighted average yield is calculated as the (a) annual stated interest or the effective interest yield on the accruing bonds or the effective interest yield on the preferred shares/income notes, divided by (b) CLO and CDO assets at value. The market yield used in the valuation of the CLO and CDO assets may be different than the interest yields shown above. See discussion below. |
| (2) | Included in private finance subordinated debt. |
The CLO and CDO issuances in which we have invested are
primarily invested in senior corporate loans. Certain of these
funds are managed by Callidus, and certain of these funds are
managed by us. See also Note 3, “Portfolio” from
our Notes to the Consolidated Financial Statements included in
Item 1.
74
The initial yields on the cost basis of the CLO preferred shares
and income notes are based on the estimated future cash flows
expected to be paid to these CLO classes from the underlying
collateral assets. As each CLO preferred share or income note
ages, the estimated future cash flows are updated based on the
estimated performance of the underlying collateral assets, and
the respective yield on the cost basis 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.
The CLO/CDO Assets in which we have 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 generally is
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 both March 31, 2009, and
December 31, 2008, the face value of the CLO/CDO Assets
held by us was subordinate to as much as 94% of the face value
of the securities outstanding in these CLOs and CDO.
At March 31, 2009, and December 31, 2008, the
underlying collateral assets of these CLO and CDO issuances,
consisting primarily of senior corporate loans, were issued by
646 issuers and 658 issuers, respectively, and had
balances as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Bonds
|
$ | 240.7 | $ | 268.3 | ||||
|
Syndicated loans
|
4,428.8 | 4,477.3 | ||||||
|
Cash(1)
|
130.6 | 89.6 | ||||||
|
Total underlying collateral assets at
cost(2)
|
$ | 4,800.1 | $ | 4,835.2 | ||||
| (1) | Includes undrawn liability amounts. | |
| (2) | At March 31, 2009, and December 31, 2008, the total cost basis of defaulted obligations was $134.0 million and $95.0 million, respectively, or approximately 2.8% and 2.0%, respectively, of the total underlying collateral assets. |
Throughout 2008, market yields for CLO securities increased. As
the market yields for our investments in CLO preferred
shares/income notes increased throughout 2008, the fair value of
certain of our investments in these assets decreased. At
March 31, 2009, the market yield used to value our
preferred shares/income notes was 27.5%. Ratings agencies have
continued to downgrade the underlying collateral in these types
of structures regardless of the payment status of the loan or
debt security. In the current economic environment, we expect
ratings downgrades, defaults and losses to continue to increase,
and we have also considered this in our valuation analysis. Net
change in unrealized appreciation or depreciation for the three
months ended March 31, 2009, included a net decrease of
$82.5 million related to our investments in CLO/CDO Assets.
We received third-party valuation assistance for our investments
in the CLO/CDO Assets in each quarter of 2008 and in the first
quarter of 2009. See “Results of
Operations — Valuation Methodology — Private
Finance” below for further discussion of the third-party
valuation assistance we received.
As the debt capital markets show significant volatility, yield
spreads may widen further. As a result, if the market yields for
our investments in CLOs continue to increase, or should the
performance of the underlying assets in the CLOs decrease or
additional ratings downgrades occur, the fair value of our
investments may decrease further.
Ciena Capital LLC. Ciena Capital LLC
(Ciena) has provided loans to commercial real estate owners and
operators. Ciena has been a participant in the SBA’s 7(a)
Guaranteed Loan Program, and its wholly-owned subsidiary is
licensed by the SBA as a Small Business Lending Company (SBLC).
Ciena remains subject to SBA rules and regulations. Ciena is
headquartered in New York, NY.
On September 30, 2008, Ciena voluntarily filed for
bankruptcy protection under Chapter 11 of Title 11 of
the United States Code (the Bankruptcy Code) in the United
States Bankruptcy Court for the Southern District of
75
New York (the Court). Ciena continues to operate its
servicing business and manage its assets as a
“debtor-in-possession”
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and the orders of
the Court.
At March 31, 2009 and December 31, 2008, our
investment in Ciena was as follows:
| March 31, 2009 | December 31, 2008 | |||||||||||||||
| ($ in millions) | Cost | Value | Cost | Value | ||||||||||||
|
Senior Loan
|
$ | 319.0 | $ | 64.1 | $ | 319.0 | $ | 104.9 | ||||||||
|
Class B Equity
Interests(1)
|
119.5 | — | 119.5 | — | ||||||||||||
|
Class C Equity
Interests(1)
|
112.6 | — | 109.3 | — | ||||||||||||
|
Total
|
$ | 551.1 | $ | 64.1 | $ | 547.8 | $ | 104.9 | ||||||||
| (1) | At March 31, 2009 and December 31, 2008, we held 100% of the Class B equity interests and 94.9% of the Class C equity interests. |
At March 31, 2009 and December 31, 2008, other assets
includes amounts receivable from or related to Ciena totaling
$15.5 million and $15.4 million, respectively, at cost
and $2.1 million and $2.1 million at value,
respectively. Net change in unrealized appreciation or
depreciation included a net decrease in our investment in Ciena
of $44.1 million and $39.3 million for the three
months ended March 31, 2009 and 2008, respectively.
In addition, at March 31, 2009, we had standby letters of
credit issued under our line of credit of $94.1 million in
connection with term securitization transactions completed by
Ciena. The term securitizations have experienced increasing
defaults as a result of the economic environment, which may
require us to fund a portion of the standby letters of credit in
2009. Our asset coverage ratio is currently less than 200% and
we currently are in default under our revolving line of credit.
In addition, the financial institution that has issued these
letters of credit has experienced a ratings downgrade. As a
result, we may need to use cash to provide credit enhancement to
these term securitizations if these letters of credit cannot be
maintained through our revolving credit facility or if the
issuer of these letters of credit is further downgraded. During
the three months ended March 31, 2009, we contributed
$3.3 million to Ciena in exchange for additional
Class C equity interests, which was used to support
Ciena’s term securitizations in lieu of a draw under the
letters of credit. This investment was required as a result of
the downgrade of the issuer of the letters of credit. We have
considered any funding under the letters of credit in the
valuation of Ciena at March 31, 2009 and December 31,
2008.
As a result of Ciena’s decision to file for bankruptcy
protection, our unconditional guaranty of the obligations
outstanding under Ciena’s revolving credit facility became
due. As of March 31, 2009, the senior secured loan to Ciena
had a cost basis of $319.0 million and a value of
$64.1 million. We continue to guarantee the remaining
principal balance of $5 million, plus related interest,
fees and expenses payable to a third party bank. In connection
with our continuing guaranty of the amounts held by this bank,
we have agreed that the amounts owing to the bank under the
Ciena revolving credit facility will be paid before any of the
secured obligations of Ciena now owed to us.
Our investment in Ciena was on non-accrual status, therefore we
did not earn any interest and related portfolio income from our
investment in Ciena for the three months ended March 31,
2009 and 2008.
At March 31, 2009, Ciena had two non-recourse
securitization warehouse facilities, both of which have matured.
In order to pay down debt under the conventional loan warehouse
facility, Ciena is in the process of selling loans on behalf of
the conventional loan warehouse facility providers. Ciena is
also working with the providers of the SBA loan warehouse
facility with regard to the repayment of that facility. We have
issued performance guaranties whereby we agreed to indemnify the
warehouse providers for any damages, losses, liabilities and
related costs and expenses that they may incur as a result of
Ciena’s failure to perform any of its obligations as loan
originator, loan seller or loan servicer under the warehouse
securitizations.
The Office of the Inspector General of the SBA (OIG) and the
United States Secret Service are conducting ongoing
investigations of allegedly fraudulently obtained SBA guaranteed
loans issued by Ciena. Ciena also is subject to other SBA and
OIG audits, investigations, and reviews. In addition, the Office
of the Inspector General of the U.S. Department of
Agriculture is conducting an investigation of Ciena’s
lending practices under the Business and Industry Loan
(B&I) program. The OIG and the U.S. Department of
Justice are also conducting a civil investigation of
Ciena’s lending
76
practices in various jurisdictions. We are unable to predict the
outcome of these inquiries, and it is possible that third
parties could try to seek to impose liability against us in
connection with certain defaulted loans in Ciena’s
portfolio. These investigations, audits and reviews are ongoing.
These investigations, audits, reviews, and litigation have had
and may continue to have a material adverse impact on Ciena and,
as a result, could continue to negatively affect our financial
results. We have considered Ciena’s voluntary filing for
bankruptcy protection, any funding under the letters of credit,
current regulatory issues, ongoing investigations and litigation
in performing the valuation of Ciena at March 31, 2009 and
December 31, 2008.
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,
2009 and 2008, and at and for the year ended December 31,
2008, were as follows:
|
At and for the |
||||||||||||||||||||||||
|
At and for the |
Year Ended |
|||||||||||||||||||||||
| Three Months Ended March 31, | December 31, | |||||||||||||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | Value | Yield(1) | ||||||||||||||||||
|
Portfolio at value:
|
||||||||||||||||||||||||
|
Commercial mortgage loans
|
$ | 53.9 | 6.7% | $ | 53.5 | 7.9% | $ | 53.5 | 7.4% | |||||||||||||||
|
Real estate owned
|
7.8 | 30.2 | 20.8 | |||||||||||||||||||||
|
Equity interests
|
17.3 | 32.1 | 19.6 | |||||||||||||||||||||
|
Total portfolio
|
$ | 79.0 | $ | 115.8 | $ | 93.9 | ||||||||||||||||||
|
Investments funded
|
$ | 1.1 | $ | 0.5 | $ | 10.1 | ||||||||||||||||||
|
Payment-in-kind interest, net of cash collections
|
$ | — | $ | 0.2 | $ | 0.2 | ||||||||||||||||||
|
Principal collections related to investment repayments or sales
|
$ | 1.1 | $ | 8.4 | $ | 16.8 | ||||||||||||||||||
| (1) | The weighted average yield on the interest-bearing investments is computed as the (a) annual stated interest on accruing loans 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. |
At March 31, 2009, we had outstanding funding commitments
related to the commercial real estate portfolio of
$32.3 million, and commitments in the form of standby
letters of credit and guarantees related to equity interests of
$7.5 million.
Managed
Funds
In addition to managing our own assets, we manage certain funds
that also invest in the debt and equity securities of primarily
private middle market companies in a variety of industries. At
March 31, 2009, we had eight separate funds under our
management (together, the Managed Funds) for which we may earn
management or other fees for our services. We may invest in the
equity of these funds, along with other third parties, from
which we may earn a current return
and/or a
future incentive allocation.
On March 3, 2009, we announced the completion of the
acquisition of the management contracts of three middle market
senior debt CLOs (together, the Emporia Funds) and certain other
related assets for approximately $11 million (subject to
post-closing adjustments). The acquired assets are included in
other assets in the accompanying consolidated balance sheet and
will be amortized over the life of the contracts. The Emporia
Funds primarily invest in middle market and broadly syndicated
senior secured loans. We are not an investor in the Emporia
Funds.
77
The assets of the Managed Funds at March 31, 2009 and
December 31, 2008, and our management fees as of
March 31, 2009 were as follows:
| Assets of Managed Funds | ||||||||||||
|
($ in millions) |
March 31, |
December 31, |
Management |
|||||||||
|
Name of Fund
|
2009 | 2008 | Fee(2) | |||||||||
|
Unitranche Fund LLC
|
$ | 781.3 | $ | 789.8 | 0.375 | % | ||||||
|
Allied Capital Senior Debt Fund, L.P.
|
397.7 | 412.9 | 1.625 | %(1)(2) | ||||||||
|
Knightsbridge CLO
2007-1
Ltd.
|
502.0 | 500.6 | 0.600 | % | ||||||||
|
Knightsbridge CLO
2008-1
Ltd.
|
304.6 | 304.8 | 0.600 | % | ||||||||
|
AGILE Fund I, LLC
|
83.2 | 99.3 | — | (1) | ||||||||
|
Emporia Preferred Funding I, Ltd.
|
414.2 | — | 0.625 | %(1) | ||||||||
|
Emporia Preferred Funding II, Ltd.
|
352.5 | — | 0.650 | %(1) | ||||||||
|
Emporia Preferred Funding III, Ltd.
|
406.2 | — | 0.650 | %(1) | ||||||||
|
Total Assets
|
$ | 3,241.7 | $ | 2,107.4 | ||||||||
| (1) | In addition to the management fees, we are entitled to an incentive allocation subject to certain performance benchmarks. There can be no assurance that the incentive allocation will be earned. |
| (2) | Management fees are stated as a percent of assets except for the Allied Capital Senior Debt Fund, L.P. (“ACSDF”) which is stated as a percent of equity capital. The management fee paid by ACSDF was 2.000% at December 31, 2008 and reduced to 1.625% effective January 1, 2009. |
A portion of the management fees earned by us may be deferred
under certain circumstances. Collection of the fees earned is
dependent in part on the performance of the fund. We may pay a
portion of management fees we receive to Callidus Capital
Corporation, a portfolio investment controlled by us, for
services provided as special manager to the Allied Capital
Senior Debt Fund, L.P., Knightsbridge CLO
2007-1 Ltd.,
Knightsbridge CLO
2008-1 Ltd.
and the Emporia Funds.
Our responsibilities to the Managed Funds may include investment
origination, underwriting, and portfolio monitoring services.
Each of the Managed Funds may separately invest in the debt or
equity of companies in our portfolio, and these investments may
be senior, pari passu or junior to the debt and equity
investments held by us. We may or may not participate in
investments made by the Managed Funds. We intend to grow our
managed capital base over time. By growing our privately managed
capital base, we seek to diversify our sources of capital,
leverage our core investment expertise and increase fees and
other income from asset management activities.
During the three months ended March 31, 2009, we did not
sell any assets to the funds. During the three months ended
March 31, 2008, we sold $166.7 million of assets to
the AGILE Fund I, LLC, for which we recognized a realized
gain of $8.8 million and dividend income of
$5.4 million.
In addition to managing these funds, we hold certain investments
in the Managed Funds as follows:
|
($ in millions) |
March 31, 2009 | December 31, 2008 | ||||||||||||||||
| Name of Fund | Investment Description | Cost | Value | Cost | Value | |||||||||||||
|
Unitranche
Fund LLC(1)
|
Subordinated Certificates and Equity Interests | $ | 124.5 | $ | 124.5 | $ | 125.4 | $ | 125.4 | |||||||||
|
Allied Capital Senior Debt Fund, L.P.
|
Equity interests | 31.8 | 32.9 | 31.8 | 31.8 | |||||||||||||
|
Knightsbridge CLO
2007-1 Ltd.
|
Class E Notes and Income Notes | 60.4 | 35.4 | 59.6 | 50.1 | |||||||||||||
|
Knightsbridge CLO
2008-1 Ltd.
|
Class C Notes, Class D Notes, Class E Notes and Income Notes | 52.3 | 47.9 | 52.7 | 52.7 | |||||||||||||
|
AGILE Fund I, LLC
|
Equity Interests | 0.7 | 0.4 | 0.7 | 0.5 | |||||||||||||
|
Total
|
$ | 269.7 | $ | 241.1 | $ | 270.2 | $ | 260.5 | ||||||||||
| (1) | We have committed up to $525.0 million of subordinated certificates to the Unitranche Fund. The Unitranche Fund will be capitalized as investment transactions are completed. Investments made by the Unitranche Fund must be approved by the investment committee of the Unitranche Fund, which includes a representative from us. Therefore, our commitment to the Unitranche Fund cannot be drawn without our approval. |
78
PORTFOLIO ASSET
QUALITY
Loans and Debt Securities on Non-Accrual
Status. In general, interest is not accrued
on loans and debt securities if we have doubt about interest
collection or where the enterprise value of the portfolio
company may not support further accrual. In addition, interest
may not accrue on loans to portfolio companies that are more
than 50% owned by us depending on such company’s capital
requirements. To the extent interest payments are received on a
loan that is not accruing interest, we may use such payments to
reduce our cost basis in the investment in lieu of recognizing
interest income.
At March 31, 2009, and December 31, 2008, loans and
debt securities at value not accruing interest for the total
investment portfolio were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Private finance
|
||||||||
|
Companies more than 25% owned
|
$134.5 | $176.1 | ||||||
|
Companies 5% to 25% owned
|
13.6 | — | ||||||
|
Companies less than 5% owned
|
69.3 | 151.8 | ||||||
|
Commercial real estate finance
|
11.0 | 7.7 | ||||||
|
Total
|
$228.4 | $335.6 | ||||||
|
Percentage of total portfolio
|
7.9 | % | 9.6 | % | ||||
At March 31, 2009 and December 31, 2008, private finance
non-accruals included our senior secured debt in Ciena, which
was $64.1 million or 2.2% and $104.9 million or 3.0%,
respectively of the total portfolio at value. The Ciena senior
secured loan was acquired in the third quarter of 2008 and was
placed on nonaccrual status upon its purchase. See
“— Private Finance — Ciena Capital
LLC” above. During the quarter ended March 31, 2009, we
placed certain interest bearing investments in six portfolio
companies on non-accrual; however, non-accruals decreased
primarily due to depreciation.
Loans and Debt Securities Over 90 Days
Delinquent. Loans and debt securities greater
than 90 days delinquent at value at March 31, 2009,
and December 31, 2008, were as follows:
| ($ in millions) |
2009
|
2008
|
||||||
|
Private finance
|
$ | 65.8 | $106.6 | |||||
|
Commercial mortgage loans
|
1.4 | 1.4 | ||||||
|
Total
|
$ | 67.2 | $108.0 | |||||
|
Percentage of total portfolio
|
2.3 | % | 3.1 | % | ||||
At March 31, 2009 and December 31, 2008, private
finance loans and debt securities over 90 days delinquent
included our senior secured debt in Ciena, which was
$64.1 million or 2.2% and $104.9 million or 3.0%,
respectively of the total portfolio at value. The Ciena senior
secured loan was acquired in the third quarter of 2008 and was
placed on nonaccrual status upon its purchase. See
“— Private Finance — Ciena Capital
LLC” above.
The amount of the portfolio that is on non-accrual status or
greater than 90 days delinquent may vary from period to
period. Loans and debt securities on non-accrual status and over
90 days delinquent should not be added together as they are
two separate measures of portfolio asset quality. Loans and debt
securities that are in both categories (i.e., on non-accrual
status and over 90 days delinquent) totaled
$67.2 million and $108.0 million at March 31,
2009, and December 31, 2008, respectively. Our assets on
non-accrual are higher than our loans over 90 days
delinquent primarily due to the effect of
payment-in-kind
interest. Loans with
payment-in-kind
interest experience no payment delinquency, but collection of
that
payment-in-kind
interest in the future may be doubtful and we may determine that
the loan should be placed on non-accrual. Given the severity of
this economic recession, we would expect that non-accruals and
loans over 90 days delinquent may increase in the future.
79
RESULTS OF
OPERATIONS
Comparison of the
Three Months Ended March 31, 2009 and 2008
The following table summarizes our operating results for the
three months ended March 31, 2009 and 2008.
|
For the Three Months |
||||||||||||||||
| Ended March 31, |
Percent |
|||||||||||||||
| (in thousands, except per share amounts) | 2009 | 2008 | Change | Change | ||||||||||||
|
(unaudited) |
||||||||||||||||
| Interest and Related Portfolio Income | ||||||||||||||||
|
Interest and dividends
|
$ | 88,730 | $ | 134,660 | $ | (45,930 | ) | (34 | )% | |||||||
|
Fees and other income
|
6,452 | 10,284 | (3,832 | ) | (37 | )% | ||||||||||
|
Total interest and related portfolio income
|
95,182 | 144,944 | (49,762 | ) | (34 | )% | ||||||||||
|
Expenses
|
||||||||||||||||
|
Interest
|
43,485 | 37,560 | 5,925 | 16 | % | |||||||||||
|
Employee
|
11,070 | 22,652 | (11,582 | ) | (51 | )% | ||||||||||
|
Employee stock options
|
773 | 4,195 | (1,994 | ) | (82 | )% | ||||||||||
|
Administrative
|
9,845 | 9,019 | 826 | 9 | % | |||||||||||
|
Impairment of long-lived asset
|
2,873 | — | 2,873 | * | ||||||||||||
|
Total operating expenses
|
68,046 | 73,426 | (5,380 | ) | (8 | )% | ||||||||||
|
Gain on repurchase of debt
|
1,995 | — | 1,995 | * | ||||||||||||
|
Net investment income before income taxes
|
29,131 | 71,518 | (42,387 | ) | (59 | )% | ||||||||||
|
Income tax expense (benefit), including excise tax
|
(378 | ) | 1,969 | (2,347 | ) | (119 | )% | |||||||||
|
Net investment income
|
29,509 | 69,549 | (40,040 | ) | (58 | )% | ||||||||||
|
Net Realized and Unrealized Gains (Losses)
|
||||||||||||||||
|
Net realized gains (losses)
|
(27,109 | ) | 3,143 | (30,252 | ) | |||||||||||
|
Net change in unrealized appreciation or depreciation
|
(350,070 | ) | (113,404 | ) | (236,666 | ) | ||||||||||
|
Total net gains (losses)
|
(377,179 | ) | (110,261 | ) | (266,918 | ) | ||||||||||
|
Net income (loss)
|
$ | (347,670 | ) | $ | (40,712 | ) | $ | (309,958 | ) | (754 | )% | |||||
|
Diluted earnings (loss) per common share
|
$ | (1.95 | ) | $ | (0.25 | ) | $ | (1.70 | ) | (680 | )% | |||||
|
Weighted average common shares outstanding — diluted
|
178,692 | 161,507 | 17,185 | 11 | % | |||||||||||
| * | Comparisons may not be meaningful. Net change in unrealized appreciation or depreciation and net gains (losses) can fluctuate significantly from period to period. |
80
Interest and Related Portfolio Income. Interest
and related portfolio income includes interest and dividend
income and fees and other income.
Interest and Dividends. Interest and dividend income for
the three months ended March 31, 2009 and 2008, was
composed of the following:
| ($ in millions) | 2009 | 2008 | ||||
|
Interest
|
||||||
|
Private finance loans and debt securities
|
$ | 70.8 | $ | 107.0 | ||
|
Preferred shares/income notes of CLOs
|
9.6 | 7.5 | ||||
|
Subordinated certificates in Unitranche Fund LLC
|
2.9 | 0.3 | ||||
|
Commercial mortgage loans
|
0.9 | 1.2 | ||||
|
Cash, U.S. Treasury bills, money market and other securities
|
0.0 | 1.8 | ||||
|
Total interest
|
84.2 | 117.8 | ||||
|
Dividends
|
4.5 | 16.9 | ||||
|
Total interest and dividends
|
$ | 88.7 | $ | 134.7 | ||
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
interest-bearing investments in the portfolio at value and the
yield on the interest-bearing investments in the portfolio at
March 31, 2009 and 2008, were as follows:
| 2009 | 2008 | |||||||||||||
| ($ in millions) | Value | Yield(1) | Value | Yield(1) | ||||||||||
|
Private finance:
|
||||||||||||||
|
Loans and debt securities:
|
||||||||||||||
|
Senior loans
|
$ | 289.1 | 5.9 | % | $ | 325.7 | 7.0 | % | ||||||
|
Unitranche debt
|
403.8 | 12.1 | % | 655.7 | 11.8 | % | ||||||||
|
Subordinated debt
|
1,492.7 | 13.5 | % | 2,430.4 | 13.0 | % | ||||||||
|
Equity securities:
|
||||||||||||||
|
Preferred shares/income notes of CLOs
|
104.4 | 8.0 | % | 197.4 | 15.8 | % | ||||||||
|
Subordinated certificates in Unitranche Fund LLC
|
124.5 | 9.2 | % | 31.5 | 12.4 | % | ||||||||
|
Commercial real estate:
|
||||||||||||||
|
Commercial Mortgage loans
|
53.9 | 6.7 | % | 53.5 | 7.9 | % | ||||||||
|
Total interest-bearing investments
|
$ | 2,468.4 | 11.8 | % | $ | 3,694.2 | 12.3 | % | ||||||
| (1) | The weighted average yield on loans and debt securities is computed as the (a) annual stated interest on accruing loans and debt securities 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 interest-bearing investments at value. The weighted average yield on the preferred shares/income notes of CLOs is calculated as the (a) effective interest yield on the preferred shares/income notes of CLOs, divided by (b) preferred shares/income notes of CLOs at value. The weighted average yield on the subordinated certificates in the Unitranche Fund LLC is computed as the (a) annual stated interest rate divided by (b) total investment at value. This yield excludes any return from the potential future excess cash flows from portfolio earnings available to the subordinated certificate holders and from related structuring fees and management and sourcing fees. See “— Fees and Other Income” below. The weighted average yields are computed as of the balance sheet date. |
Interest income has decreased over the 2008 period primarily as
a result of decreases in the weighted average yield and
decreases in the aggregate size of the interest-bearing
portfolio due to disposition of certain investments as we have
been harvesting capital from our portfolio in order to generate
capital to repay our indebtedness and de-lever our balance
sheet. Interest income also decreased by approximately $2.9
million due to additional investments being placed on
non-accrual status. The weighted average yield varies from
period to period based on the current stated interest on
interest-bearing investments, the yield on interest-bearing
investments funded, the yield on amounts repaid, the amount of
interest-bearing investments for which interest is not accruing,
changes in value of interest-bearing investments and the
81
mix of interest-bearing investments in the portfolio, including
the amount of lower-yielding senior or unitranche debt in the
portfolio at the end of the period. We are studying various
means to reduce the amount of non-interest bearing securities in
our portfolio and redeploy the capital into interest bearing
debt investments. However, because we recently have exited, and
in the future intend to exit, several interest-bearing
investments in order to accumulate capital for repayment of
debt, we expect that income from our interest-bearing
investments will continue to decrease in 2009.
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 for the three months ended March 31, 2009,
was $4.5 million as compared to $16.9 million for the
three months ended March 31, 2008. Dividend income for the
three months ended March 31, 2008 includes a
$7.1 million dividend received in connection with the
recapitalization of Norwesco, Inc., and $5.5 million of
dividends received in connection with the sale to AGILE Fund I,
LLC. Dividend income will vary from period to period depending
upon the timing and amount of dividends that are declared or
paid by a portfolio company on preferred or common equity
interests.
Fees and Other Income. Fees and other income
primarily include fees related to financial structuring,
diligence, transaction services, management and consulting
services to portfolio companies, commitments, guarantees, and
other services and loan prepayment premiums. As a business
development company, we are required to make significant
managerial assistance available to the companies in our
investment portfolio. Managerial assistance includes, but is not
limited to, management and consulting services related to
corporate finance, marketing, human resources, personnel and
board member recruiting, business operations, corporate
governance, risk management and other general business matters.
Fees and other income for the three months ended March 31,
2009 and 2008, included fees relating to the following:
| ($ in millions) | 2009 | 2008 | ||||||
|
Fund management
fees(1)
|
$ | 2.8 | 0.6 | |||||
|
Management, consulting and other services provided to portfolio
companies
|
2.2 | 2.9 | ||||||
|
Loan prepayment premiums
|
0.8 | — | ||||||
|
Commitment, guaranty and other fees from portfolio companies
|
0.6 | 1.7 | ||||||
|
Structuring and diligence
|
— | $ | 5.1 | |||||
|
Total fees and other income
|
$ | 6.4 | $ | 10.3 | ||||
| (1) | See “Portfolio and Investment Activity — Managed Funds” above. |
Fees and other income generally are 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 and the level of assets
in managed funds for which we earn management or other fees. We
have added several new Managed Funds since March 31, 2008,
which resulted in an increase in fund management fees. Given our
outlook for future investment activity for our balance sheet as
well as for certain Managed Funds, we expect that total fee
income in the future will reflect lower new investment levels.
Loan origination fees that represent yield enhancement on a loan
are capitalized and amortized into interest income over the life
of the loan.
We earned no structuring and diligence fees in the first quarter
of 2009. Structuring and diligence fees for the three months
ended March 31, 2008, included $1.8 million earned by
us in connection with investments made by the Unitranche Fund
LLC. See “Managed Funds” above. The remainder of the
structuring and diligence fees for 2008 primarily related to the
level of new investment originations. Because we expect new
investment activity to continue to be at a low level, we expect
structuring and diligence fees to be lower in 2009 than in 2008.
Operating Expenses. Operating expenses
include interest, employee, employee stock options,
administrative expenses and the impairment of long-lived asset.
Interest Expense. The fluctuations in interest
expense during the three months ended March 31, 2009 and
2008, primarily were attributable to increases in our weighted
average cost of debt capital as well as changes in the
82
level of our borrowings under various notes payable and our
revolving line of credit. Our borrowing activity and weighted
average cost of debt, including fees and debt financing costs,
at and for the three months ended March 31, 2009 and 2008,
were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Total outstanding debt
|
$ | 1,942.5 | $ | 2,191.6 | ||||
|
Average outstanding debt
|
$ | 1,945.0 | $ | 2,209.5 | ||||
|
Weighted average
cost(1)
|
8.6% | 6.2% | ||||||
| (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. |
At the end of the fourth quarter of 2008, we amended our private
notes and revolving line of credit, which increased the stated
interest rate on those obligations by 100 basis points.
Subsequent to this amendment, events of default have occurred
and are continuing on these instruments. Pursuant to the terms
of the revolving credit facility, during the continuance of an
event of default, the applicable spread on any borrowings
outstanding and fees on any letters of credit outstanding under
the revolving credit facility increase by up to an additional
200 basis points. Pursuant to the private notes, during the
continuance of an event of default, the rate of interest borne
by the private notes increases by an additional 200 basis
points. During the three months ended March 31, 2009, we
incurred additional interest expense totaling $3.6 million
related to the default interest. We are in discussions with our
lenders regarding a more comprehensive restructuring of these
debt agreements to provide us long-term operational flexibility
in this difficult economy. See “Financial Condition,
Liquidity and Capital Resources” below.
In addition, interest expense included interest paid to the
Internal Revenue Service related to installment sale gains
totaling $2.0 million and $1.9 million for the three
months ended March 31, 2009 and 2008, respectively.
Installment interest expense for the year ended
December 31, 2009, is estimated to be approximately
$7.8 million. See “Dividends and Distributions”
below.
Employee Expense. Employee expenses for the
three months ended March 31, 2009 and 2008, were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Salaries and employee benefits
|
$ | 8.8 | $ | 12.4 | ||||
|
Bonuses and performance awards
|
2.3 | 10.3 | ||||||
|
Individual performance award (IPA)
|
— | 2.4 | ||||||
|
IPA mark to market expense (benefit)
|
— | (4.1 | ) | |||||
|
Individual performance bonus (IPB)
|
— | 1.7 | ||||||
|
Total employee
expense(1)
|
$ | 11.1 | $ | 22.7 | ||||
|
Number of employees at end of period
|
134 | 186 | ||||||
| (1) | Excludes employee stock options expense. See below. |
During the second half of 2008, we consolidated our investment
execution activities to our Washington, DC headquarters and our
office in New York in an effort to improve our operating
efficiencies, reducing our headcount by approximately
50 employees. Our employee expense for the first quarter of
2009 reflects this reduction in headcount.
The quarterly accrual for employee bonuses 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. Employee bonuses generally are paid after the
completion of the fiscal year.
83
The IPA and IPB are part of an incentive compensation program
for certain officers and generally are determined annually at
the beginning of each year but may be adjusted throughout the
year. In 2008, IPAs were paid in cash in two equal installments
during the year. Through December 31, 2007, the IPA amounts
were contributed into a trust and invested in our common stock.
The IPB was distributed in cash to award recipients throughout
the year (beginning in February of each respective year) as long
as the recipient remained employed by us. We currently have not
established an IPA or IPB for 2009; however, depending upon our
need to retain and motivate our employees, we may determine in
conjunction with the Compensation Committee of the Board of
Directors that some form of 2009 retention compensation or
individual performance compensation may be in the best interests
of the company.
The trusts for the IPA payments were consolidated with our
accounts. The common stock was classified as common stock held
in deferred compensation trust in the accompanying financial
statements and the deferred compensation obligation, which
represented the amount owed to the employees, was included in
other liabilities. Changes in the value of our common stock held
in the deferred compensation trust were not recognized. However,
the liability was marked to market with a corresponding charge
or credit to employee compensation expense. On December 14,
2007, our Board of Directors made a determination that it was in
Allied Capital’s best interest to terminate our deferred
compensation arrangements. The Board of Directors’ decision
primarily was in response to increased complexity resulting from
recent changes in the regulation of deferred compensation
arrangements. The Board of Directors resolved that the accounts
under these Plans would be distributed to participants in full
on March 18, 2008, the termination and distribution date,
or as soon as was reasonably practicable thereafter, in
accordance with the provisions of each of these Plans.
The accounts under the deferred compensation arrangements
totaled $52.5 million at December 31, 2007. The
balances on the termination date were distributed to
participants in March 2008 subsequent to the termination date,
in accordance with the transition rule for payment elections
under Section 409A of the Code. Distributions from the
plans were made in cash or shares of our common stock, net of
required withholding taxes. The distribution of the accounts
under the deferred compensation arrangements resulted in a tax
deduction for 2008, subject to the limitations set by
Section 162(m) of the Code for persons subject to such
section.
Employee Stock Options Expense. The employee
stock options expense for the three months ended March 31,
2009 and 2008, was as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Employee Stock Options Expense:
|
||||||||
|
Previously awarded, unvested options as of January 1, 2006
|
$ | — | $ | 1.7 | ||||
|
Options granted on or after January 1, 2006
|
0.8 | 2.5 | ||||||
|
Total employee stock options expense
|
$ | 0.8 | $ | 4.2 | ||||
On March 3, 2009, the Compensation Committee of our Board
of Directors granted 10.6 million options with an exercise
price of $0.73 per share. The options vest in three equal
installments on June 30, 2009, June 30, 2010 and
June 30, 2011.
We estimate that the employee-related stock options expense for
outstanding unvested options as of March 31, 2009, will be
approximately $3.7 million, $4.1 million, and
$3.7 million for the years ended December 31, 2009,
2010, and 2011, respectively. This estimate does not include any
expense related to stock option grants after March 31,
2009, as the fair value of those stock options will be
determined at the time of grant. This estimate may change if our
assumptions related to future option forfeitures change.
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, travel costs,
stock record expenses, directors’ fees and stock option
expense, and various other expenses.
84
Administrative expenses for the three months ended
March 31, 2009 and 2008, were $9.8 million and
$9.0 million, respectively. Administrative expenses
increased primarily due to an increase in legal and other
professional fees.
Impairment of Long-Lived Asset. In our efforts
to reduce overall administrative expenses, we entered into an
arrangement to sell our corporate aircraft. We expect the sale
will be completed during the second quarter of 2009. The
expected sales price of the aircraft is less than our carrying
cost, therefore, we recorded an impairment charge of
$2.9 million during the three months ended March 31,
2009.
Income Tax Expense (Benefit), Including Excise
Tax. Income tax expense (benefit) for the
three months ended March 31, 2009 and 2008, was as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Income tax expense (benefit)
|
$ | (0.4 | ) | $ | (0.3 | ) | ||
|
Excise tax
expense(1)
|
— | 2.3 | ||||||
|
Income tax expense (benefit), including excise tax
|
$ | (0.4 | ) | $ | 2.0 | |||
| (1) | While excise tax expense is presented in the consolidated statement of operations as a reduction to net investment income, excise tax relates to both net investment income and net realized gains (losses). |
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.
We did not record an excise tax for the three months ended
March 31, 2009. See “Dividends and Distributions”
below.
Realized Gains and Losses. Net realized
gains or losses primarily result from the sale of portfolio
investments. Net realized gains (losses) for the three months
ended March 31, 2009 and 2008, were as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Realized gains
|
$ | 12.8 | $ | 32.7 | ||||
|
Realized losses
|
(39.9 | ) | (29.6 | ) | ||||
|
Net realized gains (losses)
|
$ | (27.1 | ) | $ | 3.1 | |||
When we exit an investment and realize a gain or loss, we make
an accounting entry to reverse any unrealized appreciation or
depreciation, respectively, that we had previously recorded to
reflect the appreciated or depreciated value of the investment.
For the three months ended March 31, 2009 and 2008, we
reversed previously recorded unrealized appreciation or
depreciation when gains or losses were realized or dividends
were received as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Reversal of previously recorded net unrealized appreciation
associated with realized gains
|
$ | (1.0 | ) | $ | (32.5 | ) | ||
|
Reversal of previously recorded net unrealized appreciation
associated with dividends received
|
(3.4 | ) | (13.5 | ) | ||||
|
Reversal of previously recorded net unrealized depreciation
associated with realized losses
|
17.0 | 28.5 | ||||||
|
Total reversal
|
$ | 12.6 | $ | (17.5 | ) | |||
85
Realized gains for the three months ended March 31, 2009
and 2008, were as follows:
($ in
millions)
| 2009 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
GC-Sun
Holdings, LP
|
$ | 6.8 | ||
|
Other
|
1.8 | |||
|
Total private finance
|
8.6 | |||
|
Commercial Real Estate:
|
||||
|
Real estate owned
|
4.1 | |||
|
Other
|
0.1 | |||
|
Total commercial real estate
|
4.2 | |||
|
Total realized gains
|
$ | 12.8 | ||
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Norwesco, Inc.
|
$ | 10.7 | ||
|
BenefitMall, Inc.
|
4.9 | |||
|
Financial Pacific Company
|
3.1 | |||
|
Penn Detroit Diesel Allison, LLC
|
1.7 | |||
|
Service Champ, Inc.
|
1.7 | |||
|
Advantage Sales & Marketing,
Inc.(1)
|
3.2 | |||
|
Coverall North America, Inc.
|
1.4 | |||
|
CR Holding, Inc.
|
1.0 | |||
|
Other
|
4.9 | |||
|
Total private finance
|
32.6 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
0.1 | |||
|
Total commercial real estate
|
0.1 | |||
|
Total realized gains
|
$ | 32.7 | ||
(1) Includes
an additional realized gain of $1.7 million related to the
release of escrowed funds from the sale of our majority equity
investment in 2006.
Realized losses for the three months ended March 31, 2009
and 2008, were as follows:
($ in
millions)
| 2009 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Advantage Sales & Marketing, Inc.
|
$ | 27.3 | ||
|
Becker Underwood, Inc.
|
2.8 | |||
|
Old Orchard Brands, LLC
|
4.5 | |||
|
Pro Mach, Inc.
|
2.9 | |||
|
Tank Intermediate Holding Corp.
|
2.2 | |||
|
Other
|
0.2 | |||
|
Total private finance
|
39.9 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
— | |||
|
Total commercial real estate
|
— | |||
|
Total realized losses
|
$ | 39.9 | ||
| 2008 | ||||
|
Portfolio Company
|
Amount | |||
|
Private Finance:
|
||||
|
Crescent Equity Corp. — Longview Cable &
Data, LLC
|
$ | 8.4 | ||
|
Mid-Atlantic Venture Fund IV, L.P.
|
5.2 | |||
|
WMA Equity Corporation and Affiliates
|
4.5 | |||
|
Driven Brands, Inc.
|
1.9 | |||
|
Direct Capital Corporation
|
1.7 | |||
|
EarthColor, Inc.
|
1.7 | |||
|
Sweet Traditions, Inc.
|
1.0 | |||
|
Other
|
4.9 | |||
|
Total private finance
|
29.3 | |||
|
Commercial Real Estate:
|
||||
|
Other
|
0.3 | |||
|
Total commercial real estate
|
0.3 | |||
|
Total realized losses
|
$ | 29.6 | ||
During the three months ended March 31, 2009, we focused
our efforts on harvesting capital from our portfolio in order to
generate capital to repay indebtedness and de-lever our balance
sheet. These asset sales have been completed under distressed
conditions in a very difficult market and consequently we have
realized net losses upon their disposition. For the three months
ended March 31, 2009, we sold or had repayments on
portfolio investments that generated cash proceeds of
$241.8 million, including cash proceeds of
$220.5 million related to asset sales. The
86
proceeds from these asset sales collectively represented 85% of
our cost basis and 91% of our value at December 31, 2008.
Realized gains and losses for the three months ended
March 31, 2008, include net realized gains totaling
$8.8 million (subsequent to post-closing adjustments) and
net realized losses of $5.5 million from the sales of
certain investments to our Managed Funds. We did not sell any
investments to our Managed Funds during the three months ended
March 31, 2009. See “— Managed Funds”
above.
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 in accordance with our valuation policy and
the provisions of the 1940 Act and FASB Statement No. 157,
Fair Value Measurements (SFAS 157 or the Statement)
and related interpretations. We determine fair value to be the
price that would be received for an investment in a current
sale, which assumes an orderly transaction between market
participants on the measurement date. At March 31, 2009,
portfolio investments recorded at fair value using level 3
inputs (as defined under the Statement) were approximately 86%
of our total assets. Because of the inherent uncertainty of
determining the fair value of investments that do not have a
readily available market quotation in an active market, 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 approach 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 determine that the fair value of a security is less than
its cost basis, and we will record unrealized appreciation when
we determine that the fair value is greater than its cost basis.
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 portfolio
companies, CLO bonds and preferred shares/income notes, CDO
bonds and investment funds. 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. We adopted
SFAS 157 on a prospective basis in the first quarter of
2008. SFAS 157 requires us to assume that the portfolio
investment is assumed to be sold in the principal market to
market participants, or in the absence of a principal market,
the most advantageous market, which may be a hypothetical
market. Market participants are defined as buyers and sellers in
the principal or most advantageous market that are independent,
knowledgeable, and willing and able to transact. In accordance
with the Statement, we have considered our principal market, or
the market in which we exit our portfolio investments with the
greatest volume and level of activity.
87
We have determined that for our buyout investments, where we
have control or could gain control through an option or warrant
security, both the debt and equity securities of the portfolio
investment would exit in the merger and acquisition (M&A)
market as the principal market generally through a sale or
recapitalization of the portfolio company. We believe that the
in-use premise of value (as defined in SFAS 157), which
assumes the debt and equity securities are sold together, is
appropriate as this would provide maximum proceeds to the
seller. As a result, we use the enterprise value methodology to
determine the fair value of these investments under
SFAS 157. Enterprise value means the entire value of the
company to a market participant, including the sum of the values
of debt and equity securities used to capitalize the enterprise
at a point in time. Enterprise value is determined using various
factors, including cash flow from operations of the portfolio
company, multiples at which private companies are bought and
sold, and other pertinent factors, such as recent offers to
purchase a portfolio company, recent transactions involving the
purchase or sale of the portfolio company’s equity
securities, liquidation events, or other events. We allocate the
enterprise value to these securities in order of the legal
priority of the securities.
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. However, we must derive a
single estimate of enterprise value. To determine the enterprise
value of a portfolio company, we analyze its historical and
projected financial results. This financial and other
information is generally obtained from the portfolio companies,
and may represent unaudited, projected or pro forma financial
information. 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 company’s 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 company’s 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, the
entry multiple for the transaction, 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.
While we typically exit our securities upon the sale or
recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where we do not
have control or the ability to gain control through an option or
warrant security, we cannot typically control the exit of our
investment into the principal market (the M&A market). As a
result, in accordance with SFAS 157, we are required to
determine the fair value of these investments assuming a sale of
the individual investment in a hypothetical market to a
hypothetical market participant (the in-exchange premise of
value). We continue to perform an enterprise value analysis for
investments in this category to assess the credit risk of the
loan or debt security and to determine the fair value of our
equity investment in these portfolio companies. The determined
equity values are generally discounted when we have a minority
ownership position, restrictions on resale, specific concerns
about the receptivity of the capital markets to a specific
company at a certain time, or other factors. For loan and debt
securities, we perform a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires us
to estimate the expected repayment date of the instrument and a
market participant’s required yield. Our estimate of the
expected repayment date of a loan or debt security is generally
shorter than the legal maturity of the instruments as our loans
have
88
historically been repaid prior to the maturity date. The yield
analysis considers changes in interest rates and changes in
leverage levels of the loan or debt security as compared to
market interest rates and leverage levels. Assuming the credit
quality of the loan or debt security remains stable, we will use
the value determined by the yield analysis as the fair value for
that security. A change in the assumptions that we use to
estimate the fair value of our loans and debt securities using
the yield analysis could have a material impact on the
determination of fair value. If there is deterioration in credit
quality or a loan or debt security is in workout status, we may
consider other factors in determining the fair value of a loan
or debt security, including the value attributable to the loan
or debt security from the enterprise value of the portfolio
company or the proceeds that would be received in a liquidation
analysis.
Our equity investments in private debt and equity funds are
generally valued at the fund’s net asset value, unless
other factors lead to a determination of fair value at a
different amount. The value of our equity securities in public
companies for which quoted prices in an active market are
readily available is based on the closing public market price on
the measurement date.
The fair value of our CLO/CDO Assets is generally based on a
discounted cash flow model that utilizes prepayment,
re-investment 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 CLO/CDO Assets as comparable yields in the
market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment or loss assumptions in the underlying
collateral pool or changes in redemption assumptions for the
CLO/CDO Assets, if applicable. We determine the fair value of
our CLO/CDO Assets on an individual
security-by-security
basis. If we were to sell a group of these CLO/CDO 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 assets.
We will record unrealized depreciation on investments when we
determine that the fair value of a security is less than its
cost basis, and will record unrealized appreciation when we
determine that the fair value is greater than its cost basis.
Because of the inherent uncertainty of valuation, the values
determined at the measurement date 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.
Additionally, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the values determined at the measurement date. In
accordance with
FSP 157-4
(discussed below), we do not consider a transaction price that
is associated with a transaction that is not orderly to be
indicative of fair value or market participant risk premiums,
and accordingly would place little, if any, weight on
transactions that are not orderly in determining fair value.
When considering recent potential or completed transactions, we
use judgment in determining if such offers or transactions were
pursuant to an orderly process for purposes of determining how
much weight is placed on these data points in accordance with
the applicable guidelines in SFAS 157 and
FSP 157-4.
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 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 company’s 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 is submitted to
our Board of Directors who is ultimately responsible for the
determination of fair value of the portfolio in good faith.
Valuation assistance from Duff & Phelps, LLC
(Duff & Phelps) for our private finance portfolio
consisted of certain limited procedures (the
89
Procedures) we identified and requested them to perform. Based
upon the performance of the Procedures on a selection of our
final portfolio company valuations, Duff & Phelps
concluded that the fair value of those portfolio companies
subjected to the Procedures did not appear unreasonable. In
addition, we also received third-party valuation assistance from
other third-party consultants for certain private finance
portfolio companies. For the three months ended March 31,
2009 and 2008, we received third-party valuation assistance as
follows:
| 2009 | 2008 | |||||||
|
Number of private finance portfolio companies reviewed
|
93 | 124 | ||||||
|
Percentage of private finance portfolio reviewed at value
|
94.0 | % | 94.0 | % | ||||
Professional fees for third-party valuation assistance were
$1.9 million for the year ended December 31, 2008, and are
estimated to be approximately $1.3 million for 2009.
Net Change in Unrealized Appreciation or
Depreciation. Net change in unrealized
appreciation or depreciation for the three months ended
March 31, 2009 and 2008, consisted of the following:
| ($ in millions) | 2009(1) | 2008(1) | ||||||
|
Net unrealized appreciation (depreciation)
|
$ | (362.7 | ) | $ | (95.9 | ) | ||
|
Reversal of previously recorded unrealized appreciation
associated with realized gains
|
(1.0 | ) | (32.5 | ) | ||||
|
Reversal of previously recorded net unrealized appreciation
associated with dividends received
|
(3.4 | ) | (13.5 | ) | ||||
|
Reversal of previously recorded unrealized depreciation
associated with realized losses
|
17.0 | 28.5 | ||||||
|
Net change in unrealized appreciation or depreciation
|
$ | (350.1 | ) | $ | (113.4 | ) | ||
| (1) | The net change in unrealized appreciation or depreciation can fluctuate significantly from period to period. As a result, quarterly comparisons may not be meaningful. |
The primary drivers of the net unrealized depreciation of
$362.7 million resulting from changes in portfolio value
for the quarter ended March 31, 2009, were
(i) additional depreciation in our CLO/CDO investments,
which totaled $82.5 million (see “— Portfolio and
Investment Activity, Private Finance”),
(ii) additional depreciation of $77.2 million on our
investment in EarthColor, Inc., a full service commercial
printer, (iii) additional depreciation of
$44.1 million on our investment in Ciena Capital (see
“— Portfolio and Investment Activity, Private
Finance” above), and (iv) additional depreciation of
$16.8 million on our investment in WMA Equity Corporation
and Affiliates, a marketer of children’s apparel.
Other investments in the portfolio, in the aggregate, accounted
for the remaining 39% of the net unrealized depreciation in the
first quarter of 2009. Within these other portfolio investments,
for the companies where the value was determined based on an
EBITDA multiple approach, enterprise values decreased primarily
as a result of decreases in multiples. Multiple compression
accounted for approximately 85% of the decrease in enterprise
value and decreased EBITDA drivers accounted for approximately
15% of the decrease in enterprise value for these companies.
Enterprise value multiples for these companies averaged 6.4x
with a median multiple of 6.0x for the first quarter valuations.
This compares to enterprise value multiples for these companies
used for fourth quarter 2008 valuations that averaged 6.9x with
a median multiple of 6.5x.
Per Share Amounts. All per share
amounts included in the Management’s 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
178.7 million and 161.5 million for the three months
ended March 31, 2009 and 2008, respectively.
OTHER
MATTERS
Regulated Investment Company Status. We
have elected to be taxed as a regulated investment company under
Subchapter M of the Code. 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
90
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 (i.e., net ordinary
investment income) as defined in the Code. With respect to
taxable realized net long-term capital gains, we may choose to
(i) distribute, (ii) deem to distribute, or
(iii) retain and pay corporate level tax on such gains. We
currently qualify as a regulated investment company. However,
there can be no assurance that we will continue to qualify for
such treatment in future years.
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 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 generally 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
generally 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. Taxable income includes non-cash income, such
as
payment-in-kind
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. Noncash taxable income is reduced by
non-cash expenses, such as realized losses and depreciation and
amortization expense.
Taxable income available for distribution includes investment
company taxable income and, to the extent not deemed to be
distributed or retained, net long-term capital gains. To the
extent that annual taxable income available for distribution
exceeds dividends paid or deemed distributed from such taxable
income 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 (see
discussion below). Such excess income will be treated under the
Code as having been distributed during the prior year for
purposes of our qualification for RIC tax treatment for such
year. The maximum amount of excess taxable income that we may
carry over for distribution in the next year under the Code is
the total amount of dividends paid in the following year,
subject to certain declaration and payment guidelines. Excess
taxable income carried over and paid out in the next year is
generally subject to a nondeductible 4% excise tax.
DIVIDENDS AND
DISTRIBUTIONS
We have elected to be taxed as a regulated investment company
under Subchapter M of the Code. As a regulated investment
company, we are required to distribute substantially all of our
investment company taxable income to shareholders through the
payment of dividends. In certain circumstances, we are
restricted in our ability to pay dividends. Each of our private
notes and our revolving credit facility contain provisions that
limit the amount of dividends we can pay and have a covenant
that requires a minimum 200% asset coverage ratio at all times,
and at March 31, 2009, we were in default of that covenant.
During the continuance of an event of default, we are precluded
from declaring dividends or other distributions to our
shareholders. In addition, pursuant to the 1940 Act, we may be
precluded from declaring dividends or other distributions to our
shareholders unless our asset coverage is at least 200%.
We estimate that we have met our dividend distribution
requirements for the 2008 tax year. We intend to retain capital
in 2009 in order to comply with the 200% asset coverage
requirements of the 1940 Act and our debt agreements and
therefore, would be able to carry forward any 2009 taxable
income for distribution in 2010. We currently qualify as a
regulated investment company. However there can be no assurance
that we will be able to achieve 200% asset coverage or reach
agreement with our lenders with respect to the payment of
dividends; therefore, we may not be able to comply with the
regulated investment company requirements to distribute income
for 2009 and other future years and we may be required to pay a
corporate level income tax.
91
No dividends were paid or declared for the three months ended
March 31, 2009. Dividends to common shareholders were $0.65
per share for the three months ended March 31, 2008.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Events of Default, Liquidity and
Operations. We experienced a significant
reduction in our net worth during the second half of 2008,
primarily resulting from net unrealized depreciation on our
portfolio, which reflected market conditions. As a result, on
December 30, 2008, we entered into amendments relating to
our private notes and revolving line of credit, including
amendments which added new covenants. The amendments are more
fully described in Note 4, “Debt” from our Notes
to the Consolidated Financial Statements included in Item 1.
In January 2009 we re-opened discussions with the revolving line
of credit lenders and the private noteholders to seek relief
under certain terms of both the revolving credit facility and
the private notes due to certain events of covenant default. At
December 31, 2008, our asset coverage was less than the
200% required by the revolving credit facility and the private
notes. We continued to experience additional net unrealized
depreciation on our portfolio in the first quarter of 2009 and
as a result, as of March 31, 2009, our asset coverage
remained less than 200%. Asset coverage generally refers to the
percentage resulting from assets less accounts payable and other
liabilities, divided by total debt. In addition, we have not
completed the documents contemplated by the December 30,
2008 amendments to the revolving credit facility and private
notes, which were to include a grant of a first lien security
interest on substantially all of our assets. Under these debt
agreements, events of default have occurred and are continuing
related to these covenants and certain financial and other
covenants. Discussions with the revolving line of credit lenders
and the private noteholders are continuing and the discussions
encompass a more comprehensive restructuring of these debt
agreements to provide long-term operational flexibility.
Pursuant to the 1940 Act, we are not permitted to issue
indebtedness unless immediately after such issuance we have
asset coverage of all outstanding indebtedness of at least 200%.
Our publicly issued notes require us to comply with this
provision of the 1940 Act. At March 31, 2009, our asset
coverage ratio was 171%, which is less than the 200%
requirement. As a result, under the publicly issued unsecured
notes payable, we will not be able to issue additional
indebtedness until such time as our asset coverage returns to at
least 200%. We have not experienced any default or cross default
with respect to the publicly issued unsecured notes payable.
The existence of an event of default under the revolving line of
credit and private notes restricts us from additional borrowing
or obtaining letters of credit under our revolving credit
facility, and from declaring dividends or other distributions to
our shareholders. Pursuant to the terms of the revolving credit
facility, during the continuance of an event of default, the
applicable spread on any borrowings outstanding and fees on any
letters of credit outstanding under the revolving credit
facility increase by up to 200 basis points. Pursuant to
the terms of the private notes, during the continuance of an
event of default, the rate of interest borne by the private
notes increases by 200 basis points.
On March 27, 2009, pursuant to the terms of the revolving
line of credit, the administrative agent for the lenders
terminated substantially all of the unused commitments under the
revolving line of credit. As a result, the aggregate commitments
under our revolving line of credit have been reduced to
$165.0 million. As of March 31, 2009, we had
$50 million in outstanding borrowings and
$113.5 million in outstanding letters of credit issued
under the revolving line of credit.
Neither the lenders nor the noteholders have accelerated
repayment of our obligations; however, the occurrence of an
event of default permits the administrative agent for the
lenders, or the holders of more than 51% of the commitments
under the revolving credit facility, to accelerate repayment of
all amounts due, to terminate commitments thereunder, and to
require us to provide cash collateral equal to the face amount
of all outstanding letters of credit. Pursuant to the terms of
the private notes, the occurrence of an event of default permits
the holders of 51% or more of any issue of outstanding private
notes to accelerate repayment of all amounts due thereunder.
Our consolidated financial statements have been prepared
assuming that we will continue as a going concern. We do not
have available cash resources sufficient to satisfy all of the
obligations under these debt agreements should the
92
lenders accelerate these obligations. These factors raise
substantial doubt about our ability to continue as a going
concern. We continue to seek a comprehensive restructuring of
these debt agreements to provide long-term operational
flexibility. In addition, we continue to sell assets to generate
capital to repay debt. There can be no assurance that our plans
will be successful in addressing the liquidity uncertainties
discussed above. In the event there is an acceleration of the
amounts outstanding under the revolving credit facility or any
issue of the private notes, it would cause us to evaluate other
alternatives and would have a material adverse effect on our
operations. The consolidated financial statements included in
Item 1 herein do not include any adjustments that might
result from these uncertainties.
We have continued to focus our efforts on generating capital in
order to repay indebtedness and de-lever our balance sheet.
During the three months ended March 31, 2009, we sold or
had repayments on portfolio investments that generated
$241.8 million of cash proceeds. Subsequent to
March 31, 2009, we sold portfolio investments that
generated additional cash proceeds of $78.4 million. These
asset sales have been completed under distressed conditions in a
very difficult market and consequently we have realized net
losses upon their disposition (see “— Realized
Gains and Losses” above). We expect to complete additional
asset sales throughout the course of the year and given the
distressed market and our desire to sell assets to generate
liquidity, we may incur additional realized losses upon such
dispositions.
Also during the three months ended March 31, 2009, we
repurchased $2.5 million of our publicly issued notes at a
cost of $0.5 million, resulting in a net gain of
$2.0 million. Subsequent to March 31, 2009, we
purchased publicly issued notes in the market with a total par
value of $56.8 million, which consisted of
$34.6 million of our 6.625% Notes due 2011 and
$22.2 million of our 6.000% Notes due 2012, for a
total cost of $17.7 million, resulting in a gain of
$39.1 million which will be reflected in our results of
operations for the three months ending June 30, 2009.
We may continue to engage in a variety of activities as a means
to improve our asset coverage ratio and net asset value, which
may include but are not limited to: continuing to sell assets to
generate capital to retire debt; refinancing or repurchasing, at
par or at a discount, our outstanding debt; foregoing or
limiting dividend payments in order to retain capital; and
purchasing our common stock in the market to the extent
permitted under the 1940 Act. We also plan to continue to
carefully manage our employee and administrative expenses. There
can be no assurance that we will be able to increase our asset
coverage ratio or net asset value.
At March 31, 2009, and December 31, 2008, our cash and
investments in money market and other securities, total assets,
total debt outstanding, total shareholders’ equity, debt to
equity ratio and asset coverage for senior indebtedness were as
follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Cash and investments in money market and other securities
(including money market and other securities: 2009-$0.0;
2008-$0.3)
|
$ | 290.2 | $ | 50.7 | ||||
|
Total assets
|
$ | 3,387.6 | $ | 3,722.2 | ||||
|
Total debt outstanding
|
$ | 1,942.5 | $ | 1,945.0 | ||||
|
Total shareholders’ equity
|
$ | 1,369.8 | $ | 1,718.4 | ||||
|
Debt to equity ratio
|
1.42 | 1.13 | ||||||
|
Asset coverage
ratio(1)
|
171 | % | 188 | % | ||||
| (1) | As a business development company, we generally are required to maintain a minimum ratio of 200% of total assets to total borrowings. |
Also pursuant to the 1940 Act, we may be precluded from
declaring dividends or other distributions to our shareholders,
or repurchasing shares of our common stock until such time as
our asset coverage would be at least 200%. At March 31,
2009, our asset coverage ratio was 171% and, as a result, we
currently are unable to declare dividends or other distributions
to our shareholders, or repurchase shares of our common stock.
In addition, we generally are not able to issue and sell our
common stock at a price below net asset value per share. Our
common stock currently is trading at a price below our net asset
value of $7.67 per share.
93
Cash generated from the portfolio includes cash flow from net
investment income and net realized gains and principal
collections related to investment repayments or sales. Cash flow
provided by our operating activities before new investment
activity for the three months ended March 31, 2009 and
2008, was as follows:
| ($ in millions) | 2009 | 2008 | ||||||
|
Net cash provided by operating activities
|
$ | 240.1 | $ | 111.3 | ||||
|
Add: portfolio investments funded
|
39.9 | 275.1 | ||||||
|
Total cash provided by operating activities before new
investments
|
$ | 280.0 | $ | 386.4 | ||||
Given the severe economic recession we are experiencing in the
United States, we believe that our cash flows from investment
exits for 2009 will be lower than prior years when we were in a
more robust economy. We believe, however, that we will generate
sufficient cash flow to fund our operations and meet our
scheduled debt service requirements, although there can be no
assurance that we will generate sufficient cash flow.
At March 31, 2009, and December 31, 2008, the value
and yield of the cash and investments in money market and other
securities were as follows:
| 2009 | 2008 | |||||||||||||||
| ($ in millions) | Value | Yield | Value | Yield | ||||||||||||
|
Money market and other securities
|
$ | 0.0 | 0.2 | % | $ | 0.3 | 1.7 | % | ||||||||
|
Cash
|
290.2 | 0.0 | % | 50.4 | 0.1 | % | ||||||||||
|
Total
|
$ | 290.2 | 0.0 | % | $ | 50.7 | 0.1 | % | ||||||||
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.
We evaluate our interest rate exposure on an ongoing basis.
Generally, we seek to fund our primarily fixed-rate debt
portfolio and our equity 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.
During the three months ended March 31, 2008, and for the
year ended December 31, 2008, we sold new equity of
$170.9 million, and $402.5 million, respectively, in
public offerings. In addition, shareholders’ equity
increased through capital share transactions by
$3.9 million and $5.4 million through the exercise of
stock 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,
2008, and the year ended December 31, 2008, respectively.
Shareholders’ equity also increased by $26.4 million
during the three months ended March 31, 2008, as a result
of the distribution of the common stock held in deferred
compensation trusts.
At March 31, 2009, and December 31, 2008, we had
outstanding debt as follows:
| 2009 | 2008 | |||||||||||||||||||||||
|
Annual |
Annual |
|||||||||||||||||||||||
|
Facility |
Amount |
Interest |
Facility |
Amount |
Interest |
|||||||||||||||||||
| ($ in millions) | Amount | Outstanding | Cost(1) | Amount | Outstanding | Cost(1) | ||||||||||||||||||
|
Notes payable:
|
||||||||||||||||||||||||
|
Privately issued unsecured notes payable
|
$ | 1,015.0 | $1,015.0 | 9.8% | (5) | $ | 1,015.0 | $ | 1,015.0 | 7.8% | ||||||||||||||
|
Publicly issued unsecured notes payable
|
877.5 | 877.5 | 6.7% | 880.0 | 880.0 | 6.7% | ||||||||||||||||||
|
Total notes payable
|
1,892.5 | 1,892.5 | 8.3% | 1,895.0 | 1,895.0 | 7.3% | ||||||||||||||||||
|
Revolving line of
credit(2)
|
165.0 | 50.0 | 6.3% | (5) | 632.5 | 50.0 | 4.3% | (3) | ||||||||||||||||
|
Total debt
|
$ | 2,057.5 | $1,942.5 | 8.6% | (5) | $ | 2,527.5 | $ | 1,945.0 | 7.7% | (4) | |||||||||||||
94
| (1) | The weighted average annual interest cost is computed as the (a) annual stated interest on the debt plus any applicable default interest, 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) | At March 31, 2009 and December 31, 2008, $1.5 million and $460.2 million, respectively, remained unused on the revolving line of credit, net of amounts committed for standby letters of credit of $113.5 million and $122.3 million, respectively, issued under the credit facility. |
| (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, annual costs of commitment fees, other facility fees and amortization of debt financing costs related to the line of credit are $6.0 and $8.5 million, respectively, at both March 31, 2009, and December 31, 2008. |
| (4) | The annual interest cost for total debt includes the annual cost of commitment fees and the amortization of debt financing costs on the revolving line of credit and other facility fees regardless of the amount outstanding on the facility as of the balance sheet date. |
| (5) | Events of default have occurred and are continuing under the revolving line of credit and private notes which have increased the interest rates by 2.00% during the continuance of such events of default. Excluding this default interest, the annual interest cost on total debt would have been 7.5%. |
Revolving Line of Credit. We have an
unsecured revolving line of credit with total commitments of
$165.0 million that expires on April 11, 2011. At
March 31, 2009, there was $50.0 million outstanding
under our revolving line of credit and standby letters of credit
of $113.5 million were issued under the credit facility.
Borrowings under the revolving line of credit generally bear
interest at a rate per annum equal to (i) LIBOR (for the
period selected by us) plus 3.00% or (ii) the higher of
(a) the Federal Funds rate plus 1.50% or (b) the Bank
of America N.A. prime rate plus 1.00%. The revolving line of
credit requires the payment of an annual commitment fee equal to
0.50% 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 revolving credit facility provides for a swingline
sub-facility. The swingline sub-facility bears interest at the
Bank of America N.A. cost of funds plus 2.00%. The revolving
credit facility also provides for a sub-facility for the
issuance of letters of credit for up to an aggregate amount of
$115 million. The letter of credit fee is 3.00% per annum
on letters of credit issued, which is payable quarterly. Events
of default have occurred which have increased the interest rate
and fees on letters of credit by up to 2.00% during the
continuance of such events of default. See “Events of
Default, Liquidity and Operations” above.
Privately Issued Unsecured
Notes Payable. We have privately issued
unsecured long-term notes to institutional investors, primarily
insurance companies. The private notes have five- or seven-year
maturities and fixed rates of interest ranging from 6.53% to
9.14% at March 31, 2009. Events of default have occurred,
which has increased these interest rates by 2.00% during the
continuance of such events of default. See “Events of
Default, Liquidity and Operations” above. The private notes
generally require payment of interest only semi-annually, and
all principal is due upon maturity. At March 31, 2009, the notes
had maturities from November 2009 to June 2015. The private
notes may be prepaid in whole or in part, together with an
interest premium, if any, as stipulated in the note agreements.
The revolving line of credit and the private notes have similar
financial and operating covenants. These covenants require us to
maintain certain financial ratios, including asset coverage,
debt to equity and interest coverage, and a minimum net worth.
These debt agreements provide for customary events of default,
including, but not limited to, payment defaults, breach of
representations or covenants, crossdefaults, 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. These debt agreements limit our
ability to declare dividends or repurchase our common stock
during the existence of certain defaults and events of default.
Amendments to Revolving Line of Credit and Privately
Issued Unsecured Notes Payable. On
December 30, 2008, we entered into amendments relating to
our private notes and revolving line of credit. The amendments
reduced our capital maintenance covenant to the greater of
$1.5 billion and 85% of consolidated adjusted debt, and
reduced our interest charges coverage ratio covenant, determined
as of the last day of each fiscal quarter for the period of four
consecutive fiscal quarters ending on such day, to 1.4 to 1 for
each fiscal quarter to and including the fiscal quarter ending
December 31, 2009, to 1.6 to 1 for the fiscal quarter
ending March 31, 2010 and each fiscal quarter thereafter to
and including the fiscal quarter ending December 31, 2010,
and to 1.7 to 1 for the fiscal quarter
95
ending March 31, 2011 and each fiscal quarter thereafter.
The amendments did not modify our obligation to maintain a
minimum 200% asset coverage ratio.
The amendments added new covenants that required us to grant to
the private noteholders (the noteholders) and the revolving line
of credit lenders (the lenders) a first lien security interest
on substantially all of our assets no later than
January 30, 2009, and to maintain a ratio of consolidated
total adjusted assets to secured debt of not less than 2.25 to
1. Also, prior to December 31, 2010, the amendments
(i) required us to limit the payment of dividends to a
maximum of $0.20 per share per fiscal quarter (or such greater
amount required for us to maintain our regulated investment
company status), and (ii) restricted us from purchasing,
redeeming or retiring any shares of our common stock or any
warrants, rights or options to purchase or acquire any shares of
our common stock for an aggregate consideration in excess of
$60 million. In addition, the amendments restricted us from
prepaying, redeeming, purchasing or otherwise acquiring any of
our currently outstanding public notes prior to their stated
maturity. The amendments also made certain other modifications.
The amendments increased the rate of interest on the instruments
by 100 basis points. In addition, these amendments required
a 50 basis point amendment fee.
Publicly Issued Unsecured Notes
Payable. At March 31, 2009, we had
outstanding publicly issued unsecured notes as follows:
| ($ in millions) | Amount | Maturity Date | ||||||
|
6.625% Notes due 2011
|
$ | 397.5 | July 15, 2011 | |||||
|
6.000% Notes due 2012
|
250.0 | April 1, 2012 | ||||||
|
6.875% Notes due 2047
|
230.0 | April 15, 2047 | ||||||
|
Total
|
$ | 877.5 | ||||||
The 6.625% Notes due 2011 and the 6.000% Notes due 2012 require
payment of interest only semi-annually, and all principal is due
upon maturity. We have the option to redeem these notes in whole
or in part, together with a redemption premium, if any, as
stipulated in the notes. In addition, we may purchase these
notes in the market at par or at a discount to the extent
permitted by the 1940 Act. During the three months ended
March 31, 2009, we paid $0.5 million to repurchase
certain of the 6.625% Notes due 2011 which had a face value of
$2.5 million.
The 6.875% Notes due 2047 require payment of interest only
quarterly, and all principal is due upon maturity. We may redeem
these notes in whole or in part at any time or from time to time
on or after April 15, 2012, at par and upon the occurrence
of certain tax events as stipulated in the notes. The notes are
listed on the New York Stock Exchange under the trading symbol
AFC.
We have certain financial and operating covenants that are
required by the publicly issued unsecured notes payable. We are
not permitted to issue indebtedness unless immediately after
such issuance we have asset coverage of all outstanding
indebtedness of at least 200% as required by the 1940 Act, as
amended. At March 31, 2009, our asset coverage ratio was
171%, which is less than the 200% requirement. As a result under
the publicly issued unsecured notes payable, we will not be able
to issue indebtedness until such time as our asset coverage
returns to at least 200%. We have not experienced any default or
cross default with respect to the publicly issued unsecured
notes payable.
96
Contractual Obligations. The following
table shows our significant contractual obligations for the
repayment of debt and payment of other contractual obligations
as of March 31, 2009.
| Payments Due By Year | ||||||||||||||||||||||||||||
|
After |
||||||||||||||||||||||||||||
| ($ in millions) | Total | 2009 | 2010 | 2011 | 2012 | 2013 | 2013 | |||||||||||||||||||||
|
Privately issued unsecured notes
payable(1)
|
$ | 1,015.0 | $ | 1,015.0 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Publicly issued unsecured notes payable
|
877.5 | — | — | 397.5 | 250.0 | — | 230.0 | |||||||||||||||||||||
|
Revolving line of
credit(2)
|
50.0 | 50.0 | — | — | — | — | — | |||||||||||||||||||||
|
Operating leases
|
14.1 | 3.4 | 4.4 | 1.7 | 1.7 | 1.7 | 1.2 | |||||||||||||||||||||
|
Total contractual obligations
|
$ | 1,956.6 | $ | 1,068.4 | $ | 4.4 | $ | 399.2 | $ | 251.7 | $ | 1.7 | $ | 231.2 | ||||||||||||||
| (1) | The private notes have stated contractual maturities as follows: 2009-$252.5 million, 2010-$408.0 million, 2011-$72.5 million, 2012-$89.0 million, 2013-$140.5 million and thereafter-$52.5 million. |
| (2) | At March 31, 2009, $50.0 million was borrowed on the revolving line of credit and $113.5 million of standby letters of credit were issued under the credit facility. In March 2009, the commitment under our unsecured revolving line of credit was reduced to $165.0 million. See “Revolving Line of Credit” above. |
As discussed above, events of default have occurred and are
continuing under the revolving line of credit and private notes.
Neither the lenders nor noteholders have accelerated repayment;
however, if the administrative agent for the lenders under the
revolving line of credit or the required percentage of lenders
under the revolving line of credit or noteholders under the
private notes, respectively, were to accelerate repayment, these
obligations would become immediately due and payable. Therefore,
in the table above, the private notes and revolving line of
credit are shown as payable in 2009.
Off-Balance
Sheet Arrangements
In the ordinary course of business, we have issued guarantees
and have extended standby letters of credit through financial
intermediaries on behalf of certain portfolio companies. We
generally have issued guarantees and have obtained standby
letters of credit under our revolving line of credit for the
benefit of counterparties to certain portfolio companies. Under
these arrangements, we would be required to make payments to
third parties if the portfolio companies were to default on
their related payment obligations or if the expiration dates of
the letters of credit are not extended. The following table
shows our guarantees and standby letters of credit that may have
the effect of creating, increasing, or accelerating our
liabilities as of March 31, 2009.
| Amount of Commitment Expiration Per Year | ||||||||||||||||||||||||||||
|
After |
||||||||||||||||||||||||||||
| ($ in millions) | Total | 2009 | 2010 | 2011 | 2012 | 2013 | 2013 | |||||||||||||||||||||
|
Guarantees
|
$ | 19.2 | $ | 7.5 | $ | 6.4 | $ | 4.4 | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
|
Standby letters of credit
|
113.5 | 113.5 | — | — | — | — | — | |||||||||||||||||||||
|
Total commitments
|
$ | 132.7 | $ | 121.0 | $ | 6.4 | $ | 4.4 | $ | 0.1 | $ | — | $ | 0.8 | ||||||||||||||
Standby letters of credit have been issued under our revolving
line of credit. Our asset coverage ratio is currently less than
200% and events of default have occurred and are continuing
under our revolving line of credit. Therefore, we are precluded
from borrowing under our revolving line of credit to fund these
standby letters of credit and we may need to fund these letter
of credit draws with cash in lieu of a borrowing. As a result,
in the table above we have assumed that these standby letters of
credit may not be able to be extended and may mature in 2009.
During the existence of an event of default, the administrative
agent is (i) permitted to require us to provide cash collateral
equal to the face amount of all outstanding standby letters of
credit and (ii) not required to extend the existing letters
of credit beyond their maturity dates, all of which expire
during the course of 2009. There can be no assurance that we
will have cash resources sufficient to satisfy these commitments
should the standby letters of credit not be extended.
97
In addition, we had outstanding commitments to fund investments
totaling $651.6 million at March 31, 2009, including
$619.3 million related to private finance investments and
$32.3 million related to commercial real estate finance
investments. Outstanding commitments related to private finance
investments included $399.6 million to the Unitranche Fund
LLC. Investments made by the Unitranche Fund must be approved by
the investment committee of the Unitranche Fund, which includes
a representative from us and GE. Therefore, our commitment to
the Unitranche Fund cannot be drawn without our approval. See
“— Portfolio and Investment Activity —
Outstanding Commitments” above.
We intend to fund these commitments with existing cash and
through cash flow from operations before new investments
although there can be no assurance that we will generate
sufficient cash flow to satisfy these commitments. Should we not
be able to satisfy these commitments, there could be a material
adverse effect on our financial condition, liquidity and results
of operations.
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 management’s most difficult,
complex, or subjective judgments. Our critical accounting
policies are those applicable to the valuation of investments,
certain revenue recognition matters and certain tax matters as
discussed below.
Valuation of Portfolio
Investments. We, as a BDC, have invested in
illiquid securities including debt and equity securities of
portfolio companies, CLO bonds and preferred shares/income
notes, CDO bonds and investment funds. 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 and
the provisions of the Investment Company Act of 1940 and FASB
Statement No. 157, Fair Value Measurements
(SFAS 157 or the Statement) and related
interpretations. We determine fair value to be the price that
would be received for an investment in a current sale, which
assumes an orderly transaction between market participants on
the measurement date. Our valuation policy considers the fact
that no ready market exists for substantially all of the
securities in which it invests and that fair value for its
investments must typically be determined using unobservable
inputs. Our valuation policy is intended to provide a consistent
basis for determining the fair value of the portfolio.
We adopted SFAS 157 on a prospective basis in the first
quarter of 2008. SFAS 157 requires us to assume that the
portfolio investment is to be sold in the principal market to
market participants, or in the absence of a principal market,
the most advantageous market, which may be a hypothetical
market. Market participants are defined as buyers and sellers in
the principal or most advantageous market that are independent,
knowledgeable, and willing and able to transact. In accordance
with the Statement, we have considered our principal market, or
the market in which we exit our portfolio investments with the
greatest volume and level of activity.
We have determined that for our buyout investments, where we
have control or could gain control through an option or warrant
security, both the debt and equity securities of the portfolio
investment would exit in the merger and acquisition (M&A)
market as the principal market generally through a sale or
recapitalization of the portfolio company. We believe that the
in-use premise of value (as defined in SFAS 157), which
assumes the debt and equity securities are sold together, is
appropriate as this would provide maximum proceeds to the
seller. As a result, we use the enterprise value methodology to
determine the fair value of these investments under
SFAS 157. Enterprise value means the entire value of the
company to a market participant, including the sum of the values
of debt and equity securities used to capitalize the enterprise
at a point in time. Enterprise value is determined using various
factors, including cash flow from operations of the portfolio
company, multiples at which private companies are bought and
sold, and other pertinent factors, such as recent offers to
purchase a portfolio company, recent transactions involving the
purchase or sale of the portfolio company’s equity
securities, liquidation events, or other events. We allocate the
enterprise value to these securities in order of the legal
priority of the securities.
98
While we typically exit our securities upon the sale or
recapitalization of the portfolio company in the M&A
market, for investments in portfolio companies where we do not
have control or the ability to gain control through an option or
warrant security, we cannot typically control the exit of our
investment into our principal market (the M&A market). As a
result, in accordance with SFAS 157, we are required to
determine the fair value of these investments assuming a sale of
the individual investment in a hypothetical market to a
hypothetical market participant (the in-exchange premise of
value). We continue to perform an enterprise value analysis for
the investments in this category to assess the credit risk of
the loan or debt security and to determine the fair value of our
equity investment in these portfolio companies. The determined
equity values are generally discounted when we have a minority
ownership position, restrictions on resale, specific concerns
about the receptivity of the capital markets to a specific
company at a certain time, or other factors. For loan and debt
securities, we perform a yield analysis assuming a hypothetical
current sale of the investment. The yield analysis requires us
to estimate the expected repayment date of the instrument and a
market participant’s required yield. The yield analysis
considers changes in interest rates and changes in leverage
levels of the loan or debt security as compared to current
market interest rates and leverage levels. Assuming the credit
quality of the loan or debt security remains stable, we will use
the value determined by the yield analysis as the fair value for
that security. If there is deterioration in credit quality or a
loan or debt security is in workout status, we may consider
other factors in determining the fair value of a loan or debt
security, including the value attributable to the loan or debt
security from the enterprise value of the portfolio company or
the proceeds that would be received in a liquidation analysis.
Our equity investments in private debt and equity funds
generally are valued at such fund’s net asset value, unless
other factors lead to a determination of fair value at a
different amount. The value of our equity securities in public
companies for which quoted prices in an active market are
readily available is based on the closing public market price on
the measurement date.
The fair value of our CLO bonds and preferred shares/income
notes and CDO bonds (CLO/CDO Assets) is generally based on a
discounted cash flow model that utilizes prepayment,
re-investment 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 CLO/CDO Assets as comparable yields in the market change
and/or based
on changes in estimated cash flows resulting from changes in
prepayment, re-investment or loss assumptions in the underlying
collateral pool or changes in redemption assumptions for the
CLO/CDO Assets, if applicable. We determine the fair value of
our CLO/CDO Assets on an individual
security-by-security
basis.
We will record unrealized depreciation on investments when we
determine that the fair value of a security is less than its
cost basis, and will record unrealized appreciation when we
determine that the fair value is greater than its cost basis.
Because of the inherent uncertainty of valuation, the values
determined at the measurement date 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.
Additionally, changes in the market environment and other events
that may occur over the life of the investments may cause the
gains or losses ultimately realized on these investments to be
different than the values determined at the measurement date. In
accordance with
FSP 157-4
(discussed below), we do not consider a transaction price that
is associated with a transaction that is not orderly to be
indicative of fair value or market participant risk premiums,
and accordingly would place little, if any, weight on
transactions that are not orderly in determining fair value.
When considering recent potential or completed transactions, we
use judgment in determining if such offers or transactions were
pursuant to an orderly process for purposes of determining how
much weight is placed on these data points in accordance with
the applicable guidelines in SFAS 157 and
FSP 157-4.
See “— Results of Operations — Change
in Unrealized Appreciation or Depreciation” above for more
discussion on portfolio valuation.
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
99
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, when applicable, and depreciation
on accrued interest and dividends receivable and other assets
where collection is doubtful.
Interest and Dividend Income. 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 generally 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 company’s capital
requirements.
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. 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.
We recognize interest income on the CLO preferred shares/income
notes using the effective interest method, based on the
anticipated yield that is determined using the estimated cash
flows over the projected life of the investment. Yields are
revised when there are changes in actual or estimated cash flows
due to changes in prepayments and/or re-investments, credit
losses or asset pricing. Changes in estimated yield are
recognized as an adjustment to the estimated yield over the
remaining life of the preferred shares/income notes from the
date the estimated yield was changed. CLO and CDO bonds have
stated interest rates. The weighted average yield on the CLO/CDO
Assets is calculated as the (a) annual stated interest or
the effective interest yield on the accruing bonds or the
effective yield on the preferred shares/income notes, divided by
(b) CLO/CDO Assets at value. The weighted average yields
are computed as of the balance sheet date.
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.
Fee Income. Fee income includes fees
for loan prepayment premiums, 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. Loan
prepayment premiums are recognized at the time of prepayment.
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, including fund
management fees, are generally recognized as income as the
services are rendered. Fees are not accrued if we have doubt
about collection of those fees.
Federal and State Income Taxes and Excise
Tax. We intend to comply with the
requirements of the Internal Revenue Code that are applicable to
regulated investment companies (RIC) and real estate investment
trusts (REIT). We and any of our subsidiaries that qualify as a
RIC or a REIT intend to distribute or retain through a deemed
distribution all of our annual taxable income to shareholders;
therefore, we have made no provision for income taxes for these
entities.
100
If we do not distribute at least 98% of our annual taxable
income in the year earned, we will generally be required to pay
an excise tax equal to 4% of the amount by which 98% of our
annual taxable income exceeds the distributions from such
taxable income for the year. To the extent that we determine
that our estimated current year annual taxable income will be in
excess of estimated current year dividend distributions from
such taxable income, we accrue 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.
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.
Recent Accounting
Pronouncements. Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That
Are Not Orderly
(FSP 157-4).
In April 2009, the FASB issued
FSP 157-4,
which provides guidance on how to determine the fair value of
assets under SFAS 157 in the current economic environment
and reemphasizes that the objective of a fair-value measurement
remains an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at
the measurement date under current market conditions.
FSP 157-4
states that a transaction price that is associated with a
transaction that is not orderly is not determinative of fair
value or market-participant risk premiums and companies should
place little, if any, weight (compared with other indications of
fair value) on transactions that are not orderly when estimating
fair value or market risk premiums.
We adopted the provisions of
FSP 157-4
on a prospective basis beginning in the quarter ending
March 31, 2009. The adoption of the provisions of
FSP 157-4
did not have a material effect on our consolidated financial
statements.
Fair Value Measurements. In September 2006, the FASB
issued Statement No. 157, which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements.
We adopted this statement on a prospective basis beginning in
the quarter ended March 31, 2008. The initial adoption of
this statement did not have a material effect on our
consolidated financial statements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk
There has been no material change in quantitative or qualitative
disclosures about market risk since December 31, 2008.
101
Item 4. Controls
and Procedures
(a) As of the end of the period covered by this quarterly
report on
Form 10-Q,
the Company’s chairman of the board, chief executive
officer, chief financial officer and chief accounting officer
conducted an evaluation of the Company’s disclosure
controls and procedures (as defined in
Rules 13a-15
and 15d-15
of the Securities Exchange Act of 1934). Based upon this
evaluation, the Company’s chairman of the board, chief
executive officer, chief financial officer and chief accounting
officer concluded that the Company’s disclosure controls
and procedures are effective to allow timely decisions regarding
required disclosure of any material information relating to the
Company that is required to be disclosed by the Company in the
reports it files or submits under the Securities Exchange Act of
1934.
(b) There have been no changes in the Company’s
internal control over financial reporting that occurred during
the quarter ended March 31, 2009, that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
102
PART II.
OTHER INFORMATION
Item 1. Legal
Proceedings
On June 23, 2004, we were notified by the SEC that they
were conducting an informal investigation of us. The
investigation related to the valuation of securities in our
private finance portfolio and other matters. On June 20,
2007, we announced that we entered into a settlement with the
SEC that resolved the SEC’s informal investigation. As part
of the settlement and without admitting or denying the
SEC’s allegations, we agreed to the entry of an
administrative order. In the order the SEC alleged that, between
June 30, 2001, and March 31, 2003, we did not maintain
books, records and accounts which, in reasonable detail,
supported or accurately and fairly reflected valuations of
certain securities in our private finance portfolio and, as a
result, did not meet certain recordkeeping and internal controls
provisions of the federal securities laws. In the administrative
order, the SEC ordered us to continue to maintain certain of our
current valuation-related controls. Specifically, for a period
of two years, we have undertaken to: (1) continue to employ
a Chief Valuation Officer, or a similarly structured
officer-level employee, to oversee our quarterly valuation
processes; and (2) continue to employ third-party valuation
consultants to assist in our quarterly valuation processes.
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 (currently known as Ciena Capital
LLC) in connection with a criminal investigation relating to
matters similar to those investigated by and settled with the
SEC as discussed above. We produced materials in response to the
requests from the U.S. Attorney’s office and certain
current and former employees were interviewed by the U.S.
Attorney’s Office. We have voluntarily cooperated with the
investigation.
In late December 2006, we received a subpoena from the U.S.
Attorney for the District of Columbia requesting, among other
things, the production of records regarding the use of private
investigators by us or our agents. The Board established a
committee, which was advised by its own counsel, to review this
matter. In the course of gathering documents responsive to the
subpoena, we became aware that an agent of Allied Capital
obtained what were represented to be telephone records of David
Einhorn and which purport to be records of calls from Greenlight
Capital during a period of time in 2005. Also, while we were
gathering documents responsive to the subpoena, allegations were
made that our management had authorized the acquisition of these
records and that management was subsequently advised that these
records had been obtained. Our management has stated that these
allegations are not true. We have cooperated fully with the
inquiry by the U.S. Attorney’s Office.
On February 26, 2007, Dana Ross filed a class action
complaint in the U.S. District Court for the District of
Columbia in which she alleges that Allied Capital Corporation
and certain members of management violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and
Rule 10b-5
thereunder. Thereafter, the court appointed new lead counsel and
approved new lead plaintiffs. On July 30, 2007, plaintiffs
served an amended complaint. Plaintiffs claim that, between
November 7, 2005, and January 22, 2007, Allied Capital
either failed to disclose or misrepresented information about
our portfolio company, Business Loan Express, LLC. Plaintiffs
seek unspecified compensatory and other damages, as well as
other relief. We believe the lawsuit is without merit, and we
intend to defend the lawsuit vigorously. On September 13,
2007, we filed a motion to dismiss the lawsuit. The motion is
pending.
On October 6, 2008, Rena Nadoff filed a shareholder
derivative action in the Superior Court of the District of
Columbia, captioned Rena Nadoff v. Walton, et al., 2008 CA
007108, seeking unspecified compensatory and other damages, as
well as equitable relief on behalf of Allied Capital
Corporation. Ms. Nadoff’s suit is substantially
similar to a derivative action she filed in February 2007, which
the Court dismissed in July 2007. On November 26, 2008, we
filed a motion to dismiss the second Nadoff lawsuit. On
February 3, 2009, the Court denied the motion to dismiss
but ordered Ms. Nadoff to file an amended complaint that
clearly identifies and sets forth the breaches of fiduciary
duty, if any, that are alleged to have occurred after the filing
(or dismissal) of the first Nadoff derivative lawsuit.
Ms. Nadoff filed an amended complaint alleging breaches of
fiduciary duty by the Board of Directors. We
103
filed a motion to dismiss the amended complaint. In response,
Ms. Nadoff requested that she be allowed to voluntarily
dismiss the amended complaint without prejudice. The court
denied her request and the motion to dismiss is pending.
In addition to the above matters, we are party to certain
lawsuits in the normal course of business. Furthermore, third
parties may try to seek to impose liability on us in connection
with the activities of our portfolio companies. For a discussion
of civil investigations being conducted regarding the lending
practices of Ciena Capital LLC, one of our portfolio companies,
see Note 3, “Portfolio — Ciena Capital
LLC” from our Notes to the Consolidated Financial
Statements included in Item 1.
While the outcome of any of the open legal proceedings described
above cannot at this time be predicted with certainty, we do not
expect these matters will materially affect our financial
condition or results of operations; however, there can be no
assurance whether any pending legal proceedings will have a
material adverse effect on our financial condition or results of
operations in any future reporting period.
Item 1A.
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.
Risks
Related to Liquidity
Certain events of default have occurred under our revolving
credit facility and our private notes and, as a result, these
lenders are permitted to accelerate repayment of the outstanding
obligations thereunder. Certain events of default
have occurred under our revolving credit facility and our
private notes. The occurrence of an event of default permits the
administrative agent for the lenders under the revolving credit
facility, or the holders of more than 51% of the commitments
under the revolving credit facility, to accelerate repayment of
all amounts due, to terminate commitments thereunder, and to
require us to provide cash collateral equal to the face amount
of all outstanding letters of credit. Pursuant to the terms of
the private notes, the occurrence of an event of default permits
the holders of 51% or more of any issue of outstanding private
notes to accelerate repayment of all amounts due thereunder.
As of March 31, 2009 we had $50 million in outstanding
borrowings and $113.5 million in outstanding letters of
credit issued under the revolving credit facility, and
$1.0 billion in outstanding private notes. Neither the
lenders nor the noteholders have accelerated repayment of our
obligations; however, there can be no assurance that they will
not accelerate repayment in the future. We do not have
sufficient cash resources to repay these obligations should the
lenders or noteholders accelerate these obligations.
Acceleration of the amounts outstanding under the revolving
credit facility or any issue of the private notes could have a
material adverse impact on our liquidity, financial condition
and operations.
The existence of an event of default restricts us from borrowing
or obtaining letters of credit under our revolving credit
facility, and from declaring dividends or other distributions to
our shareholders.
We are currently in discussions with our lenders and noteholders
to seek relief under certain terms of both our revolving credit
facility and our private notes due to the events of default. The
discussions with the lenders and the noteholders are continuing
and the discussions encompass a more comprehensive restructuring
of these debt agreements to provide long-term operational
flexibility. There can be no assurance that these discussions
with our lenders and noteholders will be successful.
Our independent registered public accounting firm has
expressed substantial doubt about our ability to continue as a
going concern. In its audit report on our
financial statements for our fiscal year ended December 31,
2008, our independent registered public accounting firm included
an explanatory paragraph indicating that our consolidated
financial statements have been prepared assuming that we will
continue as a going concern. Certain
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events of default have occurred under our revolving credit
facility and our private notes. These events of default provide
the respective lenders the right to declare immediately due and
payable unpaid amounts approximating $1.1 billion at
March 31, 2009. We do not have available cash resources to
satisfy all of the obligations under these debt agreements
should the lenders accelerate these obligations. These factors
raise substantial doubt about our ability to continue as a going
concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of these
uncertainties.
Our use of leverage magnifies the potential for gain or loss
on amounts invested and may increase the risk of investing in
us. Borrowings, also known as leverage, magnify
the potential for gain or loss on amounts invested and,
therefore, increase the risks associated with investing in our
securities. We borrow from and issue senior debt securities to
banks, insurance companies, and other lenders 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. Leverage is
generally considered a speculative investment technique. We and,
indirectly, our stockholders will bear the cost associated with
our leverage activity. Our revolving line of credit and notes
payable contain financial and operating covenants that could
restrict our business activities, including our ability to
declare dividends if we default under certain provisions. Breach
of any of those covenants could cause a default under those
instruments. Such a default, if not cured or waived, could have
a material adverse effect on us.
At March 31, 2009, we had $1.9 billion of outstanding
indebtedness bearing a weighted average annual interest cost of
8.6% and a debt to equity ratio of 1.42 to 1.00. 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 must achieve annual
returns on our assets of at least 4.9% as of March 31,
2009, which returns were achieved.
Regulations governing our operation as a BDC affect our
ability to, and the way in which we, raise additional debt and
equity capital. We will continue to need capital
to fund growth in our investments. Under the 1940 Act, we are
not permitted to issue indebtedness unless immediately after
such borrowing we have an asset coverage for total borrowings of
at least 200%. As of March 31, 2009, our asset coverage was
171%. There can be no assurance as to when we will be able to
satisfy the asset coverage requirements of the 1940 Act, if at
all, and our failure to do so would have a material adverse
impact on our liquidity, financial condition, results of
operations, and ability to pay dividends.
We generally are not able to issue and sell our common stock at
a price below net asset value per share. We may, however, sell
our common stock, warrants, options, or rights to acquire our
common stock at a price below the current net asset value per
share of the common stock if our Board of Directors determines
that such sale is in our best interests and the best interests
of our stockholders and, in certain instances, our stockholders
approve such sale. In any such case, the price at which our
securities are to be issued and sold may not be less than the
price which, in the determination of our Board of Directors,
closely approximates the market value of such securities (less
any commission or discount). If our common stock continues to
trade at a discount to net asset value, this restriction could
adversely affect our ability to raise capital. Shares of
business development companies, including shares of our common
stock, have been trading at discounts to their net asset values.
As of March 31, 2009, our net asset value per share was
$7.67. The closing price of our shares on the NYSE at
March 31, 2009 was $1.59. If our common stock trades below
net asset value, the higher cost of equity capital may result in
it being unattractive to raise new equity, which may limit our
ability to grow. The risk of trading below net asset value is
separate and distinct from the risk that our net asset value per
share may decline.
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Our credit ratings may change and may not reflect all risks
of an investment in the debt securities. At
March 31, 2009, our long-term debt carries a non-investment
grade credit rating of B1 by Moody’s Investors Service, BB+
by Standard & Poor’s, and BB by FitchRatings. 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. There can be no assurance that
the long-term debt ratings will be maintained.
Risks
Related to Current Economic and Market Conditions
We are currently in a period of capital markets disruption
and severe recession and we do not expect these conditions to
improve in the near future. These market conditions have
materially and adversely affected the debt and equity capital
markets in the United States, which has had and could continue
to have a negative impact on our business and
operations. The U.S. capital markets have
been experiencing extreme volatility and disruption for more
than 12 months as evidenced by a lack of liquidity in the
debt capital markets, significant write-offs in the financial
services sector, the repricing of credit risk in the credit
market and the failure of major financial institutions. These
events have contributed to worsening general economic conditions
that are materially and adversely impacting the broader
financial and credit markets and reducing the availability of
credit and equity capital for the markets as a whole and
financial services firms in particular. We believe that the
U.S. economy has entered into a period of severe recession,
and forecasts for 2009 generally call for a weakening economy in
the United States, with the continuation of the economic
recession and possibly an economic depression. As a result, we
believe these conditions may continue for a prolonged period of
time or worsen in the future. A prolonged period of market
illiquidity will continue to have an adverse effect on our
business, financial condition, and results of operations.
Unfavorable economic conditions also could increase our funding
costs, limit our access to the capital markets or result in a
decision by lenders not to extend credit to us. Equity capital
may be difficult to raise because, subject to some limited
exceptions, we generally are not able to issue and sell our
common stock at a price below net asset value per share. In
addition, the debt capital that will be available, if at all,
may be at a higher cost and on less favorable terms and
conditions. These events and the inability to raise capital has
significantly limited our investment originations, limited our
ability to grow and negatively impacted our operating results.
Economic recessions, including the current global recession,
could impair our portfolio companies and harm our operating
results. Many of the companies in which we have
made or will make investments are susceptible to economic
slowdowns or recessions. An economic recession, including the
current and any future recessions or economic slowdowns, 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. Current adverse economic conditions also have
decreased the value of any collateral securing our loans, if
any, and a prolonged recession or depression may further
decrease such value. These conditions are contributing to and if
prolonged could lead to further losses of value in our portfolio
and a decrease in our revenues, net income, assets and net worth.
Risks
Related to Asset Values
Declining asset values and illiquidity in the corporate debt
markets have adversely affected, and may continue to adversely
affect, the fair value of our portfolio investments, reducing
the value of our assets. As a BDC, we are
required to carry our investments at market value or, if no
market value is readily available, at fair value as determined
in good faith by the Board of Directors. Decreases in the values
of our investments are recorded as unrealized depreciation. The
continuing unprecedented declines in asset values and liquidity
in the corporate debt markets have resulted in significant net
unrealized depreciation in our portfolio. As of March 31,
2009, conditions in the debt and equity markets had continued to
deteriorate and pricing levels continued to decline. As a
result, we have incurred and, depending on market conditions, we
may incur further unrealized depreciation in future periods,
which could have a material adverse impact on our business,
financial condition and results of operations.
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Substantially all of our portfolio investments, which are
generally illiquid, 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, 2009, portfolio
investments recorded at fair value were 86% 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 market quotation in an active market
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 approach 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. In
determining fair value in good faith, we generally obtain
financial and other information from portfolio companies, which
may represent unaudited, projected or pro forma financial
information. 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. We will record unrealized
depreciation on investments when we determine that the fair
value of a security is less than its cost basis, and unrealized
appreciation when we determine that the fair value of a security
is greater than its cost basis. Without a market quotation in an
active market 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. See Note 2,
“Summary of Significant Accounting Policies” from our
Notes to the Consolidated Financial Statements included in
Item 1.
Risks
Related to Our Portfolio
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.
Our business of making private equity investments and
positioning them for liquidity events also may be affected by
current and future market conditions. Current economic and
capital markets conditions in the U.S. have severely
reduced capital availability, senior lending activity and middle
market merger and acquisition activity. The absence of an active
senior lending environment and the slowdown or stalling in
middle market merger and acquisition activity has slowed the
amount of private equity investment activity generally. As a
result, the pace of our investment activity has also slowed. In
addition, significant changes in the capital markets, including
the recent extreme volatility and disruption, has had and may
continue to have a negative effect on the valuations of our
investments, and on the potential for liquidity events involving
such investments. This could affect the timing of exit events in
our portfolio, reduce the level of net realized gains from exit
events in a given year, and could negatively affect the amount
of gains or losses upon exit.
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
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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 company’s
financial condition and prospects may be accompanied by
deterioration in the collateral for a loan, if any.
Our borrowers may default on their payments, which may have a
negative effect on our financial performance. We
make long-term loans and invest in equity securities primarily
in private middle market companies, 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 borrower’s ability to repay
its loan, including the failure to meet its business plan, a
downturn in its industry, or negative economic conditions. A
portfolio company’s 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
company’s 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 subordinated loans or
debt securities. Deterioration in a borrower’s financial
condition and prospects may be accompanied by deterioration in
any related collateral and may have a negative effect on our
financial results.
We may be unable to fund our commitments to our portfolio
companies as they become due, which may have a material adverse
effect on our business. We have outstanding
investment commitments that at March 31, 2009 totaled
$651.6 million. In addition, at March 31, 2009, we had
standby letters of credit issued under our revolving line of
credit and certain guarantees related to portfolio companies of
$132.7 million. We are currently in default under the terms
of our revolving line of credit and private notes, and in
addition our asset coverage is less than the 200% required by
the 1940 Act for us to issue new debt. As a result, we are
currently unable to borrow additional money to fund these
commitments. In addition, because our common stock trades at a
price that is less than our net asset value per share, we may
not be able to raise funds through additional equity offerings
in order to fund these commitments. To the extent we are unable
to fund these commitments, it could have a material adverse
effect on our portfolio companies, and as a result, have a
material adverse effect on our results of operations.
Our private finance investments may not produce current
returns or capital gains. Our private finance
portfolio includes loans and debt securities that require the
payment of interest currently and equity securities such as
conversion rights, warrants, or options, minority equity
co-investments, or more significant equity investments in the
case of buyout transactions. Our private finance debt
investments are generally structured to generate interest income
from the time they are made and our equity investments may also
produce a realized gain. 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, 2009, our investment in Ciena Capital LLC
(Ciena) totaled $551.1 million at cost and
$64.1 million at value, after the effect of unrealized
depreciation of $487.0 million. Other assets includes
additional
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amounts receivable from or related to Ciena totaling
$15.5 million, which have a value of $2.1 million at
March 31, 2009. In addition, we have provided standby
letters of credit, issued in connection with term securitization
transactions completed by Ciena, that totaled $94.1 million
at March 31, 2009, and we issued performance guarantees in
connection with two non-recourse warehouse facilities. On
September 30, 2008, Ciena voluntarily filed for bankruptcy.
Ciena has been a participant in the SBA’s 7(a) Guaranteed
Loan Program and its wholly-owned subsidiary is licensed by the
SBA as a Small Business Lending Company (SBLC). Ciena remains
subject to SBA rules and regulations. The Office of the
Inspector General of the SBA (OIG) and the United States
Secret Service are conducting ongoing investigations of
allegedly fraudulently obtained SBA-guaranteed loans issued by
Ciena. Ciena is also subject to other SBA and OIG audits,
investigations, and reviews. In addition, the Office of the
Inspector General of the U.S. Department of Agriculture is
conducting an investigation of Ciena’s lending practices
under the Business and Industry Loan program. The OIG and the
U.S. Department of Justice are also conducting a civil
investigation of Ciena’s lending practices in various
jurisdictions. These investigations, audits, and reviews are
ongoing. These investigations, audits, and reviews have had and
may continue to have a material adverse impact on Ciena and, as
a result, could negatively affect our financial results. See
“Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Private Finance, Ciena Capital LLC.”
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.
Risks
Related to Regulation as a Business Development Company and
Regulated Investment Company
Loss of regulated investment company tax treatment could
negatively impact our ability to service our debt and pay
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 generally will not be subject to
corporate-level income taxation on income we timely distribute,
or deem to distribute, to our shareholders 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 could negatively impact our ability to
service our debt and pay dividends to our shareholders. 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 (excluding net long-term capital gains
retained or deemed to be distributed) 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 available for distribution exceeds the distributions from
such income for the current year.
Failure to invest a sufficient portion of our assets in
qualifying assets could preclude us from investing in accordance
with our current business strategy. As a business
development company, we may 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. Therefore, we may be precluded
from investing in what we believe are attractive investments if
such investments are not qualifying assets for purposes of the
1940 Act. If we do not invest a sufficient portion of our assets
in qualifying assets, we could lose our status as a business
development company, which would have a material adverse effect
on our business, financial condition and results of operations.
Similarly, these rules could prevent us from making additional
investments in existing portfolio companies, which could result
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in the dilution of our position, or could require us to dispose
of investments at inopportune times in order to comply with the
1940 Act. If we were forced to sell nonqualifying investments in
the portfolio for compliance purposes, the proceeds from such
sale could be significantly less than the current value of such
investments.
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. In addition, changes in the laws or
regulations that govern business development companies,
regulated investment companies, asset managers, and real estate
investment trusts may significantly affect our business. There
are proposals being considered by the current administration to
change the regulation of financial institutions that may affect,
possibly adversely, investment managers or investment funds. 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.
Risks
Related to Our Ability to Pay Dividends to Our
Shareholders
There is a risk that our common stockholders may not receive
dividends or distributions. 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 precluded from making distributions. Also,
certain of our credit facilities limit our ability to declare
dividends if we default under certain provisions. As of
March 31, 2009 we had an asset coverage of 171%. Therefore,
we may be precluded from declaring dividends or other
distributions to our shareholders unless our asset coverage is
at least 200%.
If we do not meet the distribution requirements for regulated
investment companies, we will suffer adverse tax consequences.
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
payment-in-kind
interest and dividends, net of cash collections in our
consolidated statement of cash flows. Since we may recognize
income before or without receiving cash representing such
income, we may have difficulty meeting the requirement to
distribute at least 90% of our investment company taxable income
to obtain tax benefits as a regulated investment company.
Risks
Related to Changes in Interest Rates
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. In
addition, defaults under our borrowing arrangements may result
in higher interest costs during the continuance of an event of
default. 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.
Risks
Related to Asset Management Activities
There are potential conflicts of interest between us and the
funds managed by us. Certain of our officers
serve or may serve in an investment management capacity to funds
managed by us. As a result, investment professionals may
allocate such time and attention as is deemed appropriate and
necessary to carry out the operations of the managed funds. In
this respect, they may experience diversions of their attention
from us and
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potential conflicts of interest between their work for us and
their work for the managed funds in the event that the interests
of the managed funds run counter to our interests.
Although managed funds may have a different primary investment
objective than we do, the managed funds may, from time to time,
invest in the same or similar asset classes that we target. In
addition, more than one fund managed by us may invest in the
same or similar asset classes. These investments may be made at
the direction of the same individuals acting in their capacity
on behalf of us and one or more of the managed funds. As a
result, there may be conflicts in the allocation of investment
opportunities between us and the managed funds or among the
managed funds. We may or may not participate in investments made
by investment funds managed by us or one of our affiliates. See
“Management’s Discussion and Analysis and Results of
Operations — Managed Funds.”
We have sold assets to certain managed funds and, as part of our
investment strategy, we may offer to sell additional assets to
managed funds or we may purchase assets from managed funds. In
addition, funds managed by us may offer assets to or may
purchase assets from one another. While assets may be sold or
purchased at prices that are consistent with those that could be
obtained from third parties in the marketplace, there is an
inherent conflict of interest in such transactions between us
and funds we manage.
Our financial results could be negatively affected if our
Managed Funds fail to perform as expected. In the
event that any of our Managed Funds were to perform below our
expectations, our financial results could be negatively affected
as a result of a reduction in management fees, the deferral in
payment of management fees or a reduction in incentive fees we
earn. Also, if the Managed Funds perform below expectations,
investors could demand lower fees or fee concessions which could
also cause a decline in our income. In addition, certain of our
Managed Funds are required to meet various compliance and
maintenance tests related to, among other things, the ratings on
fund assets and the ratio of collateral to a fund’s
outstanding debt. If a Managed Fund fails to comply with these
tests, the payment of a portion of our management fees could be
deferred until a fund regains compliance with such tests.
Moreover, because we are also an investor in certain of our
Managed Funds, we could experience losses on our investments.
Other
Risks
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 certain 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.
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, changes in
the accrual status of our loans and debt securities, variations
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 capital and credit markets have been experiencing extreme
volatility and disruption for more than 12 months, reaching
unprecedented levels. We have experienced significant stock
price volatility. In general, 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; |
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| • | 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; | |
| • | the financial performance of the specific industries in which we invest on a recurring basis; | |
| • | 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. Our publicly
issued debt securities may or may not have an established
trading market. We cannot assure 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 ratings assigned by national statistical ratings agencies; | |
| • | the general economic environment; | |
| • | the supply of debt securities trading in the secondary market, if any; | |
| • | the redemption or repayment features, if any, of these debt securities; | |
| • | 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. |
There also may be a limited number of buyers for our debt
securities. This too may materially adversely affect the market
value of the debt securities or the trading market for the debt
securities.
Our common stock could be delisted from the New York Stock
Exchange if we trade below $1.00 or if we fail to meet other
listing criteria. In order to maintain our
listing on the New York Stock Exchange (NYSE), we must continue
to meet the NYSE minimum share price listing rule, the minimum
market capitalization rule and other continued listing criteria.
The NYSE has suspended its $1.00 minimum price requirement on a
temporary basis, initially through June 30, 2009. Absent
this temporary suspension, under the NYSE continued listing
criteria, the average closing price of our common stock must not
be below $1.00 per share for 30 or more consecutive trading
days. In the event that the average closing price of our common
stock is below $1.00 per share over a consecutive
30-day
trading period, we would have a six-month cure period to attain
both a $1.00 share price and a $1.00 average share price
over 30 trading days.
112
If our common stock were delisted, it could (i) reduce the
liquidity and market price of our common stock;
(ii) negatively impact our ability to raise equity
financing and access the public capital markets; and
(iii) materially adversely impact our results of operations
and financial condition.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
No unregistered sales of equity securities occurred during the
quarter ended March 31, 2009. During the three months ended
March 31, 2008, we issued a total of 192,482 shares of
common stock under our dividend reinvestment plan pursuant to an
exemption from the registration requirements of the Securities
Act of 1933. The aggregate offering price for the shares of
common stock sold under the dividend reinvestment plan was
approximately $3.8 million during the three months ended
March 31, 2008.
Issuer
Purchases of Equity Securities
We did not purchase shares of our equity securities during the
three months ended March 31, 2009.
During the three months ended March 31, 2009, we
repurchased $2.5 million original principal amount of our
6.625% Notes due 2011 for $0.5 million.
Item 3. Defaults
Upon Senior Securities
None.
Item 4. Submission
of Matters to a Vote of Security Holders
None.
Item 5. Other
Information
On May 5, 2009, the Company entered into an employment
agreement with John M. Scheurer, its Chief Executive Officer and
President. Mr. Scheurer’s agreement provides for a
three-year term. The agreement specifies base salary
compensation of $1.1 million during the term of the
agreement. The Compensation Committee has the right to increase
but not decrease the base salary during the term of the
employment agreement. In addition, Mr. Scheurer’s
employment agreement states that he is eligible to receive an
annual bonus as determined by the Board in its sole discretion.
Under the agreement, Mr. Scheurer is also eligible to
participate in the Company’s Amended Stock Option Plan, and
to participate in all employee benefit programs that the Company
may provide to its other executives subject to the terms of the
programs including the payment of life insurance premiums.
Mr. Scheurer has the right to voluntarily terminate his
employment at any time with 30 days’ notice, and in
such case, he will not receive any severance pay. Among other
things, Mr. Scheurer’s employment agreement prohibits
him from hiring employees of the Company for a period of two
years following his departure from the Company.
Pursuant to Mr. Scheurer’s agreement, if he resigns
without good reason or his employment is terminated with cause,
he will not receive any severance pay. If, however, employment
is terminated by the Company without cause or by
Mr. Scheurer for good reason, he will be entitled to
severance pay, which will 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 severance amount, plus a cash payment in lieu of
certain post-termination health and welfare benefits. Severance
payments will generally be paid in a lump sum no earlier than
six months after separation.
If Mr. Scheurer’s employment is terminated as a result
of death or disability (as defined in the employment agreement),
Mr. Scheurer will be entitled to severance pay equal to one
times his average base salary for the
113
preceding three years, plus one times his average bonus
compensation for the preceding three years, plus a lump sum
severance amount, plus a cash payment in lieu of certain
post-termination health and welfare benefits.
If any provision of the employment agreement would cause
Mr. Scheurer to incur any additional tax under
Section 409A of the Code or any regulations or Treasury
guidance promulgated thereunder, the Company will reform the
provision in a manner that maintains, to the extent possible,
the original intent of the applicable provision without
violating the provisions of Section 409A of the Code.
In addition, on May 5, 2009, the Company entered into the
third amendment to the employment agreement with Penni F. Roll,
its Chief Financial Officer, to make certain modifications to
the definition of good reason in the agreement.
Item 6. Exhibits
(a) List of Exhibits
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
3.1
|
Restated Articles of Incorporation. (Incorporated by reference to Exhibit a.2 filed with Allied Capital’s Post-Effective Amendment No. 1 to registration statement on Form N-2 (File No. 333-141847) filed on June 1, 2007). | |||
|
3.2
|
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 filed with Allied Capital’s Form 10-K on March 2, 2009). | |||
|
4.1
|
Specimen Certificate of Allied Capital’s Common Stock, par value $0.0001 per share. (Incorporated by reference to Exhibit d. filed with Allied Capital’s registration statement on Form N-2 (File No. 333-51899) filed on May 6, 1998). | |||
|
4.3
|
Form of Note under the Indenture relating to the issuance of debt securities. (Contained in Exhibit 4.4). (Incorporated by reference to Exhibit d.1 filed with Allied Capital’s registration statement on Form N-2/A (File No. 333-133755) filed on June 21, 2006). | |||
|
4.4
|
Indenture by and between Allied Capital Corporation and The Bank of New York, dated June 16, 2006. (Incorporated by reference to Exhibit d.2 filed with Allied Capital’s registration statement on Form N-2/A (File No. 333-133755) filed on June 21, 2006). | |||
|
4.5
|
Statement of Eligibility of Trustee on Form T-1. (Incorporated by reference to Exhibit d.3 filed with Allied Capital’s registration statement on Form N-2 (File No. 333-133755) filed on May 3, 2006). | |||
|
4.6
|
Form of First Supplemental Indenture by and between Allied Capital Corporation and the Bank of New York, dated as of July 25, 2006. (Incorporated by reference to Exhibit d.4 filed with Allied Capital’s Post-Effective Amendment No. 1 to the registration statement on Form N-2/A (File No. 333-133755) filed on July 25, 2006). | |||
|
4.7
|
Form of 6.625% Note due 2011. (Incorporated by reference to Exhibit d.5 filed with Allied Capital’s Post-Effective Amendment No. 1 to the registration statement on Form N-2/A (File No. 333-133755) filed on July 25, 2006). | |||
|
4.8
|
Form of Second Supplemental Indenture by and between Allied Capital Corporation and The Bank of New York, dated as of December 8, 2006. (Incorporated by reference to Exhibit d.6 filed with Allied Capital’s Post-Effective Amendment No. 2 to the registration statement on Form N-2/A (File No. 333-133755) filed on December 8, 2006). | |||
|
4.9
|
Form of 6.000% Notes due 2012. (Incorporated by reference to Exhibit d.7 filed with Allied Capital’s Post-Effective Amendment No. 2 to the registration statement on Form N-2/A (File No. 333-133755) filed on December 8, 2006). | |||
|
4.10
|
Form of Third Supplemental Indenture by and between Allied Capital Corporation and The Bank of New York, dated as of March 28, 2007. (Incorporated by reference to Exhibit d.8 filed with Allied Capital’s Post-Effective Amendment No. 3 to the registration statement on Form N-2/A (File No. 333-133755) filed on March 28, 2007). | |||
114
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
4.11
|
Form of 6.875% Notes due 2047. (Incorporated by reference to Exhibit d.9 filed with Allied Capital’s Post-Effective Amendment No. 3 to the registration statement on Form N-2/A (File No. 333-133755) filed on March 28, 2007). | |||
|
4.11(a)
|
Form of 6.875% Notes due 2047. (Incorporated by reference to Exhibit d.9(a) filed with Allied Capital’s Post-Effective Amendment No. 4 to the registration statement on Form N-2/A (File No. 333-133755) filed on April 2, 2007). | |||
|
10.1
|
Dividend Reinvestment Plan, as amended. (Incorporated by reference to Exhibit e. filed with Allied Capital’s registration statement on Form N-2 (File No. 333-87862) filed on May 8, 2002). | |||
|
10.2
|
Credit Agreement, dated April 9, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on April 10, 2008). | |||
|
10.2(a)
|
First Amendment to Credit Agreement, dated December 30, 2008. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K on December 31, 2008). | |||
|
10.3
|
Note Agreement, dated October 13, 2005. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on October 14, 2005). | |||
|
10.3(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of October 13, 2005. (Incorporated by reference to Exhibit f.3(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.4
|
Note Agreement, dated May 1, 2006. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on May 1, 2006). | |||
|
10.4(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of May 1, 2006. (Incorporated by reference to Exhibit f.11(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.15
|
Second Amended and Restated Control Investor Guaranty, dated as of January 30, 2008, between Allied Capital and CitiBank, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on February 5, 2008). | |||
|
10.17
|
The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on December 21, 2005). | |||
|
10.17(a)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II, dated January 20, 2006. (Incorporated by reference to Exhibit 10.17(a) filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.17(b)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan II, dated December 14, 2007. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on December 19, 2007). | |||
|
10.18
|
The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on December 21, 2005). | |||
|
10.18(a)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan, dated January 20, 2006. (Incorporated by reference to Exhibit 10.18(a) filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.18(b)
|
Amendment to The 2005 Allied Capital Corporation Non-Qualified Deferred Compensation Plan, dated December 14, 2007. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on December 19, 2007). | |||
|
10.19
|
Amended Stock Option Plan. (Incorporated by reference to Appendix B of Allied Capital’s definitive proxy statement for Allied Capital’s 2007 Annual Meeting of Stockholders filed on April 3, 2007). | |||
|
10.20(a)
|
Allied Capital Corporation 401(k) Plan, dated September 1, 1999. (Incorporated by reference to Exhibit 4.4 filed with Allied Capital’s registration statement on Form S-8 (File No. 333-88681) filed on October 8, 1999). | |||
|
10.20(b)
|
Amendment to Allied Capital Corporation 401(k) Plan, dated April 15, 2004. (Incorporated by reference to Exhibit 10.20(b) filed with Allied Capital’s Form 10-Q for the period ended June 30, 2004). | |||
|
10.20(c)
|
Amendment to Allied Capital Corporation 401(k) plan, dated November 1, 2005. (Incorporated by reference to Exhibit 10.20(c) filed with Allied Capital’s Form 10-Q for the quarter ended September 30, 2005). | |||
115
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
10.20(d)
|
Amendment to Allied Capital Corporation 401(k) plan, dated April 21, 2006. (Incorporated by reference to Exhibit i.4(c) filed with Allied Capital’s Form N-2 (File No. 333-133755) filed on May 3, 2006). | |||
|
10.20(e)
|
Amendment to Allied Capital Corporation 401(k) plan, adopted December 18, 2006. (Incorporated by reference to Exhibit 10.20(e) filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.20(f)
|
Amendment to Allied Capital Corporation 401(k) plan, dated June 21, 2007. (Incorporated by reference to Exhibit 10.20(f) filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2007). | |||
|
10.20(g)
|
Amendment to Allied Capital Corporation 401(k) plan, dated June 21, 2007. (Incorporated by reference to Exhibit 10.20(g) filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2007). | |||
|
10.20(h)
|
Amendment to Allied Capital Corporation 401(k) plan, dated September 14, 2007, with an effective date of January 1, 2008. (Incorporated by reference to Exhibit 10.20(h) filed with Allied Capital’s Form 10-Q for the quarter ended September 30, 2007). | |||
|
10.20(i)
|
Amendment to Allied Capital Corporation 401(k) Plan. | |||
|
10.21
|
Employment Agreement, dated January 1, 2004, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.21 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.21(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.21(b)
|
Second Amendment to Employment Agreement, dated December 15, 2008, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.21(b) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008.) | |||
|
10.21(c)
|
Third Amendment to Employment Agreement, dated February 26, 2009, between Allied Capital and William L. Walton. (Incorporated by reference to Exhibit 10.21(c) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008.) | |||
|
10.22
|
Employment Agreement, dated January 1, 2004, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.22 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.22(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.2 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.22(b)
|
Second Amendment to Employment Agreement, dated December 15, 2008, between Allied Capital and Joan M. Sweeney. (Incorporated by reference to Exhibit 10.22(b) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008.) | |||
|
10.23
|
Employment Agreement, dated January 1, 2004, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.23 filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.23(a)
|
Amendment to Employment Agreement, dated March 29, 2007, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.3 filed with Allied Capital’s Form 8-K filed on April 3, 2007). | |||
|
10.23(b)
|
Second Amendment to Employment Agreement, dated December 15, 2008, between Allied Capital and Penelope F. Roll. (Incorporated by reference to Exhibit 10.23(b) filed with Allied Capital’s Form 10-K for the year ended December 31, 2008.) | |||
|
10.23(c)*
|
Third Amendment to Employment Agreement, dated May 5, 2009, between Allied Capital and Penelope F. Roll. | |||
|
10.24*
|
Employment Agreement, dated May 5, 2009, between Allied Capital and John M. Scheurer. | |||
|
10.25
|
Form of Custody Agreement with Riggs Bank N.A., which was assumed by PNC Bank through merger. (Incorporated by reference to Exhibit j.1 filed with Allied Capital’s registration statement on Form N-2 (File No. 333-51899) filed on May 6, 1998). | |||
116
|
Exhibit |
||||
|
Number
|
Description
|
|||
|
10.26
|
Custodian Agreement with Chevy Chase Trust. (Incorporated by reference to Exhibit 10.26 filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.27
|
Custodian Agreement with Bank of America. (Incorporated by reference to Exhibit 10.27 filed with Allied Capital’s Form 10-K for the year ended December 31, 2005). | |||
|
10.28
|
Code of Ethics. (Incorporated by reference to Exhibit 10.28 filed with Allied Capital’s Form 10-K for the year ended December 31, 2006). | |||
|
10.29
|
Custodian Agreement with Union Bank of California. (Incorporated by reference to Exhibit 10.29 filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2006). | |||
|
10.30
|
Custodian Agreement with M&T Bank. (Incorporated by reference to Exhibit 10.30 filed with Allied Capital’s Form 10-Q for the quarter ended June 30, 2006). | |||
|
10.31
|
Note Agreement, dated as of May 14, 2003. (Incorporated by reference to Exhibit 10.31 filed with Allied Capital’s Form 10-Q for the quarter ended March 31, 2003). | |||
|
10.31(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of May 14, 2003. (Incorporated by reference to Exhibit f.19(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.32
|
Custodian Agreement with Branch Banking and Trust Company. | |||
|
10.33
|
Note Agreement, dated June 20, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K on June 23, 2008). | |||
|
10.37
|
Form of Indemnification Agreement between Allied Capital and its directors and certain officers. (Incorporated by reference to Exhibit 10.37 filed with Allied Capital’s Form 10-K for the year ended December 31, 2003). | |||
|
10.38
|
Note Agreement, dated as of March 25, 2004. (Incorporated by reference to Exhibit 10.38 filed with Allied Capital’s Form 10-Q for the period ended March 31, 2004.) | |||
|
10.38(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of March 25, 2004. (Incorporated by reference to Exhibit f.25(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.38(b)
|
First Waiver and Second Amendment dated as of July 25, 2008, to the Note Agreement dated as of March 25, 2004. (Incorporated by reference to Exhibit 10.38(b) filed with Allied Capital’s Form 10-Q for the period ended June 30, 2008). | |||
|
10.39
|
Note Agreement, dated as of November 15, 2004. (Incorporated by reference to Exhibit 99.1 filed with Allied Capital’s current report on Form 8-K filed on November 18, 2004.) | |||
|
10.39(a)
|
Amendment dated February 29, 2008, to Note Agreement dated as of November 15, 2004. (Incorporated by reference to Exhibit f.26(a) filed with Allied Capital’s Form N-2 (File No. 333-150006) filed on April 1, 2008). | |||
|
10.40
|
Real Estate Securities Purchase Agreement. (Incorporated by reference to Exhibit 2.1 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
10.41
|
Platform Assets Purchase Agreement. (Incorporated by reference to Exhibit 2.2 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
10.42
|
Transition Services Agreement. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K filed on May 4, 2005.) | |||
|
10.43
|
First Omnibus Waiver and Amendment to the Note Agreements, dated as of July 25, 2008. (Incorporated by reference to Exhibit 10.40 filed with Allied Capital’s Form 10-Q for the period ended June 30, 2008). | |||
|
10.43(a)
|
Second Omnibus Amendment to the Note Agreements, dated as of December 30, 2008. (Incorporated by reference to Exhibit 10.1 filed with Allied Capital’s Form 8-K December 31, 2008). | |||
|
10.44*
|
Custodian Agreement, dated as of April 3, 2009 by and between Allied Capital Corporation and U.S. Bank National Association. | |||
|
11
|
Statement regarding computation of per share earnings is included in Note 7 to Allied Capital’s Notes to the Consolidated Financial Statements. | |||
|
15*
|
Letter regarding unaudited interim financial information. | |||
|
21
|
Subsidiaries of Allied Capital and jurisdiction of incorporation/organization: | |||
| A.C. Corporation | Delaware | |||
117
|
Exhibit |
||||
|
Number
|
Description
|
|||
| Allied Capital REIT, Inc. | Maryland | |||
| Allied Capital Holdings, LLC | Delaware | |||
| Allied Capital Beteiligungsberatung GmbH (inactive) | Germany | |||
|
31.1*
|
Certification of the Chairman of the Board pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
31.2*
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
31.3*
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
31.4*
|
Certification of the Chief Accounting Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | |||
|
32.1*
|
Certification of the Chairman of the Board pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
|
32.2*
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
|
32.3*
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
|
32.4*
|
Certification of the Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |||
| * | Filed herewith. |
118
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunder duly authorized.
ALLIED CAPITAL CORPORATION
(Registrant)
|
Dated: May 11, 2009
|
/s/ William
L. Walton William L. Walton Chairman of the Board |
|
|
/s/ John
M. Scheurer John M. Scheurer Chief Executive Officer and President |
||
|
/s/ Penni
F. Roll Penni F. Roll Chief Financial Officer |
||
|
/s/ John
C. Wellons John C. Wellons Chief Accounting Officer |
119
EXHIBIT
INDEX
|
Exhibit |
||||
|
Number
|
Description
|
|||
| 10 | .20(i) | Amendment to Allied Capital Corporation 401(k) Plan. | ||
| 10 | .23(c) | Third Amendment to Employment Agreement, dated May 5, 2009, between Allied Capital and Penelope F. Roll. | ||
| 10 | .24 | Employment Agreement, dated May 5, 2009, between Allied Capital and John M. Scheurer. | ||
| 10 | .44 | Custodian Agreement, dated as of April 3, 2009 between Allied Capital Corporation and U.S. Bank National Association. | ||
| 15 | Letter regarding Unaudited Interim Financial Information. | |||
| 31 | .1 | Certification of the Chairman of the Board pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 31 | .2 | Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 31 | .3 | Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 31 | .4 | Certification of the Chief Accounting Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. | ||
| 32 | .1 | Certification of the Chairman of the Board pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
| 32 | .2 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
| 32 | .3 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
| 32 | .4 | Certification of the Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | ||
120