10-Q 1 w32574e10vq.htm FORM 10-Q e10vq
 

 
 
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, 2007
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 periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x  NO o
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.     Large Accelerated Filer     x  Accelerated Filer     o Non-Accelerated Filer     o
      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO x
      On May 7, 2007, there were 152,279,012 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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PART I: FINANCIAL INFORMATION
Item 1.  Financial Statements
ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
                       
    March 31,   December 31,
    2007   2006
         
(in thousands, except per share amounts)   (unaudited)    
ASSETS
Portfolio at value:
               
 
Private finance
               
   
Companies more than 25% owned (cost: 2007-$1,836,724; 2006-$1,578,822)
  $ 1,773,164     $ 1,490,180  
   
Companies 5% to 25% owned (cost: 2007-$438,374; 2006-$438,560)
    457,871       449,813  
   
Companies less than 5% owned (cost: 2007-$2,159,014; 2006-$2,479,981)
    2,145,284       2,437,908  
             
     
Total private finance (cost: 2007-$4,434,112; 2006-$4,497,363)
    4,376,319       4,377,901  
 
Commercial real estate finance (cost: 2007-$103,384; 2006-$103,546)
    122,529       118,183  
             
     
Total portfolio at value (cost: 2007-$4,537,496; 2006-$4,600,909)
    4,498,848       4,496,084  
Investments in money market and other securities
    271,170       202,210  
Accrued interest and dividends receivable
    67,690       64,566  
Other assets
    148,041       122,958  
Cash
    327       1,687  
             
     
Total assets
  $ 4,986,076     $ 4,887,505  
             
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
               
 
Notes payable and debentures (maturing within one year: 2007-$—; 2006-$—)
  $ 1,891,516     $ 1,691,394  
 
Revolving line of credit
          207,750  
 
Accounts payable and other liabilities
    116,283       147,117  
             
     
Total liabilities
    2,007,799       2,046,261  
             
Commitments and contingencies
               
Shareholders’ equity:
               
 
Common stock, $0.0001 par value, 200,000 shares authorized; 152,124 and 148,575 shares issued and outstanding at March 31, 2007, and December 31, 2006, respectively
    15       15  
 
Additional paid-in capital
    2,595,936       2,493,335  
 
Common stock held in deferred compensation trust
    (31,371 )     (28,335 )
 
Notes receivable from sale of common stock
    (2,715 )     (2,850 )
 
Net unrealized appreciation (depreciation)
    (57,164 )     (123,084 )
 
Undistributed earnings
    473,576       502,163  
             
     
Total shareholders’ equity
    2,978,277       2,841,244  
             
     
Total liabilities and shareholders’ equity
  $ 4,986,076     $ 4,887,505  
             
Net asset value per common share
  $ 19.58     $ 19.12  
             
The accompanying notes are an integral part of these consolidated financial statements.

1


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
                       
    For the Three
    Months Ended
    March 31,
     
    2007   2006
(in thousands, except per share amounts)        
    (unaudited)
Interest and Related Portfolio Income:
               
 
Interest and dividends
               
   
Companies more than 25% owned
  $ 27,157     $ 30,146  
   
Companies 5% to 25% owned
    11,861       5,650  
   
Companies less than 5% owned
    62,965       53,085  
             
     
Total interest and dividends
    101,983       88,881  
             
 
Fees and other income
               
   
Companies more than 25% owned
    3,989       12,087  
   
Companies 5% to 25% owned
    28       2,716  
   
Companies less than 5% owned
    1,952       7,327  
             
     
Total fees and other income
    5,969       22,130  
             
     
Total interest and related portfolio income
    107,952       111,011  
             
Expenses:
               
 
Interest
    30,288       24,485  
 
Employee
    21,928       21,428  
 
Employee stock options
    3,661       3,606  
 
Administrative
    13,224       11,334  
             
     
Total operating expenses
    69,101       60,853  
             
Net investment income before income taxes
    38,851       50,158  
Income tax expense (benefit), including excise tax
    (649 )     8,858  
             
Net investment income
    39,500       41,300  
             
Net Realized and Unrealized Gains (Losses):
               
 
Net realized gains (losses)
               
   
Companies more than 25% owned
    (1,350 )     433,187  
   
Companies 5% to 25% owned
    166       (343 )
   
Companies less than 5% owned
    28,850       (9 )
             
     
Total net realized gains
    27,666       432,835  
 
Net change in unrealized appreciation or depreciation
    65,920       (374,548 )
             
     
Total net gains
    93,586       58,287  
             
Net increase in net assets resulting from operations
  $ 133,086     $ 99,587  
             
Basic earnings per common share
  $ 0.89     $ 0.72  
             
Diluted earnings per common share
  $ 0.87     $ 0.70  
             
Weighted average common shares outstanding — basic
    149,503       138,759  
             
Weighted average common shares outstanding — diluted
    152,827       141,738  
             
The accompanying notes are an integral part of these consolidated financial statements.

2


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
                     
    For the Three Months
    Ended March 31,
     
    2007   2006
(in thousands, except per share amounts)        
    (unaudited)
Operations:
               
 
Net investment income
  $ 39,500     $ 41,300  
 
Net realized gains
    27,666       432,835  
 
Net change in unrealized appreciation or depreciation
    65,920       (374,548 )
             
   
Net increase in net assets resulting from operations
    133,086       99,587  
             
Shareholder distributions:
               
 
Common stock dividends
    (95,753 )     (82,518 )
             
   
Net decrease in net assets resulting from shareholder distributions
    (95,753 )     (82,518 )
             
Capital share transactions:
               
 
Sale of common stock
    93,784       82,970  
 
Issuance of common stock in lieu of cash distributions
    4,266       3,640  
 
Issuance of common stock upon the exercise of stock options
    1,366       3,935  
 
Stock option expense
    3,661       3,606  
 
Net decrease in notes receivable from sale of common stock
    135       130  
 
Purchase of common stock held in deferred compensation trust
    (3,089 )     (2,121 )
 
Distribution of common stock held in deferred compensation trust
    53       38  
 
Other
    (476 )      
             
   
Net increase in net assets resulting from capital share transactions
    99,700       92,198  
             
   
Total increase in net assets
    137,033       109,267  
Net assets at beginning of period
    2,841,244       2,620,546  
             
Net assets at end of period
  $ 2,978,277     $ 2,729,813  
             
Net asset value per common share
  $ 19.58     $ 19.50  
             
Common shares outstanding at end of period
    152,124       139,984  
             
The accompanying notes are an integral part of these consolidated financial statements.

3


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
                       
    For the Three Months Ended
    March 31,
     
    2007   2006
(in thousands)        
    (unaudited)
Cash flows from operating activities:
               
 
Net increase in net assets resulting from operations
  $ 133,086     $ 99,587  
 
Adjustments:
               
   
Portfolio investments
    (170,216 )     (647,851 )
   
Principal collections related to investment repayments or sales
    235,509       340,410  
   
Change in accrued or reinvested interest and dividends
    (11,267 )     2,061  
   
Net collection (amortization) of discounts and fees
    (1,844 )     (277 )
   
Redemption of (investments in) money market securities
    (66,335 )     (16,726 )
   
Stock option expense
    3,661       3,606  
   
Changes in other assets and liabilities
    (40,453 )     2,797  
   
Depreciation and amortization
    507       433  
   
Realized gains from the receipt of notes and other consideration from sale of investments, net of collections
    (2,814 )     (179,987 )
   
Realized losses
    5,515       3,651  
   
Net change in unrealized (appreciation) or depreciation
    (65,920 )     374,548  
             
     
Net cash provided by (used in) operating activities
    19,429       (17,748 )
             
Cash flows from financing activities:
               
 
Sale of common stock
    93,784       82,970  
 
Sale of common stock upon the exercise of stock options
    1,366       3,935  
 
Collections of notes receivable from sale of common stock
    135       130  
 
Borrowings under notes payable
    200,000        
 
Repayments on notes payable and debentures
          (12,000 )
 
Net borrowings under (repayments on) revolving line of credit
    (207,750 )     1,250  
 
Purchase of common stock held in deferred compensation trust
    (3,089 )     (2,121 )
 
Other financing activities
    (6,325 )     53  
 
Common stock dividends and distributions paid
    (98,910 )     (82,976 )
             
     
Net cash provided by (used in) financing activities
    (20,789 )     (8,759 )
             
Net decrease in cash
    (1,360 )     (26,507 )
Cash at beginning of period
    1,687       31,363  
             
Cash at end of period
  $ 327     $ 4,856  
             
The accompanying notes are an integral part of these consolidated financial statements.

4


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Companies More Than 25% Owned                        
 
Alaris Consulting, LLC
  Senior Loan (16.5%, Due 12/05 – 12/07)(6)   $ 27,055     $ 26,987     $  
 
(Business Services)
  Equity Interests             5,877        
    Guaranty ($1,100)                        
 
Avborne, Inc.(7)
  Preferred Stock (12,500 shares)             611       873  
 
(Business Services)
  Common Stock (27,500 shares)                    
 
Avborne Heavy Maintenance, Inc.(7)
  Preferred Stock (1,568 shares)             2,401        
 
(Business Services)
  Common Stock (2,750 shares)                    
    Guaranty ($2,401)                        
 
Border Foods, Inc. 
  Preferred Stock (100,000 shares)             12,721        
 
(Consumer Products)
  Common Stock (148,838 shares)             3,847        
 
Business Loan Express, LLC
(Financial Services)
  Class A Equity Interests(25.0% — See Note 3)(6)     85,822       85,822       85,822  
      Class B Equity Interests             119,436       79,139  
    Class C Equity Interests             109,301       64,976  
    Guaranty ($182,392 — See Note 3)                        
    Standby Letters of Credit ($20,000 —
  See Note 3)
                       
 
Calder Capital Partners, LLC(5)
  Senior Loan (8.0%, Due 5/09)(6)     1,326       1,326       1,326  
 
(Financial Services)
  Equity Interests             2,154       2,154  
 
Callidus Capital Corporation
  Senior Loan (12.0%, Due 12/08)     1,150       1,150       1,150  
 
(Financial Services)
  Subordinated Debt (18.0%, Due 10/08)     6,021       6,021       6,021  
      Common Stock (100 shares)             2,067       24,493  
 
Coverall North America, Inc.
  Unitranche Debt (12.0%, Due 7/11)     35,054       34,896       34,896  
 
(Business Services)
  Subordinated Debt (15.0%, Due 7/11)     6,000       5,974       5,974  
      Common Stock (884,880 shares)             16,648       21,475  
 
CR Holding, Inc.
  Subordinated Debt (16.6%, Due 2/13)     39,917       39,752       39,752  
 
(Consumer Products)
  Common Stock (37,200,551 shares)             33,321       30,880  
 
Direct Capital Corporation
  Subordinated Debt (16.0%, Due 3/13)     35,750       35,574       35,574  
 
(Financial Services)
  Common Stock (2,097,234 shares)             19,250       19,250  
 
Financial Pacific Company
  Subordinated Debt (17.4%, Due 2/12 – 8/12)     71,947       71,732       71,732  
 
(Financial Services)
  Preferred Stock (10,964 shares)             10,276       16,739  
      Common Stock (14,735 shares)             14,819       67,540  
 
ForeSite Towers, LLC
  Equity Interests                   557  
 
(Tower Leasing)
                           
 
Global Communications, LLC
  Senior Loan (10.7%, Due 9/02 – 11/07)(6)     15,957       15,957       15,957  
 
(Business Services)
  Subordinated Debt (17.0%, Due 12/03 – 9/05)(6)     11,339       11,336       4,930  
    Preferred Equity Interest             14,067        
    Options             1,639        
 
Gordian Group, Inc.
  Senior Loan (10.0%, Due 6/06 – 12/08)(6)     11,792       11,798        
 
(Business Services)
  Common Stock (1,000 shares)             6,942        
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
(7)
  Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies.
The accompanying notes are an integral part of these consolidated financial statements.

5


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Healthy Pet Corp.
  Senior Loan (9.9%, Due 8/10)   $ 32,338     $ 32,338     $ 32,338  
 
(Consumer Services)
  Subordinated Debt (15.0%, Due 8/10)     43,939       43,807       43,807  
      Common Stock (30,142 shares)             30,142       43,818  
 
HMT, Inc.
  Preferred Stock (554,052 shares)             2,637       2,637  
 
(Energy Services)
  Common Stock (300,000 shares)             3,000       30,173  
    Warrants             1,155       11,617  
 
Hot Stuff Foods, LLC
  Senior Loan (8.8%, Due 2/11-2/12)     49,770       49,549       49,549  
 
(Consumer Products)
  Subordinated Debt (13.7%, Due 8/12 – 2/13)     60,606       60,361       57,254  
      Subordinated Debt (16.0%, Due 2/13)(6)     20,841       20,749        
      Common Stock (1,147,453 shares)             56,187        
 
Huddle House, Inc.
  Subordinated Debt (15.0%, Due 12/12)     58,515       58,239       58,239  
(Retail)
  Common Stock (415,328 shares)             41,533       43,078  
 
Impact Innovations Group, LLC
  Equity Interests in Affiliate                   319  
 
(Business Services)
                           
 
Insight Pharmaceuticals Corporation
  Subordinated Debt (15.0%, Due 9/12)     44,257       44,116       44,116  
 
(Consumer Products)
  Subordinated Debt (19.0%, Due 9/12)(6)     16,181       16,130       14,510  
    Preferred Stock (25,000 shares)             25,000        
    Common Stock (620,000 shares)             6,325        
 
Jakel, Inc.
  Subordinated Debt (15.5%, Due 3/08)(6)     15,692       15,692        
 
(Industrial Products)
  Preferred Stock (6,460 shares)             6,460        
      Common Stock (158,061 shares)             9,347        
 
Legacy Partners Group, Inc.
  Senior Loan (14.0%, Due 5/09)(6)     4,843       4,843       4,843  
 
(Financial Services)
  Equity Interests             4,261       613  
 
Litterer Beteiligungs-GmbH(4)
  Subordinated Debt (8.0%, Due 3/07)     698       698       698  
 
(Business Services)
  Equity Interest             1,809       1,980  
 
Mercury Air Centers, Inc.
  Subordinated Debt (16.0%, Due 4/09 –                        
 
(Business Services)
  11/12)     49,862       49,737       49,737  
      Common Stock (57,970 shares)             35,053       251,709  
      Standby Letters of Credit ($75)                        
 
MVL Group, Inc.
  Senior Loan (12.0%, Due 6/09 – 7/09)     30,674       30,613       30,613  
 
(Business Services)
  Subordinated Debt (14.5%, Due 6/09 – 7/09)     39,449       39,092       39,092  
    Common Stock (648,661 shares)             643       1,333  
 
Penn Detroit Diesel Allison, LLC
  Subordinated Debt (15.5%, Due 8/13)     38,459       38,287       38,287  
 
(Business Services)
  Equity Interests             21,128       23,965  
 
Powell Plant Farms, Inc.
  Senior Loan (15.0%, Due 12/07)(6)     38,990       30,142       30,142  
 
(Consumer Products)
  Subordinated Debt (20.0%, Due 6/03)(6)     19,291       19,223       3,837  
      Preferred Stock (1,483 shares)                    
      Warrants                    
 
Service Champ, Inc.
  Subordinated Debt (15.5%, Due 4/12)     27,910       27,802       27,802  
 
(Business Services)
  Common Stock (63,888 shares)             13,662       16,488  
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

6


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance       (unaudited)
Portfolio Company            
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Staffing Partners Holding
                           
  Company, Inc.   Subordinated Debt (13.5%, Due 1/07)(6)   $ 541     $ 541     $ 540  
 
(Business Services)
                           
 
Startec Global Communications
                           
 
Corporation
  Senior Loan (10.0%, Due 5/07 – 5/09)     13,583       13,583       13,583  
 
(Telecommunications)
  Common Stock (19,180,000 shares)             37,255       17,085  
 
Sweet Traditions, Inc.
  Senior Loan (9.0%, Due 8/11)     39,022       35,382       35,382  
 
(Retail)
  Preferred Stock (961 Shares)             950       950  
    Common Stock (10,000 Shares)             50       50  
      Standby Letter of Credit ($120)                        
 
Triview Investments, Inc.(8)
  Senior Loan (9.6%, Due 6/07 – 12/07)     14,758       14,754       14,754  
  (Broadcasting & Cable/Business   Subordinated Debt (15.4%, Due 1/10 – 7/12)     63,455       63,142       63,142  
  Services/Consumer Products)   Subordinated Debt (8.4%, Due 11/07 – 7/08)(6)     4,850       4,850       4,850  
      Common Stock (202 shares)             102,755       39,024  
    Guaranty ($800)                        
    Standby Letter of Credit ($200)                        
 
            Total companies more than 25% owned           $ 1,836,724     $ 1,773,164  
 
Companies 5% to 25% Owned        
 
Advantage Sales & Marketing, Inc.
  Subordinated Debt (12.0%, Due 3/14)   $ 153,082     $ 152,433     $ 152,433  
 
(Business Services)
  Equity Interests                   11,000  
 
Air Medical Group Holdings LLC
  Senior Loan (9.0%, Due 3/11)     2,557       2,495       2,495  
  (Healthcare Services)   Subordinated Debt (14.0%, Due 11/12)     35,183       35,133       35,133  
    Equity Interests             3,470       6,900  
 
Alpine ESP Holdings, Inc. 
  Preferred Stock (622 shares)             622       543  
 
(Business Services)
  Common Stock (13,513 shares)             14        
 
Amerex Group, LLC
  Subordinated Debt (12.0%, Due 1/13)     8,400       8,400       8,400  
 
(Consumer Products)
  Equity Interests             3,527       20,235  
 
BB&T Capital Partners/Windsor
                           
 
Mezzanine Fund, LLC (5)
  Equity Interests             5,873       5,554  
  (Private Equity Fund)                            
 
Becker Underwood, Inc.
  Subordinated Debt (14.5%, Due 8/12)     24,399       24,321       24,321  
 
(Industrial Products)
  Common Stock(5,073 shares)             5,813       3,300  
 
BI Incorporated
  Subordinated Debt (13.5%, Due 2/14)     30,385       30,256       30,256  
 
(Business Services)
  Common Stock (40,000 shares)             4,000       6,000  
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
(8)
  Triview Investments, Inc. holds investments in Longview Cable & Data, LLC (Broadcasting & Cable) with a cost of $67.8 million and a value of $7.8 million, Triax Holdings, LLC (Consumer Products) with a cost of $98.9 million and a value of $93.4 million, and Crescent Hotels & Resorts, LLC and affiliates (Business Services) with a cost of $18.8 million and a value of $20.6 million.
The accompanying notes are an integral part of these consolidated financial statements.

7


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
CitiPostal, Inc. and Affiliates
  Senior Loan (11.1%, Due 8/13-11/14)   $ 20,423     $ 20,326     $ 20,326  
 
(Business Services)
  Equity Interests             4,415       5,350  
 
Creative Group, Inc.
  Subordinated Debt (12.0%, Due 9/13)     15,000       13,686       13,686  
 
(Business Services)
  Warrant             1,387       865  
 
Drew Foam Companies, Inc.
  Preferred Stock (722 shares)             722       688  
 
(Business Services)
  Common Stock (7,287 shares)             7        
 
MedBridge Healthcare, LLC
  Senior Loan (6.0%, Due 8/09)(6)     7,164       7,164       7,164  
 
(Healthcare Services)
  Subordinated Debt (10.0%, Due 8/14)(6)     5,184       5,184       2,408  
    Convertible Subordinated Debt (2.0%,
Due 8/14)(6)
    2,970       984        
    Equity Interests             1,416        
 
Multi-Ad Services, Inc.
  Unitranche Debt (11.3%, Due 11/11)     19,900       19,785       19,785  
 
(Business Services)
  Equity Interests             2,000       1,777  
 
Nexcel Synthetics, LLC
  Subordinated Debt (14.5%, Due 6/09)     8,000       7,982       7,982  
 
(Consumer Products)
  Equity Interests             1,755       759  
 
PresAir LLC
  Senior Loan (7.5%, Due 12/10)(6)     5,810       5,492       2,462  
 
(Industrial Products)
  Equity Interests             1,341        
 
Progressive International
                           
 
Corporation
  Subordinated Debt (16.0%, Due 12/09)     7,591       7,574       7,574  
 
(Consumer Products)
  Preferred Stock (500 shares)             500       1,046  
    Common Stock (197 shares)             13       2,800  
    Warrants                    
 
Regency Healthcare Group, LLC
  Senior Loan (11.1%, Due 6/12)     1,250       1,232       1,232  
 
(Healthcare Services)
  Unitranche Debt (11.1%, Due 6/12)     20,000       19,913       19,913  
      Equity Interests             1,500       1,640  
 
SGT India Private Limited(4)
  Common Stock (109,524 shares)             4,093       3,040  
 
(Business Services)
                           
 
Soteria Imaging Services, LLC
  Subordinated Debt (11.6%, Due 11/10)     19,500       18,603       18,603  
 
(Healthcare Services)
  Equity Interests             2,170       2,542  
 
Universal Environmental Services, LLC
  Unitranche Debt (15.5%, Due 2/09)     10,989       10,963       9,659  
 
(Business Services)
  Equity Interests             1,810        
 
            Total companies 5% to 25% owned           $ 438,374     $ 457,871  
 
Companies Less Than 5% Owned
                           
 
3SI Security Systems, Inc.
  Subordinated Debt (14.5%, Due 8/13)   $ 27,111     $ 26,999     $ 26,999  
 
(Consumer Products)
                           
 
AgData, L.P.
  Unitranche Debt (10.3%, Due 7/12)     11,330       11,272       11,272  
 
(Consumer Services)
                           
 
Axium Healthcare Pharmacy, Inc.
  Unitranche Debt (12.0%, Due 12/12)     9,000       8,920       8,920  
 
(Healthcare Services)
  Common Stock (26,500 shares)             2,650       1,800  
 
Baird Capital Partners IV Limited Partnership(5)
(Private Equity Fund)
 
Limited Partnership Interest
            1,183       962  
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

8


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Benchmark Medical, Inc.
  Warrants           $ 18     $  
 
(Healthcare Services)
                           
 
BenefitMall, Inc.
  Unitranche Debt (13.3%, Due 8/12)   $ 110,030       109,665       109,665  
 
(Business Services)
  Common Stock (45,528,000 shares)(11)             45,528       46,755  
      Warrants(11)                    
      Standby Letters of Credit ($9,981)                        
 
Breeze-Eastern Corporation(3)
  Senior Loan (10.1%, Due 5/11)     9,975       9,975       9,975  
 
(Industrial Products)
                           
 
Broadcast Electronics, Inc.
  Senior Loan (9.1%, Due 7/12)     4,950       4,919       4,919  
 
(Business Services)
                           
 
Callidus Debt Partners
                           
 
CDO Fund I, Ltd.(4)(9)
  Class C Notes (12.9%, Due 12/13)     18,800       18,946       18,988  
 
(Senior Debt Fund)
  Class D Notes (17.0%, Due 12/13)     9,400       9,473       9,494  
 
Callidus Debt Partners
                           
  CLO Fund III, Ltd. (4)(9)
(Senior Debt Fund)
  Preferred Shares (23,600,000 shares, 9.9%) (10)            
22,702
     
22,514
 
 
Callidus Debt Partners
                           
 
CLO Fund IV, Ltd.(4)(9)
  Income Notes (13.1%)(10)             12,795       12,795  
 
(Senior Debt Fund)
                           
 
Callidus Debt Partners
                           
 
CLO Fund V, Ltd. (4)(9)
  Income Notes (15.8%)(10)             14,320       14,320  
 
(Senior Debt Fund)
                           
 
Callidus MAPS CLO Fund I LLC(9)
  Class E Notes (10.9%, Due 12/17)     17,000       17,000       17,145  
 
(Senior Debt Fund)
  Income Notes (13.3%)(10)             50,963       46,463  
 
Camden Partners Strategic Fund II,
                           
 
L.P.(5)
  Limited Partnership Interest             997       2,215  
 
(Private Equity Fund)
                           
 
Carlisle Wide Plank Floors, Inc.
  Unitranche Debt (10.5%, Due 6/11)     14,000       13,906       13,906  
 
(Consumer Products)
  Preferred Stock (400,000 Shares)             400       400  
 
Catterton Partners V, L.P.(5)
  Limited Partnership Interest             3,760       4,016  
 
(Private Equity Fund)
                           
 
Catterton Partners VI, L.P.(5)
  Limited Partnership Interest             1,072       987  
 
(Private Equity Fund)
                           
 
Centre Capital Investors IV, LP(5)
  Limited Partnership Interest             1,801       1,501  
 
(Private Equity Fund)
                           
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
(9)
  The fund is managed by Callidus Capital, a portfolio company of Allied Capital.
(11)
  Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
(10)
  Represents the effective yield earned on these preferred equity investments. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.
The accompanying notes are an integral part of these consolidated financial statements.

9


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Commercial Credit Group, Inc.
  Subordinated Debt (14.8%, Due 2/11)   $ 10,000     $ 9,962     $ 9,962  
 
(Financial Services)
  Preferred Stock (32,500 shares)             3,900       3,900  
      Warrants                    
 
Community Education Centers, Inc.
  Subordinated Debt (16.0%, Due 12/10)     34,420       34,334       34,334  
 
(Education Services)
                           
 
Compass Group Diversified
                           
 
Holdings LLC(3)
  Senior Loan (8.4%, Due 11/11)     9,069       8,952       8,952  
 
(Financial Services)
                           
 
Component Hardware Group, Inc.
  Subordinated Debt (13.5%, Due 1/13)     18,226       18,146       18,146  
 
(Industrial Products)
                           
 
Cook Inlet Alternative Risk, LLC
  Unitranche Debt (10.0%, Due 4/12)     60,000       59,663       59,663  
 
(Business Services)
  Equity Interests             2,000       2,700  
 
Cortec Group Fund IV, L.P.(5)
  Limited Partnership Interest             1,712       1,226  
 
(Private Equity)
                           
 
CSAV, Inc.
  Subordinated Debt (11.8%, Due 6/13)     37,500       37,500       37,500  
 
(Business Services)
                           
 
DCWV Acquisition Corporation
  Senior Loan (8.8%, Due 7/12)     3,700       3,687       3,687  
 
(Consumer Products)
  Unitranche Debt (11.0%, Due 7/12)     16,575       16,485       16,485  
 
Deluxe Entertainment Services Group, Inc.
  Subordinated Debt (13.6%, Due 7/11)     30,000       30,000       30,000  
 
(Business Services)
                           
 
Distant Lands Trading Co.
  Senior Loan (10.1%, Due 11/11)     5,450       5,408       5,408  
 
(Consumer Products)
  Unitranche Debt (11.0%, Due 11/11)     54,375       54,144       54,144  
      Common Stock (4,000 shares)             4,000       3,194  
 
Drilltec Patents & Technologies
                           
 
Company, Inc.
  Subordinated Debt (18.0%, Due 8/06)     4,119       4,119       4,119  
 
(Energy Services)
  Subordinated Debt (16.5%, Due 8/06)(6)     10,994       10,918       10,994  
 
Driven Brands, Inc.
  Senior Loan (8.9%, Due 6/11)     37,070       36,926       36,926  
 
d/b/a Meineke and Econo Lube
  Subordinated Debt (12.1%, Due 6/12 – 6/13)     83,000       82,701       82,701  
 
(Consumer Services)
  Common Stock (11,675,331 shares)(11)             29,455       19,935  
      Warrants(11)                    
 
Digital VideoStream, LLC
  Unitranche Debt (11.0%, Due 2/12)     17,838       17,737       17,737  
 
(Business Services)
  Convertible Subordinated Debt                        
      (10.0%, Due 2/16)     3,824       3,808       3,808  
 
Dynamic India Fund IV(4)(5)
  Equity Interests             3,850       3,850  
 
(Private Equity Fund)
                           
 
EarthColor, Inc.
  Subordinated Debt (15.0%, Due 11/13)     107,000       106,497       106,497  
 
(Business Services)
  Common Stock (53,540 shares)(11)             53,540       51,796  
    Warrants(11)                    
 
eCentury Capital Partners, L.P.(5)
  Limited Partnership Interest             6,274       2,738  
 
(Private Equity Fund)
                           
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
  (11)     Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
The accompanying notes are an integral part of these consolidated financial statements.

10


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Elexis Beta GmbH(4)
  Options           $ 426     $ 50  
 
(Industrial Products)
                           
 
Farley’s & Sathers Candy Company, Inc.
  Subordinated Debt (11.4%, Due 3/11)   $ 20,000       19,935       19,935  
 
(Consumer Products)
                           
 
Frozen Specialties, Inc.
  Warrants             435       270  
 
(Consumer Products)
                           
 
Garden Ridge Corporation
(Retail)
  Subordinated Debt (7.0%, Due 5/12)(6)     22,500       22,500       22,500  
 
Geotrace Technologies, Inc.
  Subordinated Debt (10.0%, Due 6/09)     23,495       22,105       22,105  
 
(Energy Services)
  Warrants             2,350       2,100  
 
Ginsey Industries, Inc.
  Subordinated Debt (12.5%, Due 5/07)     2,489       2,489       2,489  
 
(Consumer Products)
                           
 
Grant Broadcasting Systems II
  Subordinated Debt (5.0%, Due 6/11)     3,005       3,005       3,005  
 
(Broadcasting & Cable)
                           
 
Grotech Partners, VI, L.P.(5)
  Limited Partnership Interest             8,223       6,139  
 
(Private Equity Fund)
                           
 
Havco Wood Products LLC
  Senior Debt (9.9%, Due 8/11)     2,000       1,982       1,982  
 
(Industrial Products)
  Unitranche Debt (11.5%, Due 8/11)     13,600       12,707       12,707  
      Equity Interests             1,055       3,000  
 
Haven Eldercare of New England, LLC
  Subordinated Debt (12.0%, Due 8/09)     2,527       2,527       2,527  
 
(Healthcare Services)
                           
 
HealthASPex Services Inc.
  Senior Loan (4.0%, Due 7/08)     500       500       500  
 
(Business Services)
                           
 
The Hillman Companies, Inc.(3)
  Subordinated Debt (10.0%, Due 9/11)     44,580       44,434       44,434  
 
(Consumer Products)
                           
 
The Homax Group, Inc.
  Senior Loan (9.2%, Due 10/12)     12,550       12,550       12,550  
 
(Consumer Products)
  Subordinated Debt (12.0%, Due 4/14)     14,000       13,189       13,189  
      Preferred Stock (89 shares)             89       80  
      Common Stock (28 shares)             6        
      Warrants             1,106       993  
 
Ideal Snacks Corporation
  Senior Loan (9.0%, Due 6/10)     5,850       5,818       5,818  
 
(Consumer Products)
                           
 
Integrity Interactive Corporation
  Unitranche Debt (10.5%, Due 2/12)     29,000       28,823       28,823  
 
(Business Services)
                           
 
International Fiber Corporation
  Subordinated Debt (14.0%, Due 6/12)     22,098       22,029       22,029  
 
(Industrial Products)
  Preferred Stock (25,000 shares)             2,500       2,200  
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
  (11)     Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
The accompanying notes are an integral part of these consolidated financial statements.

11


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Kodiak Fund LP(5)
  Equity Interests           $ 9,513     $ 9,460  
 
(Private Equity Fund)
                           
 
Line-X, Inc.
  Senior Loan (12.0%, Due 8/11)   $ 2,200       2,182       2,182  
 
(Consumer Products)
  Unitranche Debt (12.0% Due 8/11)     47,884       47,692       46,224  
      Standby Letter of Credit ($1,500)                        
 
MedAssets, Inc.
  Preferred Stock (227,865 shares)             2,049       3,670  
 
(Business Services)
  Common Stock (50,000 shares)                   150  
 
MHF Logistical Solutions, Inc.
  Subordinated Debt (11.5%, Due 6/12)(6)     33,600       33,448       27,518  
(Business Services)
  Subordinated Debt (18.0%, Due 6/13)(6)     11,211       11,154        
      Common Stock (20,934 shares)(11)             20,942        
      Warrants(11)                    
 
Mid-Atlantic Venture Fund IV, L.P.(5)
  Limited Partnership Interest             6,975       3,037  
 
(Private Equity Fund)
                           
 
Mogas Energy, LLC
  Subordinated Debt (9.5%, Due 8/08)     16,285       15,086       15,086  
 
(Energy Services)
                           
 
NetShape Technologies, Inc.
  Senior Debt (8.6%, Due 2/13)     8,991       8,957       8,957  
 
(Industrial Products)
                           
 
Network Hardware Resale, Inc.
  Unitranche Debt (10.5%, Due 12/11)     36,701       36,893       36,893  
 
(Business Services)
  Convertible Subordinated Debt (9.8%, Due 12/15)     13,242       13,307       13,599  
 
Norwesco, Inc.
  Subordinated Debt (12.6%, Due 1/12 – 7/12)     82,595       82,297       82,297  
 
(Industrial Products)
  Common Stock (559,603 shares)(11)             38,313       81,086  
    Warrants(11)                    
 
Novak Biddle Venture Partners III, L.P.(5)
  Limited Partnership Interest             1,835       1,883  
 
(Private Equity Fund)
                           
 
Oahu Waste Services, Inc.
  Stock Appreciation Rights             239       800  
 
(Business Services)
                           
 
Odyssey Investment Partners Fund III,
                           
 
LP(5)
  Limited Partnership Interest             2,462       2,310  
 
(Private Equity Fund)
                           
 
Passport Health
                           
 
Communications, Inc.
  Subordinated Debt (14.0%, Due 4/12)     10,222       10,181       10,181  
 
(Healthcare Services)
  Preferred Stock (651,381 shares)             2,000       2,255  
 
Pendum, Inc.
  Subordinated Debt (17.0%, Due 1/11)(6)     34,028       34,028       26,676  
 
(Business Services)
  Preferred Stock (82,715 shares)                    
      Warrants                    
 
Performant Financial Corporation
  Common Stock (478,816 shares)             734        
 
(Business Services)
                           
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
  (11)     Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
The accompanying notes are an integral part of these consolidated financial statements.

12


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Postle Aluminum Company, LLC
  Unitranche Debt (11.0%, Due 10/12)   $ 62,250     $ 61,927     $ 61,927  
 
(Industrial Products)
  Equity Interests             2,500       2,600  
 
Pro Mach, Inc.
  Subordinated Debt (12.5%, Due 6/12)     14,471       14,406       14,406  
 
(Industrial Products)
  Equity Interests             1,500       2,200  
 
Promo Works, LLC
  Unitranche Debt (10.3%, Due 12/11)     31,000       30,739       30,739  
 
(Business Services)
  Guaranty ($900)                        
 
S.B. Restaurant Company
  Unitranche Debt (9.8%, Due 4/11)     41,501       41,118       41,118  
 
(Retail)
  Preferred Stock (54,125 shares)             135       135  
    Warrants             619       1,600  
    Standby Letters of Credit ($2,611)                        
 
SBBUT, LLC
  Equity Interests                    
 
(Consumer Products)
                           
 
Service Center Metals, LLC
  Subordinated Debt (15.5%, Due 9/11)     5,000       4,978       4,978  
 
(Industrial Products)
  Equity Interests             313       325  
 
Soff-Cut Holdings, Inc.
  Preferred Stock (300 shares)             300       300  
 
(Industrial Products)
  Common Stock (2,000 shares)             200       200  
 
SPP Mezzanine Funding, L.P.(5)
  Limited Partnership Interest             2,825       3,159  
 
(Private Equity Fund)
                           
 
SPP Mezzanine Funding II, L.P.(5)
  Limited Partnership Interest             1,105       846  
 
(Private Equity Fund)
                           
 
Stag-Parkway, Inc.
  Unitranche Debt (10.8%, Due 7/12)     63,000       62,724       62,724  
 
(Business Services)
                           
 
STS Operating, Inc.
  Subordinated Debt (11.0%, Due 1/13)     30,386       30,256       30,256  
 
(Industrial Products)
                           
 
The Step2 Company, LLC
  Unitranche Debt (10.5%, Due 4/12)     64,348       64,064       64,064  
 
(Consumer Products)
  Equity Interests             2,000       1,991  
 
Tradesmen International, Inc.
  Subordinated Debt (12.0%, Due 12/09)     9,136       8,629       8,629  
 
(Business Services)
                           
 
TransAmerican Auto Parts, LLC
  Subordinated Debt (14.0%, Due 11/12)     13,011       12,960       12,960  
 
(Consumer Products)
  Equity Interests             1,198       845  
 
Universal Air Filter Company
  Unitranche Debt (11.0%, Due 11/11)     18,867       18,781       18,781  
 
(Industrial Products)
                           
 
Updata Venture Partners II, L.P.(5)
  Limited Partnership Interest             4,627       5,047  
 
(Private Equity Fund)
                           
 
Venturehouse-Cibernet Investors, LLC
  Equity Interest             42       42  
 
(Business Services)
                           
 
Venturehouse Group, LLC(5)
  Equity Interest             598       901  
 
(Private Equity Fund)
                           
 
VICORP Restaurants, Inc.
  Warrants             33        
 
(Retail)
                           
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

13


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        March 31, 2007
         
Private Finance        
Portfolio Company       (unaudited)
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Walker Investment Fund II, LLLP(5)
  Limited Partnership Interest           $ 1,330     $ 458  
 
(Private Equity Fund)
                           
 
Wear Me Apparel Corporation
  Subordinated Debt (15.0%, Due 12/10)   $ 39,990       39,509       39,990  
 
(Consumer Products)
  Warrants             1,219       5,120  
 
Webster Capital II, L.P.(5)
  Limited Partnership Interest             75       75  
 
(Private Equity Fund)
                           
 
Wilton Industries, Inc.
  Subordinated Debt (16.0%, Due 6/08)     2,400       2,400       2,400  
 
(Consumer Products)
                           
 
Woodstream Corporation
  Subordinated Debt (13.5%, Due 11/12 – 5/13)     53,293       53,174       53,174  
 
(Consumer Products)
  Common Stock (180 shares)             673       3,885  
      Warrants                   2,815  
 
York Insurance Services Group, Inc.
  Subordinated Debt (14.5%, Due 1/14)     44,471       44,274       44,274  
 
(Business Services)
  Common Stock (15,000 shares)             1,500       2,000  
 
Other companies
  Other debt investments(6)     223       223       218  
    Other equity investments             8        
 
            Total companies less than 5% owned           $ 2,159,014     $ 2,145,284  
 
            Total private finance (144 portfolio companies)           $ 4,434,112     $ 4,376,319  
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

14


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                 
Commercial Real Estate Finance
               
(in thousands, except number of loans)
               
                                   
            March 31, 2007
             
    Interest   Number of   (unaudited)
    Rate Ranges   Loans   Cost   Value
                 
Commercial Mortgage Loans
                               
      Up to 6.99%       3     $ 20,443     $ 19,693  
      7.00%–8.99%       9       24,034       24,269  
      9.00%–10.99%       4       24,316       24,316  
    15.00% and above     2       3,970       3,970  
 
 
Total commercial mortgage loans(13)
            18     $ 72,763     $ 72,248  
 
Real Estate Owned
                  $ 15,657     $ 20,969  
 
Equity Interests(2) — Companies more than 25% owned
(Guarantees — $6,871)
          $ 14,964     $ 29,312  
 
 
Total commercial real estate finance
                  $ 103,384     $ 122,529  
 
Total portfolio
                  $ 4,537,496     $ 4,498,848  
 
                                 
                             
    Yield   Cost   Value
             
Liquidity Portfolio(14)
                       
 
American Beacon Money Market Select FD Fund
    5.3%     $ 87,789     $ 87,789  
 
Certificate of Deposit (Due June 2007)
    5.5%       41,143       41,143  
 
American Beacon Money Market Fund
    5.2%       40,904       40,904  
 
SEI Daily Income Tr Prime Obligation Fund
    5.2%       35,113       35,113  
 
Blackrock Liquidity Funds
    5.2%       10       10  
 
   
Total liquidity portfolio
          $ 204,959     $ 204,959  
 
Other Investments in Money Market Securities(14)
                       
 
Columbia Treasury Reserves Money Market Fund
    5.2%     $ 64,998     $ 64,998  
 
Blackrock Liquidity Funds
    5.2%     $ 1,213     $ 1,213  
 
                         
 (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.
(13)       Commercial mortgage loans totaling $19.2 million at value were on non-accrual status and therefore were considered non-income producing.
(14)       Included in investments in money market and other securities on the accompanying Consolidated Balance Sheet.
The accompanying notes are an integral part of these consolidated financial statements.

15


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Companies More Than 25% Owned                        
 
Alaris Consulting, LLC
  Senior Loan (16.5%, Due 12/05 – 12/07)(6)   $ 27,055     $ 26,987     $  
 
(Business Services)
  Equity Interests             5,305        
    Guaranty ($1,100)                        
 
Avborne, Inc.(7)
  Preferred Stock (12,500 shares)             610       918  
 
(Business Services)
  Common Stock (27,500 shares)                    
 
Avborne Heavy Maintenance, Inc.(7)
  Preferred Stock (1,568 shares)             2,401        
 
(Business Services)
  Common Stock (2,750 shares)                    
    Guaranty ($2,401)                        
 
Border Foods, Inc. 
  Preferred Stock (100,000 shares)             12,721        
 
(Consumer Products)
  Common Stock (148,838 shares)             3,848        
 
Business Loan Express, LLC
  Class A Equity Interests(25.0%)(6)     66,622       66,622       66,622  
 
(Financial Services)
  Class B Equity Interests             119,436       79,139  
    Class C Equity Interests             109,301       64,976  
    Guaranty ($189,706 — See Note 3)                        
    Standby Letters of Credit ($25,000 —
  See Note 3)
                       
 
Calder Capital Partners, LLC(5)
  Senior Loan (8.0%, Due 5/09)(6)     975       975       975  
 
(Financial Services)
  Equity Interests             2,076       2,076  
 
Callidus Capital Corporation
  Subordinated Debt (18.0%, Due 10/08)     5,762       5,762       5,762  
 
(Financial Services)
  Common Stock (100 shares)             2,058       22,550  
 
Coverall North America, Inc.
  Unitranche Debt (12.0%, Due 7/11)     36,500       36,333       36,333  
 
(Business Services)
  Subordinated Debt (15.0%, Due 7/11)     6,000       5,972       5,972  
      Common Stock (884,880 shares)             16,649       19,619  
 
CR Brands, Inc.
  Subordinated Debt (16.6%, Due 2/13)     39,573       39,401       39,401  
 
(Consumer Products)
  Common Stock (37,200,551 shares)             33,321       25,738  
 
Financial Pacific Company
  Subordinated Debt (17.4%, Due 2/12 – 8/12)     71,589       71,362       71,362  
 
(Financial Services)
  Preferred Stock (10,964 shares)             10,276       15,942  
      Common Stock (14,735 shares)             14,819       65,186  
 
ForeSite Towers, LLC
  Equity Interests             7,620       12,290  
 
(Tower Leasing)
                           
 
Global Communications, LLC
  Senior Loan (10.7%, Due 9/02 – 11/07)(6)     15,957       15,957       15,957  
 
(Business Services)
  Subordinated Debt (17.0%, Due 12/03 – 9/05)(6)     11,339       11,336       11,237  
    Preferred Equity Interest             14,067        
    Options             1,639        
 
Gordian Group, Inc.
  Senior Loan (10.0%, Due 6/06 – 12/08)(6)     11,792       11,803        
 
(Business Services)
  Common Stock (1,000 shares)             6,762        
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
(7)
  Avborne, Inc. and Avborne Heavy Maintenance, Inc. are affiliated companies.
The accompanying notes are an integral part of these consolidated financial statements.

16


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Healthy Pet Corp.
  Senior Loan (9.9%, Due 8/10)   $ 27,038     $ 27,038     $ 27,038  
 
(Consumer Services)
  Subordinated Debt (15.0%, Due 8/10)     43,720       43,579       43,579  
      Common Stock (30,142 shares)             30,142       28,921  
 
HMT, Inc.
  Preferred Stock (554,052 shares)             2,637       2,637  
 
(Energy Services)
  Common Stock (300,000 shares)             3,000       8,664  
    Warrants             1,155       3,336  
 
Huddle House, Inc.
  Senior Loan (8.9%, Due 12/11)     19,950       19,950       19,950  
 
(Retail)
  Subordinated Debt (15.0%, Due 12/12)     58,484       58,196       58,196  
    Common Stock (415,328 shares)             41,662       41,662  
 
Impact Innovations Group, LLC
  Equity Interests in Affiliate                   873  
 
(Business Services)
                           
 
Insight Pharmaceuticals Corporation
  Subordinated Debt (16.1%, Due 9/12)     60,049       59,850       59,850  
 
(Consumer Products)
  Preferred Stock (25,000 shares)             25,000       7,845  
    Common Stock (620,000 shares)             6,325        
 
Jakel, Inc.
  Subordinated Debt (15.5%, Due 3/08)(6)     15,192       15,192       6,655  
 
(Industrial Products)
  Preferred Stock (6,460 shares)             6,460        
      Common Stock (158,061 shares)             9,347        
 
Legacy Partners Group, LLC
  Senior Loan (14.0%, Due 5/09)(6)     7,646       7,646       4,843  
 
(Financial Services)
  Subordinated Debt (18.0%, Due 5/09)(6)     2,952       2,952        
    Equity Interests             4,248        
 
Litterer Beteiligungs-GmbH(4)
  Subordinated Debt (8.0%, Due 3/07)     692       692       692  
 
(Business Services)
  Equity Interest             1,809       1,199  
 
Mercury Air Centers, Inc.
  Subordinated Debt (16.0%, Due 4/09 –                        
 
(Business Services)
  11/12)     49,358       49,217       49,217  
      Common Stock (57,970 shares)             35,053       195,019  
      Standby Letters of Credit ($1,581)                        
 
MVL Group, Inc.
  Senior Loan (12.0%, Due 6/09 – 7/09)     27,299       27,245       27,245  
 
(Business Services)
  Subordinated Debt (14.5%, Due 6/09)     35,846       35,478       35,478  
    Common Stock (648,661 shares)             643        
 
Penn Detroit Diesel Allison, LLC
  Subordinated Debt (15.5%, Due 8/13)     38,173       37,994       37,994  
 
(Business Services)
  Equity Interests             21,128       25,949  
 
Powell Plant Farms, Inc.
  Senior Loan (15.0%, Due 12/07)(6)     35,040       26,192       26,192  
 
(Consumer Products)
  Subordinated Debt (20.0%, Due 6/03)(6)     19,291       19,223       962  
      Preferred Stock (1,483 shares)                    
      Warrants                    
 
Service Champ, Inc.
  Subordinated Debt (15.5%, Due 4/12)     27,733       27,619       27,619  
 
(Business Services)
  Common Stock (63,888 shares)             13,662       16,786  
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

17


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company            
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Staffing Partners Holding
                           
  Company, Inc.   Subordinated Debt (13.5%, Due 1/07)(6)   $ 540     $ 540     $ 486  
 
(Business Services)
                           
 
Startec Global Communications
                           
 
Corporation
  Senior Loan (10.0%, Due 5/07 – 5/09)     15,965       15,965       15,965  
 
(Telecommunications)
  Common Stock (19,180,000 shares)             37,256       11,232  
 
Sweet Traditions, LLC
  Senior Loan (9.0%, Due 8/11)     39,022       35,172       35,172  
 
(Retail)
  Equity Interests             450       450  
      Standby Letter of Credit ($120)                        
 
Triview Investments, Inc.(8)
  Senior Loan (9.6%, Due 6/07 – 12/07)     14,758       14,747       14,747  
  (Broadcasting & Cable/Business   Subordinated Debt (16.0%, Due 9/11 – 7/12)     56,288       56,008       56,008  
  Services/Consumer Products)   Subordinated Debt (7.9%, Due 11/07 – 7/08)(6)     4,327       4,327       4,342  
      Common Stock (202 shares)             98,604       31,322  
    Guaranty ($800)                        
    Standby Letter of Credit ($200)                        
 
            Total companies more than 25% owned           $ 1,578,822     $ 1,490,180  
 
Companies 5% to 25% Owned        
 
Advantage Sales & Marketing, Inc.
  Subordinated Debt (12.0%, Due 3/14)   $ 152,320     $ 151,648     $ 151,648  
 
(Business Services)
  Equity Interests                   11,000  
 
Air Medical Group Holdings LLC
  Senior Loan (9.9%, Due 3/11)     1,828       1,763       1,763  
  (Healthcare Services)   Subordinated Debt (14.0%, Due 11/12)     35,180       35,128       35,128  
    Equity Interests             3,470       5,950  
 
Alpine ESP Holdings, Inc. 
  Preferred Stock (622 shares)             622       602  
 
(Business Services)
  Common Stock (13,513 shares)             14        
 
Amerex Group, LLC
  Subordinated Debt (12.0%, Due 1/13)     8,400       8,400       8,400  
 
(Consumer Products)
  Equity Interests             3,546       13,823  
 
BB&T Capital Partners/Windsor
                           
 
Mezzanine Fund, LLC (5)
  Equity Interests             5,873       5,554  
  (Private Equity Fund)                            
 
Becker Underwood, Inc.
  Subordinated Debt (14.5%, Due 8/12)     24,244       24,163       24,163  
 
(Industrial Products)
  Common Stock (5,073 shares)             5,813       3,700  
 
BI Incorporated
  Subordinated Debt (13.5%, Due 2/14)     30,269       30,135       30,135  
 
(Business Services)
  Common Stock (40,000 shares)             4,000       4,100  
                             
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
(8)
  Triview Investments, Inc. holds investments in Longview Cable & Data, LLC (Broadcasting & Cable) with a cost of $67.3 million and a value of $7.5 million, Triax Holdings, LLC (Consumer Products) with a cost of $98.9 million and a value of $91.5 million, and Crescent Hotels & Resorts, LLC and affiliates (Business Services) with a cost of $7.5 million and a value of $7.3 million.
The accompanying notes are an integral part of these consolidated financial statements.

18


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
CitiPostal, Inc. and Affiliates
  Senior Loan (11.1%, Due 8/13-11/14)   $ 20,670     $ 20,569     $ 20,569  
 
(Business Services)
  Equity Interests             4,447       4,700  
 
Creative Group, Inc.
  Subordinated Debt (12.0%, Due 9/13)     15,000       13,656       13,656  
 
(Business Services)
  Warrant             1,387       1,387  
 
Drew Foam Companies, Inc.
  Preferred Stock (722 shares)             722       722  
 
(Business Services)
  Common Stock (7,287 shares)             7       7  
 
MedBridge Healthcare, LLC
  Senior Loan (6.0%, Due 8/09)(6)     7,164       7,164       7,164  
 
(Healthcare Services)
  Subordinated Debt (10.0%, Due 8/14)(6)     5,184       5,184       1,813  
    Convertible Subordinated Debt (2.0%,
Due 8/14)(6)
    2,970       984        
    Equity Interests             1,306        
 
Multi-Ad Services, Inc.
  Unitranche Debt (11.3%, Due 11/11)     20,000       19,879       19,879  
 
(Business Services)
  Equity Interests             2,000       2,000  
 
Nexcel Synthetics, LLC
  Subordinated Debt (14.5%, Due 6/09)     10,998       10,978       10,978  
 
(Consumer Products)
  Equity Interests             1,755       1,486  
 
PresAir LLC
  Senior Loan (7.5%, Due 12/10)(6)     5,810       5,492       2,206  
 
(Industrial Products)
  Equity Interests             1,336        
 
Progressive International
                           
 
Corporation
  Subordinated Debt (16.0%, Due 12/09)     7,553       7,533       7,533  
 
(Consumer Products)
  Preferred Stock (500 shares)             500       1,024  
    Common Stock (197 shares)             13       2,300  
    Warrants                    
 
Regency Healthcare Group, LLC
  Senior Loan (11.1%, Due 6/12)     1,250       1,232       1,232  
 
(Healthcare Services)
  Unitranche Debt (11.1%, Due 6/12)     20,000       19,908       19,908  
      Equity Interests             1,500       1,616  
 
SGT India Private Limited(4)
  Common Stock (109,524 shares)             3,944       3,346  
 
(Business Services)
                           
 
Soteria Imaging Services, LLC
  Subordinated Debt (11.6%, Due 11/10)     18,500       17,569       17,569  
 
(Healthcare Services)
  Equity Interests             2,163       2,541  
 
Universal Environmental Services, LLC
  Unitranche Debt (14.5%, Due 2/09)     10,989       10,962       10,211  
 
(Business Services)
  Equity Interests             1,795        
 
            Total companies 5% to 25% owned           $ 438,560     $ 449,813  
 
Companies Less Than 5% Owned
                           
 
3SI Security Systems, Inc.
  Subordinated Debt (14.5%, Due 8/13)   $ 26,857     $ 26,740     $ 26,740  
 
(Consumer Products)
                           
 
AgData, L.P.
  Unitranche Debt (10.3%, Due 7/12)     11,330       11,269       11,269  
 
(Consumer Services)
                           
 
Anthony, Inc.
  Subordinated Debt (13.3%, Due 8/11 –                        
 
(Industrial Products)
  9/12)     14,818       14,768       14,768  
 
Axium Healthcare Pharmacy, Inc.
  Senior Loan (12.0%, Due 12/12)     200       161       161  
 
(Healthcare Services)
  Unitranche Debt (12.0%, Due 12/12)     9,000       8,956       8,956  
      Common Stock (26,500 shares)             2,650       2,650  
 
Baird Capital Partners IV Limited Partnership(5)
(Private Equity Fund)
 
Limited Partnership Interest
            876       876  
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

19


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Bantek West, Inc.
  Subordinated Debt (11.6%, Due 1/11)(6)   $ 30,000     $ 30,000     $ 21,463  
 
(Business Services)
                           
 
Benchmark Medical, Inc.
  Warrants             18        
 
(Healthcare Services)
                           
 
BenefitMall, Inc.
  Unitranche Debt (13.3%, Due 8/12)     110,030       109,648       109,648  
 
(Business Services)
  Common Stock (45,528,000 shares)(11)             45,528       43,578  
      Warrants(11)                    
      Standby Letters of Credit ($9,981)                        
 
Breeze-Eastern Corporation(3)
  Senior Loan (10.1%, Due 5/11)     10,000       10,000       10,000  
 
(Industrial Products)
                           
 
Broadcast Electronics, Inc.
  Senior Loan (9.1%, Due 7/12)     4,963       4,930       4,930  
 
(Business Services)
                           
 
C&K Market, Inc.
  Subordinated Debt (14.0%, Due 12/08)     27,819       27,738       27,738  
 
(Retail)
                           
 
Callidus Debt Partners
                           
 
CDO Fund I, Ltd.(4)(9)
  Class C Notes (12.9%, Due 12/13)     18,800       18,951       18,951  
 
(Senior Debt Fund)
  Class D Notes (17.0%, Due 12/13)     9,400       9,476       9,476  
 
Callidus Debt Partners
                           
  CLO Fund III, Ltd. (4)(9)
(Senior Debt Fund)
  Preferred Shares (23,600,000 shares, 12.7%) (12)            
23,285
     
23,010
 
 
Callidus Debt Partners
                           
 
CLO Fund IV, Ltd.(4)(9)
  Income Notes (13.8%)(12)             12,986       12,986  
 
(Senior Debt Fund)
                           
 
Callidus Debt Partners
                           
 
CLO Fund V, Ltd. (4)(9)
  Income Notes (15.8%)(12)             13,769       13,769  
 
(Senior Debt Fund)
                           
 
Callidus MAPS CLO Fund I LLC(9)
  Class E Notes (10.9%, Due 12/17)     17,000       17,000       17,155  
 
(Senior Debt Fund)
  Income Notes (15.9%)(12)             50,960       47,421  
 
Camden Partners Strategic Fund II,
                           
 
L.P.(5)
  Limited Partnership Interest             2,141       2,873  
 
(Private Equity Fund)
                           
 
Carlisle Wide Plank Floors, Inc.
  Unitranche Debt (10.5%, Due 6/11)     14,000       13,900       13,900  
 
(Consumer Products)
  Preferred Stock (400,000 Shares)             400       400  
 
Catterton Partners V, L.P.(5)
  Limited Partnership Interest             3,306       3,412  
 
(Private Equity Fund)
                           
 
Catterton Partners VI, L.P.(5)
  Limited Partnership Interest             531       531  
 
(Private Equity Fund)
                           
 
Centre Capital Investors IV, LP(5)
  Limited Partnership Interest             1,991       1,889  
 
(Private Equity Fund)
                           
 
     
(1)
  Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
(2)
  Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
(3)
  Public company.
(4)
  Non-U.S. company or principal place of business outside the U.S.
(5)
  Non-registered investment company.
(6)
  Loan or debt security is on non-accrual status and therefore is considered non-income producing.
(9)
  The fund is managed by Callidus Capital, a portfolio company of Allied Capital.
(11)
  Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
(12)
  Represents the effective yield earned on these preferred equity investments. The yield is included in interest income from companies less than 5% owned in the consolidated statement of operations.
The accompanying notes are an integral part of these consolidated financial statements.

20


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Commercial Credit Group, Inc.
  Subordinated Debt (14.8%, Due 2/11)   $ 5,000     $ 4,959     $ 4,959  
 
(Financial Services)
  Preferred Stock (32,500 shares)             3,900       3,900  
      Warrants                    
 
Community Education Centers, Inc.
  Subordinated Debt (16.0%, Due 12/10)     34,158       34,067       34,067  
 
(Education Services)
                           
 
Compass Group Diversified
                           
 
Holdings LLC(3)
  Senior Loan (8.4%, Due 11/11)     8,500       8,375       8,375  
 
(Financial Services)
                           
 
Component Hardware Group, Inc.
  Subordinated Debt (13.5%, Due 1/13)     18,158       18,075       18,075  
 
(Industrial Products)
                           
 
Cook Inlet Alternative Risk, LLC
  Unitranche Debt (10.0%, Due 4/12)     67,500       67,146       67,146  
 
(Business Services)
  Equity Interests             2,000       2,300  
 
Cortec Group Fund IV, L.P.(5)
  Limited Partnership Interest             1,137       1,137  
 
(Private Equity)
                           
 
CSAV, Inc.
  Subordinated Debt (11.9%, Due 6/13)     37,500       37,500       37,500  
 
(Business Services)
                           
 
DCWV Acquisition Corporation
  Senior Loan (8.9%, Due 7/12)     2,074       2,060       2,060  
 
(Consumer Products)
  Unitranche Debt (11.0%, Due 7/12)     16,788       16,694       16,694  
 
Deluxe Entertainment Services Group, Inc.
  Subordinated Debt (13.6%, Due 7/11)     30,000       30,000       30,000  
 
(Business Services)
                           
 
Distant Lands Trading Co.
  Senior Loan (10.6%, Due 11/11)     2,700       2,656       2,656  
 
(Consumer Products)
  Unitranche Debt (11.0%, Due 11/11)     54,375       54,130       54,130  
      Common Stock (4,000 shares)             4,000       2,975  
 
Drilltec Patents & Technologies
                           
 
Company, Inc.
  Subordinated Debt (18.0%, Due 8/06)     4,119       4,119       4,119  
 
(Energy Services)
  Subordinated Debt (16.5%, Due 8/06)(6)     10,994       10,918       9,121  
 
Driven Brands, Inc.
  Senior Loan (8.9%, Due 6/11)     37,070       36,918       36,918  
 
d/b/a Meineke and Econo Lube
  Subordinated Debt (12.1%, Due 6/12 – 6/13)     83,000       82,684       82,684  
 
(Consumer Services)
  Common Stock (11,675,331 shares)(11)             29,455       19,702  
      Warrants(11)                    
 
Digital VideoStream, LLC
  Unitranche Debt (11.0%, Due 2/12)     19,127       19,021       19,021  
 
(Business Services)
  Convertible Subordinated Debt
(10.0%, Due 2/16)
    3,730       3,714       3,714  
 
Dynamic India Fund IV(4)(5)
  Equity Interests             3,850       3,850  
 
(Private Equity Fund)
                           
 
EarthColor, Inc.
  Senior Loan (7.4%, Due 11/11)     35,000       35,000       35,000  
 
(Business Services)
  Subordinated Debt (15.0%, Due 11/13)     107,000       106,478       106,478  
    Common Stock (53,540 shares)(11)             53,540       53,540  
    Warrants(11)                    
 
eCentury Capital Partners, L.P.(5)
  Limited Partnership Interest             6,274       2,090  
 
(Private Equity Fund)
                           
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
  (11)     Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
The accompanying notes are an integral part of these consolidated financial statements.

21


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Elexis Beta GmbH(4)
  Options           $ 426     $ 50  
 
(Industrial Products)
                           
 
Farley’s & Sathers Candy Company, Inc.
  Subordinated Debt (11.4%, Due 3/11)   $ 20,000       19,931       19,931  
 
(Consumer Products)
                           
 
Frozen Specialties, Inc.
  Warrants             435       320  
 
(Consumer Products)
                           
 
Garden Ridge Corporation
(Retail)
  Subordinated Debt (7.0%, Due 5/12)(6)     22,500       22,500       22,500  
 
Geotrace Technologies, Inc.
  Subordinated Debt (10.0%, Due 6/09)     23,945       22,481       22,481  
 
(Energy Services)
  Warrants             2,350       1,900  
 
Ginsey Industries, Inc.
  Subordinated Debt (12.5%, Due 3/07)     2,743       2,743       2,743  
 
(Consumer Products)
                           
 
Grant Broadcasting Systems II
  Subordinated Debt (5.0%, Due 6/11)     3,005       3,005       3,005  
 
(Broadcasting & Cable)
                           
 
Grotech Partners, VI, L.P.(5)
  Limited Partnership Interest             8,223       6,088  
 
(Private Equity Fund)
                           
 
Havco Wood Products LLC
  Unitranche Debt (11.1%, Due 8/11)     19,654       18,615       18,615  
 
(Industrial Products)
  Equity Interests             1,049       3,000  
 
Haven Eldercare of New England, LLC(10)
  Subordinated Debt (12.0%, Due 8/09)     2,827       2,827       2,827  
 
(Healthcare Services)
                           
 
Haven Healthcare Management, LLC(10)
  Subordinated Debt (18.0%, Due 4/07)     140       140       140  
 
(Healthcare Services)
                           
 
HealthASPex Services Inc.
  Senior Loan (4.0%, Due 7/08)     500       500       500  
 
(Business Services)
                           
 
The Hillman Companies, Inc.(3)
  Subordinated Debt (10.0%, Due 9/11)     44,580       44,427       44,427  
 
(Consumer Products)
                           
 
The Homax Group, Inc.
  Senior Loan (9.2%, Due 10/12)     12,485       12,485       12,485  
 
(Consumer Products)
  Subordinated Debt (12.0%, Due 4/14)     14,000       13,171       13,171  
      Preferred Stock (89 shares)             89       89  
      Common Stock (28 shares)             6       6  
      Warrants             1,106       1,106  
 
Hot Stuff Foods, LLC
  Senior Loan (8.9%, Due 2/11-2/12)     48,580       48,351       48,351  
 
(Consumer Products)
  Subordinated Debt (13.7%, Due 8/12 – 2/13)     60,606       60,353       60,353  
      Subordinated Debt (16.0%, Due 2/13)(6)     20,841       20,749       8,460  
      Common Stock (1,122,452 shares)(11)             56,186        
      Warrants(11)                    
 
Ideal Snacks Corporation
  Senior Loan (9.0%, Due 6/10)     5,850       5,815       5,815  
 
(Consumer Products)
                           
 
Integrity Interactive Corporation
  Unitranche Debt (10.5%, Due 2/12)     29,500       29,314       29,314  
 
(Business Services)
                           
 
International Fiber Corporation
  Subordinated Debt (14.0%, Due 6/12)     21,986       21,914       21,914  
 
(Industrial Products)
  Preferred Stock (25,000 shares)             2,500       2,200  
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
  (10)     Haven Eldercare of New England, LLC and Haven Healthcare Management, LLC are affiliated companies.
  (11)     Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
The accompanying notes are an integral part of these consolidated financial statements.

22


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Kodiak Fund LP(5)
  Equity Interests           $ 4,700     $ 4,656  
 
(Private Equity Fund)
                           
 
Line-X, Inc.
  Senior Loan (9.1%, Due 8/11)   $ 2,000       1,981       1,981  
 
(Consumer Products)
  Unitranche Debt (10.0% Due 8/11)     48,509       48,306       48,306  
      Standby Letter of Credit ($1,500)                        
 
MedAssets, Inc.
  Preferred Stock (227,865 shares)             2,049       3,623  
 
(Business Services)
  Common Stock (50,000 shares)                   250  
 
MHF Logistical Solutions, Inc.
  Subordinated Debt (11.5%, Due 6/12)     33,600       33,448       33,448  
 
(Business Services)
  Subordinated Debt (18.0%, Due 6/13)(6)     11,211       11,155       8,719  
      Common Stock (20,934 shares)(11)             20,942        
      Warrants(11)                    
 
Mid-Atlantic Venture Fund IV, L.P.(5)
  Limited Partnership Interest             6,974       3,221  
 
(Private Equity Fund)
                           
 
Mogas Energy, LLC
  Subordinated Debt (9.5%, Due 3/12 – 4/12)     16,336       15,100       16,318  
 
(Energy Services)
  Warrants             1,774       6,250  
 
Network Hardware Resale, Inc.
  Unitranche Debt (10.5%, Due 12/11)     37,154       37,357       37,357  
 
(Business Services)
  Convertible Subordinated Debt (9.8%, Due 12/15)     12,000       12,068       12,559  
 
Norwesco, Inc.
  Subordinated Debt (12.6%, Due 1/12 – 7/12)     82,486       82,172       82,172  
 
(Industrial Products)
  Common Stock (559,603 shares)(11)             38,313       83,329  
    Warrants(11)                    
 
Novak Biddle Venture Partners III, L.P.(5)
  Limited Partnership Interest             1,834       1,947  
 
(Private Equity Fund)
                           
 
Oahu Waste Services, Inc.
  Stock Appreciation Rights             239       800  
 
(Business Services)
                           
 
Odyssey Investment Partners Fund III,
                           
 
LP(5)
  Limited Partnership Interest             1,883       1,744  
 
(Private Equity Fund)
                           
 
Palm Coast Data, LLC
  Senior Loan (8.9%, Due 8/10)     15,306       15,243       15,243  
 
(Business Services)
  Subordinated Debt (15.5%, Due 8/12 – 8/15)     30,396       30,277       30,277  
      Common Stock (21,743 shares)(11)             21,743       41,707  
      Warrants(11)                    
 
Passport Health
                           
 
Communications, Inc.
  Subordinated Debt (14.0%, Due 4/12)     10,145       10,101       10,101  
 
(Healthcare Services)
  Preferred Stock (651,381 shares)             2,000       2,189  
 
Performant Financial Corporation
  Common Stock (478,816 shares)             734        
 
(Business Services)
                           
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
  (11)     Common stock is non-voting. In addition to non-voting stock ownership, the Company has an option to acquire a majority of the voting securities of the portfolio company at fair market value.
The accompanying notes are an integral part of these consolidated financial statements.

23


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Postle Aluminum Company, LLC
  Unitranche Debt (11.0%, Due 10/12)   $ 57,500     $ 57,189     $ 57,189  
 
(Industrial Products)
  Equity Interests             2,500       2,500  
 
Pro Mach, Inc.
  Subordinated Debt (12.5%, Due 6/12)     14,471       14,402       14,402  
 
(Industrial Products)
  Equity Interests             1,500       2,200  
 
Promo Works, LLC
  Unitranche Debt (10.3%, Due 12/11)     31,000       30,727       30,727  
 
(Business Services)
  Guaranty ($1,200)                        
 
S.B. Restaurant Company
  Unitranche Debt (9.8%, Due 4/11)     41,501       41,094       41,094  
 
(Retail)
  Preferred Stock (54,125 shares)             135       135  
    Warrants             619       1,200  
    Standby Letters of Credit ($2,611)                        
 
SBBUT, LLC
  Equity Interests                    
 
(Consumer Products)
                           
 
Service Center Metals, LLC
  Subordinated Debt (15.5%, Due 9/11)     5,000       4,976       4,976  
 
(Industrial Products)
  Equity Interests             312       318  
 
Soff-Cut Holdings, Inc.
  Preferred Stock (300 shares)             300       300  
 
(Industrial Products)
  Common Stock (2,000 shares)             200       180  
 
SPP Mezzanine Funding, L.P.(5)
  Limited Partnership Interest             2,551       2,825  
 
(Private Equity Fund)
                           
 
SPP Mezzanine Funding II, L.P.(5)
  Limited Partnership Interest             326       326  
 
(Private Equity Fund)
                           
 
Stag-Parkway, Inc.
  Unitranche Debt (10.8%, Due 7/12)     63,000       62,711       62,711  
 
(Business Services)
                           
 
STS Operating, Inc.
  Subordinated Debt (15.0%, Due 1/13)     30,156       30,021       30,021  
 
(Industrial Products)
                           
 
The Step2 Company, LLC
  Unitranche Debt (10.5%, Due 4/12)     67,898       67,457       67,457  
 
(Consumer Products)
  Equity Interests             2,000       1,763  
 
Tradesmen International, Inc.
  Subordinated Debt (12.0%, Due 12/09)     15,000       14,468       14,468  
 
(Business Services)
  Warrants             710       3,300  
 
TransAmerican Auto Parts, LLC
  Subordinated Debt (14.0%, Due 11/12)     12,947       12,892       12,892  
 
(Consumer Products)
  Equity Interests             1,190       747  
 
Universal Air Filter Company
  Unitranche Debt (11.0%, Due 11/11)     19,117       19,026       19,026  
 
(Industrial Products)
                           
 
Updata Venture Partners II, L.P.(5)
  Limited Partnership Interest             5,477       5,158  
 
(Private Equity Fund)
                           
 
Venturehouse-Cibernet Investors, LLC
  Equity Interest             42       42  
 
(Business Services)
                           
 
Venturehouse Group, LLC(5)
  Equity Interest             598       365  
 
(Private Equity Fund)
                           
 
VICORP Restaurants, Inc.
  Warrants             33        
 
(Retail)
                           
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

24


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                               
        December 31, 2006
Private Finance        
Portfolio Company        
(in thousands, except number of shares)   Investment(1)(2)   Principal   Cost   Value
                 
Walker Investment Fund II, LLLP(5)
  Limited Partnership Interest           $ 1,329     $ 458  
 
(Private Equity Fund)
                           
 
Wear Me Apparel Corporation
  Subordinated Debt (15.0%, Due 12/10)   $ 40,000       39,407       39,407  
 
(Consumer Products)
  Warrants             1,219       5,120  
 
Wilton Industries, Inc.
  Subordinated Debt (16.0%, Due 6/08)     2,400       2,400       2,400  
 
(Consumer Products)
                           
 
Woodstream Corporation
  Subordinated Debt (13.5%, Due 11/12 – 5/13)     53,114       52,989       52,989  
 
(Consumer Products)
  Common Stock (180 shares)             673       3,885  
      Warrants                   2,815  
 
York Insurance Services Group, Inc.
  Subordinated Debt (14.5%, Due 1/14)     44,249       44,045       44,045  
 
(Business Services)
  Common Stock (15,000 shares)             1,500       1,500  
 
Other companies
  Other debt investments(6)     223       223       218  
    Other equity investments             8        
 
            Total companies less than 5% owned           $ 2,479,981     $ 2,437,908  
 
            Total private finance (145 portfolio companies)           $ 4,497,363     $ 4,377,901  
 
         
   (1)     Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by nature of indebtedness for a single issuer. The maturity dates represent the earliest and the latest maturity dates.
   (2)     Common stock, preferred stock, warrants, options, and equity interests are generally non-income producing and restricted.
   (3)     Public company.
   (4)     Non-U.S. company or principal place of business outside the U.S.
   (5)     Non-registered investment company.
   (6)     Loan or debt security is on non-accrual status and therefore is considered non-income producing.
The accompanying notes are an integral part of these consolidated financial statements.

25


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INVESTMENTS — (Continued)
                 
Commercial Real Estate Finance
               
(in thousands, except number of loans)
               
                                   
            December 31, 2006
    Interest   Number of    
    Rate Ranges   Loans   Cost   Value
                 
Commercial Mortgage Loans
                               
      Up to 6.99%       3     $ 20,470     $ 19,692  
      7.00%–8.99%       9       24,092       24,073  
      9.00%–10.99%       4       24,117       24,117  
    15.00% and above     2       3,970       3,970  
 
 
Total commercial mortgage loans(13)
            18     $ 72,649     $ 71,852  
 
Real Estate Owned
                  $ 15,708     $ 19,660  
 
Equity Interests(2) — Companies more than 25% owned
(Guarantees — $6,871)
          $ 15,189     $ 26,671  
 
 
Total commercial real estate finance
                  $ 103,546     $ 118,183  
 
Total portfolio
                  $ 4,600,909     $ 4,496,084  
 
                                 
                             
    Yield   Cost   Value
             
Liquidity Portfolio
                       
 
American Beacon Money Market Select FD Fund(14)
    5.3%     $ 85,672     $ 85,672  
 
Certificate of Deposit (Due March 2007)(14)
    5.6%       40,565       40,565  
 
American Beacon Money Market Fund(14)
    5.2%       40,384       40,384  
 
SEI Daily Income Tr Prime Obligation Fund(14)
    5.2%       34,671       34,671  
 
Blackrock Liquidity Funds(14)
    5.2%       476       476  
 
   
Total liquidity portfolio
          $ 201,768     $ 201,768  
 
Other Investments in Money Market Securities(14)
                       
 
Columbia Treasury Reserves Money Market Fund
    5.2%     $ 441     $ 441  
 
Columbia Money Market Reserves
    5.2%     $ 1     $ 1  
 
                         
 (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.
(13)       Commercial mortgage loans totaling $18.9 million at value were on non-accrual status and therefore were considered non-income producing.
(14)       Included in investments in money market and other securities on the accompanying Consolidated Balance Sheet.
The accompanying notes are an integral part of these consolidated financial statements.

26


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at and for the three months ended March 31, 2007 and 2006 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 and its portfolio companies.
      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.
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 2006 balances to conform with the 2007 financial statement presentation.
      The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the unaudited consolidated financial results of the Company included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 2007, the results of operations for the three months ended March 31, 2007 and 2006, and changes in net assets and cash flows for the three months ended March 31, 2007 and 2006. The results of operations for the three months ended March 31, 2007, 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 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

27


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Summary of Significant Accounting Policies, continued
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 are included in the companies less than 5% owned category on the consolidated statement of operations.
      In the ordinary course of business, the Company enters into transactions with portfolio companies that may be considered related party transactions.
      Valuation of Portfolio Investments
      The Company, as a BDC, has invested in illiquid securities including debt and equity securities of companies and CDO and CLO bonds and preferred shares/income notes. The 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. The Company determines fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The Company’s valuation policy considers the fact that no ready market exists for substantially all of the securities in which it invests. The Company’s valuation policy is intended to provide a consistent basis for determining the fair value of the portfolio. The Company will record unrealized depreciation on investments when it believes that an investment has become impaired, including where collection of a loan or realization of an equity security is doubtful, or when the enterprise value of the portfolio company does not currently support the cost of the Company’s debt or equity investments. Enterprise value means the entire value of the company to a potential buyer, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The Company will record unrealized appreciation if it believes that the underlying portfolio company has appreciated in value and/or the Company’s equity security has also appreciated in value. The value of investments in publicly traded securities is determined using quoted market prices discounted for restrictions on resale, if any.
      Loans and Debt Securities
      For loans and debt securities, fair value generally approximates cost unless the borrower’s enterprise value, overall financial condition or other factors lead to a determination of fair value at a different amount. The value of loan and debt securities may be greater than the Company’s cost basis if the amount that would be repaid on the loan or debt security upon the sale of the portfolio company is greater than the Company’s cost basis.
      When the Company receives nominal cost warrants or free equity securities (“nominal cost equity”), the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. At that time, the original issue discount basis of the nominal cost equity is recorded by increasing the cost basis in the equity and decreasing the cost basis in the related debt securities.

28


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Summary of Significant Accounting Policies, continued
      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 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. Loan origination fees, original issue discount, and market discount are capitalized and then amortized into interest income using a method that approximates the effective interest method. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income and any unamortized original issue discount or market discount is recorded as a realized gain. Prepayment premiums are recorded on loans and debt securities when received.
      The weighted average yield on loans and debt securities is computed as the (a) annual stated interest 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.
      Equity Securities
      The Company’s equity securities in portfolio companies for which there is no liquid public market are valued at fair value based on the enterprise value of the portfolio company, which is determined using various factors, including cash flow from operations of the portfolio company, 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 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.
      The value of the Company’s equity securities in public companies for which market quotations are readily available is based on the closing public market price on the balance sheet date. Securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.
      Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are expected to be collected and to the extent that the Company has the option to receive the dividend in cash. Dividend income on common equity securities is recorded on the record date for private companies or on the ex-dividend date for publicly traded companies.

29


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Summary of Significant Accounting Policies, continued
     Collateralized Debt Obligations (“CDO”) and Collateralized Loan Obligations (“CLO”)
      CDO and CLO bonds and preferred shares/ income notes (“CDO/ CLO Assets”) are carried at fair value, which is based on a discounted cash flow model that utilizes prepayment, 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. The Company recognizes unrealized appreciation or depreciation on its CDO/ CLO Assets as comparable yields in the market change and/or based on changes in estimated cash flows resulting from changes in prepayment, re-investment or loss assumptions in the underlying collateral pool. The Company determines the fair value of its CDO/CLO Assets on an individual security-by-security basis.
      The Company recognizes interest income on the preferred shares/income notes using the effective interest method, based on the anticipated yield and 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 share/income note from the date the estimated yield was changed. CDO and CLO bonds have stated interest rates.
      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 and deposits of proceeds from sales of borrowed Treasury securities, and depreciation on accrued interest and dividends receivable and other assets where collection is doubtful.
      Fee Income
      Fee income includes fees for 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 are generally recognized as income as the services are rendered.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Summary of Significant Accounting Policies, continued
      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 (the “Interpretation”) and issued or modified after December 31, 2002, are recognized at fair value at inception. 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, such as underwriting, accounting and legal fees, and printing costs are recorded as a reduction to the proceeds from the sale of common stock.
      Dividends to Shareholders
      Dividends to shareholders are recorded on the record date.
      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 (the “Statement”). The Statement 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 Statement No. 123. 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, 2007 and 2006, was as follows:
                     
    2007   2006
($ in millions, except per share amounts)        
Employee Stock Option Expense:
               
 
Previously awarded, unvested options as of January 1, 2006
  $ 3.2     $ 3.4  
 
Options granted on or after January 1, 2006
    0.5       0.2  
             
   
Total employee stock option expense
  $ 3.7     $ 3.6  
             
   
Per basic share
  $ 0.02     $ 0.03  
   
Per diluted share
  $ 0.02     $ 0.03  

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Summary of Significant Accounting Policies, continued
      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, 2007, and 2006:
                 
    2007(1)   2006
         
Expected term (in years)
          5.0  
Risk-free interest rate
    %     4.3 %
Expected volatility
    %     29.6 %
Dividend yield
    %     9.0 %
Weighted average fair value per option
  $     $ 3.35  
 
  (1)  The Company did not grant any options during the three months ended March 31, 2007.
     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 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. 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 the Company’s historical dividend yield over a historical time period consistent with the expected term.
      To determine the stock options expense, 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 under the Statement that will be recorded in the Company’s statement of operations will be approximately $11.8 million, $4.0 million, and $0.1 million for the years ended December 31, 2007, 2008, and 2009, respectively, which includes approximately $1.9 million, $1.0 million, and $0.1 million, respectively, related to options granted since adoption of the Statement (January 1, 2006). This estimate may change if the Company’s assumptions related to future option forfeitures change. This estimate does not include any expense related to future stock option grants as the fair value of those stock options will be determined at the time of grant. The aggregate total stock option expense remaining as of March 31, 2007, is expected to be recognized over an estimated weighted-average period of 1.0 years.
      Federal and State Income Taxes and Excise Tax
      The Company intends to comply with the requirements of the Internal Revenue Code (“Code”) that are applicable to regulated investment companies (“RIC”) and real estate investment trusts (“REIT”). ACC and any subsidiaries that qualify as a RIC or a REIT intend to distribute or retain through a deemed distribution all of their annual taxable income to shareholders; therefore, the Company has made no provision for income taxes exclusive of excise taxes for these entities.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Summary of Significant Accounting Policies, continued
      If the Company does not distribute at least 98% of its annual taxable income in the year earned, the Company will generally be required to pay an excise tax equal to 4% of the amount by which 98% of the Company’s annual taxable income exceeds the distributions from such taxable income for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes 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. Earnings per share is computed after subtracting dividends on preferred shares, if any.
      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 $4.5 billion at both March 31, 2007, and December 31, 2006. At March 31, 2007, and December 31, 2006, 90% and 92%, 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
      In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this interpretation did not have a significant effect on the Company’s consolidated financial position or its results of operations.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 2. Summary of Significant Accounting Policies, continued
      In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this statement to have a significant effect on the Company’s consolidated financial position or its results of operations.
      In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115. This statement 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 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this statement to have a significant effect on the Company’s consolidated financial position or its results of operations.
Note 3. Portfolio
      Private Finance
      At March 31, 2007, and December 31, 2006, the private finance portfolio consisted of the following:
                                                     
    2007   2006
         
    Cost   Value   Yield(1)   Cost   Value   Yield(1)
($ in millions)                        
Loans and debt securities:
                                               
 
Senior loans
  $ 406.8     $ 365.0       8.4 %   $ 450.0     $ 405.2       8.4 %
 
Unitranche debt(2)
    783.0       780.2       11.4 %     800.0       799.2       11.2 %
 
Subordinated debt
    2,036.2       1,946.1       12.5 %     2,038.3       1,980.8       12.9 %
                                     
   
Total loans and debt securities (3)
    3,226.0       3,091.3       11.7 %     3,288.3       3,185.2       11.9 %
Equity securities
    1,208.1       1,285.0               1,209.1       1,192.7          
                                     
   
Total
  $ 4,434.1     $ 4,376.3             $ 4,497.4     $ 4,377.9          
                                     
 
(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, 2007, and December 31, 2006, the cost and value of subordinated debt included the Class A equity interests in BLX and the guaranteed dividend yield on these equity interests was included in interest income. During the fourth quarter of 2006, the Class A equity interests were placed on non-accrual status. The weighted average yield is computed as of the balance sheet date.
 
(2)  Unitranche debt is a single debt investment that is a blend of senior and subordinated debt terms.
 
(3)  The total principal balance outstanding on loans and debt securities was $3,258.7 million and $3,322.3 million at March 31, 2007, and December 31, 2006, respectively. The difference between principal and cost is represented by unamortized loan origination fees and costs, original issue discounts, and market discounts totaling $32.7 million and $34.0 million at March 31, 2007, and December 31, 2006, respectively.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
     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 are generally issued by private companies and are generally 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 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, 2007, and December 31, 2006, 89% and 86%, respectively, of the private finance loans and debt securities had a fixed rate of interest and 11% and 14%, respectively, had a floating rate of interest. Senior loans generally carry a floating rate of interest, usually set as a spread over LIBOR, and generally require payments of both principal and interest throughout the life of the loan. Senior loans generally have 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 may require 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 is generally 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 is generally paid to the Company quarterly.
      Equity securities consist primarily of securities issued by private companies and may be subject to certain restrictions on their resale and are generally illiquid. The Company may make equity investments for minority stakes in portfolio companies or may receive equity features, such as nominal cost warrants, in conjunction with its debt investments. The Company may also invest in the equity (preferred and/or voting or non-voting common) of a portfolio company where the 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.
      Mercury Air Centers, Inc. At March 31, 2007, the Company’s investment in Mercury Air Centers, Inc. (Mercury) totaled $84.8 million at cost and $301.4 million at value, which included unrealized appreciation of $216.6 million. At December 31, 2006, the Company’s investment in

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
Mercury totaled $84.3 million at cost and $244.2 million at value, which included unrealized appreciation of $159.9 million.
      Mercury owns and operates fixed base operations generally under long-term leases from local airport authorities, which consist of terminal and hangar complexes that service the needs of the general aviation community. Mercury is headquartered in Richmond Heights, OH. The Company completed the purchase of a majority ownership in Mercury in April 2004.
      Total interest and related portfolio income earned from the Company’s investment in Mercury for the three months ended March 31, 2007, and 2006, was as follows:
                   
    For the Three
    Months Ended
    March 31,
     
    2007   2006
($ in millions)        
Interest income
  $ 2.0     $ 2.9  
Fees and other income
    0.1       0.2  
             
 
Total interest and related portfolio income
  $ 2.1     $ 3.1  
             
      Interest income from Mercury included $0.5 million for both the three months ended March 31, 2007 and 2006, which was paid in kind. The interest paid in kind was paid to the Company through the issuance of additional debt.
      Net change in unrealized appreciation or depreciation included a net increase in unrealized appreciation on the Company’s investment in Mercury of $56.7 million and $4.7 million for the three months ended March 31, 2007 and 2006, respectively.
      In April 2007, the Company signed a definitive agreement to sell its majority equity interest in Mercury. Based on the definitive agreement, Mercury is expected to sell for an enterprise value of approximately $427 million, subject to pre- and post-closing adjustments. In connection with the transaction, the Company expects to be repaid approximately $50 million of subordinated debt outstanding to Mercury at closing. The transaction is expected to close in the third quarter of 2007 upon satisfying certain closing conditions, including regulatory approvals.
      Business Loan Express, LLC. BLX originates, sells, and services primarily real estate secured loans, including real estate secured conventional small business loans, Small Business Administration’s 7(a) loans and small investment real estate loans. BLX is headquartered in New York, NY.
      The Company’s investment in BLX totaled $314.5 million at cost and $229.9 million at value, which included unrealized depreciation of $84.6 million, at March 31, 2007, and $295.3 million at cost and $210.7 million at value, which included unrealized depreciation of $84.6 million, at December 31, 2006. In the first quarter of 2007 the Company increased its investment in BLX by $19.2 million by acquiring additional Class A equity interests. In addition, in the first quarter of 2007, the chief executive officer of BLX invested $3.0 million in the form of Class A equity interests in BLX. The Company agreed to purchase these interests for cash at fair value in the event that BLX amends or otherwise restructures its existing senior credit facility or he is terminated for any reason.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
The purpose of these additional investments was to fund payments to the SBA discussed below and to provide additional equity to BLX.
      Total interest and related portfolio income earned from the Company’s investment in BLX for the three months ended March 31, 2007 and 2006, was as follows:
                   
    For the Three
    Months Ended
    March 31,
     
    2007   2006
($ in millions)        
Interest income on subordinated debt and Class A equity interests
  $     $ 3.9  
Fees and other income
    1.4       2.2  
             
 
Total interest and related portfolio income
  $ 1.4     $ 6.1  
             
      Interest and dividend income from BLX for the three months ended March 31, 2006, included interest income of $1.8 million which was paid in kind. The interest paid in kind was paid to the Company through the issuance of additional equity interests. In the fourth quarter of 2006, the Company placed its investment in BLX’s 25% Class A equity interests on non-accrual status. As a result, there was no interest income from the Company’s investment in BLX for the three months ended March 31, 2007.
      In consideration for providing the revolving credit facility guaranty and the standby letters of credit, the Company earned fees of $1.4 million and $1.6 million for the three months ended March 31, 2007 and 2006, respectively, which were included in fees and other income. The remaining fees and other income relate to management fees from BLX. The Company did not charge a management fee to BLX in the first quarter of 2007.
      Net change in unrealized appreciation or depreciation included no change in the unrealized depreciation on the Company’s investment in BLX for the three months ended March 31, 2007, and a net decrease in unrealized appreciation of $22.7 million for the three months ended March 31, 2006.
      BLX is a national, non-bank lender that participates in the SBA’s 7(a) Guaranteed Loan Program and is licensed by the SBA as a Small Business Lending Company (SBLC). The Office of the Inspector General of the SBA (OIG) and the United States Secret Service are conducting an ongoing investigation of allegedly fraudulently obtained SBA-guaranteed loans issued by BLX. Specifically, on or about January 9, 2007, BLX became aware of an indictment captioned as the United States v. Harrington, No. 2:06-CR-20662 pending in the United States District Court for the Eastern District of Michigan. The indictment alleges that a former BLX employee in the Detroit office engaged in the fraudulent origination of loans guaranteed, in substantial part, by the SBA. The Company understands that BLX is working cooperatively with the U.S. Attorney’s Office and the investigating agencies with respect to this matter. The OIG and the U.S. Department of Justice are also conducting a civil investigation of BLX’s lending practices in various jurisdictions. These investigations are ongoing. As an SBA lender, BLX is also subject to other SBA and OIG audits, investigations, and reviews. These investigations, audits and reviews, changes in the laws or regulations that govern SBLCs or the SBA 7(a) Guaranteed Loan Program, or changes in government funding for this program could have a material adverse impact on BLX and, as a result,

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
could negatively affect the Company’s financial results. The Company has considered these matters in performing the valuation of BLX at March 31, 2007. The Company is monitoring the situation and has retained a third party to work with BLX to conduct a review of BLX’s current internal control systems, with a focus on preventing fraud and further strengthening BLX’s operations.
      On March 6, 2007, BLX entered into an agreement with the SBA. According to the agreement, BLX remains a preferred lender in the SBA 7(a) Guaranteed Loan Program and retains the ability to sell loans into the secondary market. As part of this agreement, BLX agreed to the immediate payment of approximately $10 million to the SBA to cover amounts paid by the SBA with respect to some of the SBA-guaranteed loans that have been the subject of inquiry by the United States Attorney’s Office for the Eastern District of Michigan. As part of the SBA’s increased oversight, the agreement provides that any loans originated and closed by BLX during the term of the agreement will be reviewed by an independent third party selected by the SBA prior to the sale of such loans into the secondary market. The agreement also requires BLX to repurchase the guaranteed portion of certain loans that default after having been sold into the secondary market, and subjects such loans to a similar third party review prior to any reimbursement of BLX by the SBA. In connection with this agreement, BLX also entered into an escrow agreement with the SBA and an escrow agent in which BLX agreed to deposit $10 million with the escrow agent for any additional payments BLX may be obligated to pay to the SBA in the future. BLX remains subject to SBA rules and regulations and as a result may be required to make additional payments to the SBA in the ordinary course of business. The agreement states that nothing in the agreement shall affect the rights of BLX to securitize or service its loans. Notwithstanding the foregoing, BLX and the SBA are conducting ongoing discussions with respect to BLX’s ability to securitize the unguaranteed portions of SBA loans.
      On or about January 16, 2007, BLX and Business Loan Center LLC (BLC) became aware of a lawsuit titled, United States, ex rel James R. Brickman and Greenlight Capital, Inc. v. Business Loan Express LLC f/k/a Business Loan Express, Inc.; Business Loan Center LLC f/k/a Business Loan Center, Inc.; Robert Tannenhauser; Matthew McGee; and George Harrigan, 05-CV-3147 (JEC), that is pending in the United States District Court for the Northern District of Georgia. The complaint includes allegations arising under the False Claims Act and relating to alleged fraud in connection with SBA guarantees on shrimp vessel loans made by BLX and BLC. On April 9, 2007, BLX, BLC and the other defendants filed motions to dismiss the complaint in its entirety. The motions are pending.
      At December 31, 2006, the Company held all of BLX’s Class A and Class B equity interests, and 94.9% of the Class C equity interests. At March 31, 2007, the Company held 96.6% of the Class A equity interests, all of the Class B equity interests and 94.9% of the Class C equity interests. BLX has an equity appreciation rights plan for management that will dilute the value available to the Class C equity interest holders. As a limited liability company, BLX’s taxable income flows through directly to its members. BLX’s annual taxable income generally differs from its book income for the fiscal year due to temporary and permanent differences in the recognition of income and expenses. BLX’s taxable income is first allocated to the Class A equity interests to the extent that guaranteed dividends are paid in cash or in kind on such interests, with the remainder being allocated to the Class B and C equity interests.
      At the time of the corporate reorganization of BLX, Inc. from a C corporation to a limited liability company in 2003, for tax purposes BLX had a “built-in gain” representing the aggregate fair market value of its assets in excess of the tax basis of its assets. As a RIC, the Company will be

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
subject to special built-in gain rules on the assets of BLX. Under these rules, taxes will be payable by the Company at the time and to the extent that the built-in gains on BLX’s assets at the date of reorganization are recognized in a taxable disposition of such assets in the 10-year period following the date of the reorganization. At such time, the built-in gains realized upon the disposition of these assets will be included in the Company’s taxable income, net of the corporate level taxes paid by the Company on the built-in gains. At the date of BLX’s reorganization, the Company estimated that its future tax liability resulting from the built-in gains may total up to a maximum of $40 million. However, if these assets are disposed of after the 10-year period, there will be no corporate level taxes on these built-in gains. While the Company has no obligation to pay the built-in gains tax until these assets or its interests in BLX are disposed of in the future, it may be necessary to record a liability for these taxes in the future should the Company intend to sell the assets of or its interests in BLX within the 10-year period. At March 31, 2007, and December 31, 2006, the Company considered the increase in fair value of its investment in BLX due to BLX’s tax attributes as an LLC and has also considered the reduction in fair value of its investment due to these estimated built-in gain taxes in determining the fair value of its investment in BLX.
      At March 31, 2007, BLX had a three-year $500.0 million revolving credit facility provided by third party lenders that matures in March 2009. The revolving credit facility may be expanded through new or additional commitments up to $600.0 million at BLX’s option. This facility provides for a sub-facility for the issuance of letters of credit for up to an amount equal to 25% of the committed facility. The Company has provided an unconditional guaranty to these revolving credit facility lenders in an amount equal to 50% of the total obligations (consisting of principal, letters of credit issued under the facility, accrued interest, and other fees) of BLX under this facility. At March 31, 2007, the principal amount outstanding on the revolving credit facility was $300.8 million and letters of credit issued under the facility were $55.9 million. The total obligation guaranteed by us at March 31, 2007, was $179.4 million. At March 31, 2007, the Company had also provided four standby letters of credit totaling $20.0 million in connection with four term securitization transactions completed by BLX.
      The guaranty on the BLX revolving line of credit facility can be called by the lenders in the event of a default, which includes certain defaults under the Company’s revolving credit facility. Among other requirements, the BLX facility requires that BLX maintain compliance with certain financial covenants such as interest coverage, maximum debt to net worth, asset coverage, and maintenance of certain asset quality metrics. In addition, BLX would have an event of default if BLX failed to maintain its lending status with the SBA and such failure could reasonably be expected to result in a material adverse effect on BLX, or if BLX failed to maintain certain financing programs for the sale or long-term funding of BLX’s loans. At March 31, 2007, BLX received waivers from its lenders with respect to non-compliance with certain covenants, including waiver of compliance with the interest coverage ratio and certain other covenants to permit BLX to comply with its obligations under its agreement with the SBA. In addition, BLX and the SBA are conducting ongoing discussions with respect to BLX’s ability to securitize the unguaranteed portions of SBA loans. The waiver provides that BLX may retain unguaranteed portions of SBA loans on its balance sheet. Certain of these waivers expire on June 30, 2007.
      BLX has a separate non-recourse warehouse facility to enable it to securitize the unguaranteed portion of its SBA loans. BLX has been receiving temporary extensions of the warehouse facility, and

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
the current extension expires on June 1, 2007. BLX is in negotiations with the warehouse facility providers to renew and amend the facility for an additional one year term, subject to satisfactory conclusion of discussions with the SBA with respect to BLX’s ability to securitize the unguaranteed portions of SBA loans. If the current facility were to expire without renewal, the outstanding amounts owing to the warehouse providers do not become immediately due and payable. Instead, BLX would be required to apply substantially all collections on the unguaranteed interests that currently are in the warehouse facility to repay the outstanding amounts owing to the warehouse providers until the warehouse providers were paid in full, similar to an amortizing term loan. In such an event, BLX would not have the right to sell additional unguaranteed interests in SBA loans into this facility.
      The Company is monitoring BLX’s discussions with the SBA, the senior lenders and the warehouse securitization facility providers, and intends to work with BLX management to implement its business plan, including funding alternatives. The ultimate resolution of these matters could have a material adverse impact on BLX’s financial condition, and, as a result, the Company’s financial results could be negatively affected.
      Advantage Sales and Marketing, Inc. In June 2004, the Company completed the purchase of a majority voting ownership in Advantage, which was subject to dilution by a management option pool. Advantage is a sales and marketing agency providing outsourced sales, merchandising, and marketing services to the consumer packaged goods industry. Advantage has offices across the United States and is headquartered in Irvine, CA.
      On March 29, 2006, the Company sold its majority equity interest in Advantage. The Company was repaid its $184 million in subordinated debt outstanding and realized a gain at closing on its equity investment sold of $433.1 million, subject to post-closing adjustments. Subsequent to closing on this sale, the Company realized additional gains in 2006 resulting from post-closing adjustments totaling $1.3 million. In addition, there is potential for the Company to receive additional consideration through an earn-out payment that would be based on Advantage’s 2006 audited results. The Company’s realized gain of $434.4 million for the year ended December 31, 2006, subject to post-closing adjustments, excludes any earn-out amounts.
      As consideration for the common stock sold in the transaction, the Company received a $150 million subordinated note, with the balance of the consideration paid in cash. In addition, a portion of the Company’s cash proceeds from the sale of the common stock were placed in escrow, subject to certain holdback provisions. At March 31, 2007, the amount of the escrow included in other assets in the accompanying consolidated balance sheet was approximately $24 million.
      Total interest and related portfolio income earned from the Company’s investment in Advantage while the Company held a majority equity interest for the three months ended March 31, 2006, was $14.1 million.
      Net change in unrealized appreciation or depreciation for the three months ended March 31, 2006, included the reversal of $389.7 million of previously recorded unrealized appreciation associated with the realization of a gain on the sale of the Company’s majority equity interest in Advantage.
      In connection with the sale transaction, the Company retained an equity investment in the business valued at $15 million at closing as a minority shareholder. During the fourth quarter of 2006,

40


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
Advantage made a distribution on this minority equity investment, which reduced the Company’s cost basis to zero and resulted in a realized gain of $4.8 million.
      The Company’s investment in Advantage, which was composed of subordinated debt and a minority equity interest, totaled $152.4 million at cost and $163.4 million at value at March 31, 2007, and $151.6 million at cost and $162.6 million at value at December 31, 2006. This investment was included in companies 5% to 25% owned in the consolidated financial statements as the Company continues to hold a seat on Advantage’s board of directors.
      Collateralized Loan Obligations (“CLOs”) and Collateralized Debt Obligations (“CDOs”). At March 31, 2007, and December 31, 2006, the Company owned bonds and preferred shares/income notes in CLOs and a CDO as follows:
                                                     
    2007   2006
         
    Cost   Value   Yield(1)   Cost   Value   Yield(1)
($ in millions)                        
Bonds(2):
                                               
Callidus Debt Partners CDO Fund I, Ltd. 
  $ 28.4     $ 28.5       14.3%     $ 28.4     $ 28.4       14.3%  
Callidus MAPS CLO Fund I LLC
    17.0       17.1       10.9%       17.0       17.2       10.9%  
                                     
 
Total bonds
    45.4       45.6       13.0%       45.4       45.6       13.0%  
Preferred Shares/ Income Notes(3):
                                               
Callidus Debt Partners CLO Fund III, Ltd. 
    22.7       22.5       9.9%       23.3       23.0       12.7%  
Callidus Debt Partners CLO Fund IV, Ltd. 
    12.8       12.8       13.1%       13.0       13.0       13.8%  
Callidus Debt Partners CLO Fund V, Ltd. 
    14.3       14.3       15.8%       13.8       13.8       15.8%  
Callidus MAPS CLO Fund I LLC
    51.0       46.5       13.3%       51.0       47.4       15.9%  
                                     
 
Total preferred shares/ income notes
    100.8       96.1       12.8%       101.1       97.2       14.8%  
                                     
   
Total
  $ 146.2     $ 141.7             $ 146.5     $ 142.8          
                                     
 
(1)  The yield on these securities is included in interest and dividend income in the accompanying statement of operations.
 
(2)  These securities are included in private finance subordinated debt.
 
(3)  These securities are included in private finance equity securities.
     The bonds, preferred shares and income notes of the CLOs and CDO in which the Company has invested are junior in priority for payment of interest and principal to the more senior notes issued by the CLOs and CDO. Cash flow from the underlying collateral assets in the CLOs and CDO is generally allocated first to the senior bonds in order of priority, then any remaining cash flow is generally distributed to the preferred shareholders and income note holders. To the extent there are defaults and unrecoverable losses on the underlying collateral assets that result in reduced cash flows, the preferred shares/income notes will bear this loss first and then the subordinated bonds would bear any loss after the preferred shares/income notes.
      At March 31, 2007 and December 31, 2006 the face value of the CLO and CDO bonds held by the Company were subordinate to approximately 82% to 84% and 82% to 85%, respectively, of the face value of the securities issued in these CLOs and CDO. At both March 31, 2007, and December 31, 2006, the face value of the CLO preferred shares/income notes held by the Company were subordinate to approximately 86% to 92% of the face value of the securities issued in these CLOs.

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ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
      At March 31, 2007, and December 31, 2006, the underlying collateral assets of these CLO and CDO investments, consisting primarily of senior debt, were issued by 482 issuers and 465 issuers, respectively, and had balances as follows:
                   
    2007   2006
($ in millions)        
Bonds
  $ 272.9     $ 245.4  
Syndicated loans
    1,758.7       1,769.9  
Cash(1)
    16.2       59.5  
             
 
Total underlying collateral assets
  $ 2,047.8     $ 2,074.8  
             
 
(1)  Includes undrawn liability amounts.
     At March 31, 2007, there were no delinquencies in the underlying collateral assets of the CLO and CDO issuances owned by the Company. At December 31, 2006, there was one defaulted obligor in the underlying collateral assets of Callidus MAPS CLO Fund I, LLC. There were no other delinquencies in the underlying collateral assets in the other CLO and CDO issuances owned by the Company. At December 31, 2006, the total face value of defaulted obligations was $9.6 million, or approximately 0.5% of the total underlying collateral assets.
      The initial yields on the CLO and CDO bonds, preferred shares and income notes are based on the estimated future cash flows from the underlying collateral assets expected to be paid to these CLO and CDO classes. As each CLO and CDO bond, preferred share or income note ages, the estimated future cash flows are updated based on the estimated performance of the underlying collateral assets, and the respective yield is adjusted as necessary. As future cash flows are subject to uncertainties and contingencies that are difficult to predict and are subject to future events that may alter current assumptions, no assurance can be given that the anticipated yields to maturity will be achieved.
      Loans and Debt Securities on Non-Accrual Status. At March 31, 2007, and December 31, 2006, private finance loans and debt securities at value not accruing interest were as follows:
                     
    2007   2006
($ in millions)        
Loans and debt securities in workout status
               
 
Companies more than 25% owned
  $ 45.5     $ 51.1  
 
Companies 5% to 25% owned
    4.9       4.0  
 
Companies less than 5% owned
    61.0       31.6  
Loans and debt securities not in workout status
               
 
Companies more than 25% owned
    121.2       87.1  
 
Companies 5% to 25% owned
    7.2       7.2  
 
Companies less than 5% owned
    26.9       38.9  
             
   
Total
  $ 266.7     $ 219.9  
             

42


 

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, 2007, and December 31, 2006, were as follows:
                   
    2007   2006
         
Industry
               
Business services
    37 %     39 %
Consumer products
    20       20  
Financial services
    12       9  
Industrial products
    9       9  
Consumer services
    6       6  
Retail
    5       6  
Healthcare services
    3       3  
Energy services
    2       2  
Other(1)
    6       6  
             
 
Total
    100 %     100 %
             
Geographic Region(2)
               
Mid-Atlantic
    31 %     31 %
Midwest
    32       30  
Southeast
    15       18  
West
    16       17  
Northeast
    6       4  
             
 
Total
    100 %     100 %
             
 
(1)  Includes investments in senior debt CDO and CLO funds which represented 3% of the private finance portfolio at both March 31, 2007, and December 31, 2006. These funds invest in senior debt representing a variety of industries.
 
(2)  The geographic region for the private finance portfolio depicts the location of the headquarters for the 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, 2007, and December 31, 2006, the commercial real estate finance portfolio consisted of the following:
                                                   
    2007   2006
         
    Cost   Value   Yield(1)   Cost   Value   Yield(1)
($ in millions)                        
Commercial mortgage loans
  $ 72.8     $ 72.2       7.5%     $ 72.6     $ 71.9       7.5%  
Real estate owned
    15.6       21.0               15.7       19.6          
Equity interests
    15.0       29.3               15.2       26.7          
                                     
 
Total
  $ 103.4     $ 122.5             $ 103.5     $ 118.2          
                                     
 
(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.

43


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 3. Portfolio, continued
     Commercial Mortgage Loans and Equity Interests. The commercial mortgage loan portfolio contains loans that were originated by the Company or were purchased from third-party sellers. At both March 31, 2007, and December 31, 2006, approximately 96% and 4% of the Company’s commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. At March 31, 2007, and December 31, 2006, loans with a value of $19.2 million and $18.9 million, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.
      Equity interests consist primarily of equity securities issued by privately owned companies that invest in single real estate properties. These equity interests may be subject to certain restrictions on their resale and are generally illiquid. Equity interests generally do not produce a current return, but are generally held in anticipation of investment appreciation and ultimate realized gain on sale.
      The property types and the geographic composition securing the commercial mortgage loans and equity interests at value at March 31, 2007, and December 31, 2006, were as follows:
                   
    2007   2006
         
Property Type
               
Hospitality
    45 %     45 %
Office
    20       20  
Retail
    19       19  
Housing
    13       13  
Other
    3       3  
             
 
Total
    100 %     100 %
             
Geographic Region
               
Southeast
    36 %     36 %
Mid-Atlantic
    34       35  
Midwest
    23       21  
Northeast
    7       8  
West
           
             
 
Total
    100 %     100 %
             

44


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4. Debt
      At March 31, 2007, and December 31, 2006, the Company had the following debt:
                                                     
    2007   2006
         
        Annual       Annual
    Facility   Amount   Interest   Facility   Amount   Interest
    Amount   Drawn   Cost(1)   Amount   Drawn   Cost(1)
($ in millions)                        
Notes payable and debentures:
                                               
 
Privately issued unsecured notes payable
    $1,041.5       $1,041.5       6.1%       $1,041.4       $1,041.4       6.1%  
 
Publicly issued unsecured notes payable
    850.0       850.0       6.7%       650.0       650.0       6.6%  
                                             
   
Total notes payable and debentures
    1,891.5       1,891.5       6.3%       1,691.4       1,691.4       6.3%  
Revolving line of credit(4)
    922.5             —% (2)     922.5       207.7       6.4% (2)
                                             
 
Total debt
    $2,814.0       $1,891.5       6.5% (3)     $2,613.9       $1,899.1       6.5% (3)
                                             
 
(1)  The weighted average annual interest cost is computed as the (a) annual stated interest on the debt plus the annual amortization of commitment fees, other facility fees and amortization of debt financing costs that are recognized into interest expense over the contractual life of the respective borrowings, divided by (b) debt outstanding on the balance sheet date.
 
(2)  There were no amounts drawn on the revolving line of credit at March 31, 2007. The annual interest cost at December 31, 2006, reflects the interest rate payable for borrowings under the revolving line of credit. In addition to the current interest payable, there were annual costs of commitment fees, other facility fees and amortization of debt financing costs of $3.8 million and $3.9 million at March 31, 2007, and December 31, 2006, respectively.
 
(3)  The annual interest cost for total debt includes the annual cost of commitment fees, other facility fees and amortization of debt financing costs on the revolving line of credit regardless of the amount outstanding on the facility as of the balance sheet date.
 
(4)  At March 31, 2007, $888.0 million remained unused and available on the revolving line of credit, net of amounts committed for standby letters of credit of $34.5 million issued under the credit facility.
  Notes Payable and Debentures
      Privately Issued Unsecured Notes Payable. The Company has privately issued unsecured long-term notes to institutional investors. The notes have five- or seven-year maturities and have fixed rates of interest. The notes require payment of interest only semi-annually, and all principal is due upon maturity. At March 31, 2007, the notes had maturities from May 2008 to May 2013. The notes may be prepaid in whole or in part, together with an interest premium, as stipulated in the note agreements.
      The Company also has privately issued five-year unsecured long-term notes denominated in Euros and Sterling for a total U.S. dollar equivalent of $15.2 million. The notes have fixed interest rates and have substantially the same terms as the Company’s other unsecured notes. The Euro notes require annual interest payments and the Sterling notes require semi-annual interest payments until maturity. Simultaneous with issuing the notes, the Company entered into a cross currency swap with a financial institution which fixed the Company’s interest and principal payments in U.S. dollars for the life of the debt.
      Publicly Issued Unsecured Notes Payable. The Company has outstanding publicly issued unsecured notes as follows:
                   
    Amount   Maturity Date
($ in millions)        
6.625% Notes due 2011
  $ 400.0       July 15, 2011  
6.000% Notes due 2012
    250.0       April 1, 2012  
6.875% Notes due 2047
    200.0       April 15, 2047  
             
 
Total
  $ 850.0          
             

45


 

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.
      On March 28, 2007, the Company completed the issuance of $200.0 million of 6.875% Notes due 2047 for net proceeds of $193.0 million (net of underwriting discounts and estimated offering expenses). In April 2007, the Company issued additional notes, through an over-allotment option, totaling $30.0 million for net proceeds of $29.1 million (net of underwriting discounts and estimated offering expenses).
      The 6.875% Notes due 2047 require payment of interest only quarterly, and all principal is due upon maturity. The Company 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.
      Scheduled Maturities. Scheduled future maturities of notes payable at March 31, 2007, were as follows:
           
Year   Amount Maturing
     
    ($ in millions)
2007
  $  
2008
    153.0  
2009
    269.0  
2010
    408.0  
2011
    472.5  
Thereafter
    589.0  
       
 
 
Total
  $ 1,891.5  
       
      Revolving Line of Credit
      At March 31, 2007, and December 31, 2006, the Company had an unsecured revolving line of credit with a committed amount of $922.5 million that expires on September 30, 2008. At the Company’s option, borrowings under the revolving line of credit generally bear interest at a rate equal to (i) LIBOR (for the period the Company selects) plus 1.05% or (ii) the higher of the Federal Funds rate plus 0.50% or the Bank of America, N.A. prime rate. The revolving line of credit requires the payment of an annual commitment fee equal to 0.20% of the committed amount (whether used or unused). The revolving line of credit generally requires payments of interest at the end of each LIBOR interest period, but no less frequently than quarterly, on LIBOR based loans and monthly payments of interest on other loans. All principal is due upon maturity.
      The annual cost of commitment fees, other facility fees and amortization of debt financing costs was $3.8 million and $3.9 million at March 31, 2007, and December 31, 2006, respectively.
      The revolving credit facility provides for a sub-facility for the issuance of letters of credit for up to an amount equal to 16.66% of the committed facility or $153.7 million. The letter of credit fee is 1.05% per annum on letters of credit issued, which is payable quarterly.

46


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 4. Debt, continued
      The average debt outstanding on the revolving line of credit was $142.1 million and $301.9 million, respectively, for the three months ended March 31, 2007 and 2006. The maximum amount borrowed under this facility and the weighted average stated interest rate for the three months ended March 31, 2007 and 2006, were $225.5 million and 6.4%, respectively, and $540.3 million and 5.9%, respectively. At March 31, 2007, the amount available under the revolving line of credit was $888.0 million, net of amounts committed for standby letters of credit of $34.5 million issued under the credit facility.
      Covenant Compliance
      The Company has various financial and operating covenants required by the privately issued unsecured notes payable and the revolving line of credit outstanding at March 31, 2007, and December 31, 2006. These covenants require the Company to maintain certain financial ratios, including debt to equity and interest coverage, and a minimum net worth. These credit facilities provide for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, cross-defaults, bankruptcy events, failure to pay judgments, attachment of the Company’s assets, change of control and the issuance of an order of dissolution. Certain of these events of default are subject to notice and cure periods or materiality thresholds. The Company’s credit facilities limit its ability to declare dividends if the Company defaults under certain provisions. As of March 31, 2007, and December 31, 2006, the Company was in compliance with these covenants.
      The Company has certain financial and operating covenants that are required by the publicly issued unsecured notes payable, including that the Company will maintain a minimum ratio of 200% of total assets to total borrowings, as required by the Investment Company Act of 1940, as amended, while these notes are outstanding. As of March 31, 2007, and December 31, 2006, the Company was in compliance with these covenants.
Note 5. Guarantees and Commitments
      In the ordinary course of business, the Company has issued guarantees and has extended standby letters of credit through financial intermediaries on behalf of certain portfolio companies. All standby letters of credit have been issued through Bank of America, N.A. As of March 31, 2007, and December 31, 2006, the Company had issued guarantees of debt, rental obligations, and lease obligations aggregating $194.5 million and $202.1 million, respectively, and had extended standby letters of credit aggregating $34.5 million and $41.0 million, respectively. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. The maximum amount of potential future payments was $229.0 million and $243.1 million at March 31, 2007, and December 31, 2006, respectively.

47


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 5. Guarantees and Commitments, continued
      As of March 31, 2007, the guarantees and standby letters of credit expired as follows:
                                                           
    Total   2007   2008   2009   2010   2011   After 2011
(in millions)                            
Guarantees
  $ 194.5     $ 0.3     $ 3.0     $ 184.9     $     $ 4.4     $ 1.9  
Standby letters of credit(1)
    34.5       4.0       30.5                          
                                           
 
Total(2)
  $ 229.0     $ 4.3     $ 33.5     $ 184.9     $     $ 4.4     $ 1.9  
                                           
 
(1)  Standby letters of credit are issued under the Company’s revolving line of credit that expires in September 2008. Therefore, unless a standby letter of credit is set to expire at an earlier date, it is assumed that the standby letters of credit will expire contemporaneously with the expiration of the Company’s line of credit in September 2008.
 
(2)  The Company’s most significant commitments relate to its investment in Business Loan Express, LLC (BLX), which commitments totaled $202.4 million at March 31, 2007. At March 31, 2007, the Company guaranteed 50% of the outstanding total obligations on BLX’s revolving line of credit for a total guaranteed amount of $179.4 million and had also provided four standby letters of credit totaling $20.0 million in connection with four term securitizations completed by BLX. In addition, the Company has agreed to purchase the $3.0 million of Class A equity interests purchased by the chief executive officer of BLX at fair value in the event that BLX amends or otherwise restructures its existing senior credit facility or he is terminated for any reason. See Note 3.
     In the ordinary course of business, the Company enters into agreements with service providers and other parties that may contain provisions for the Company to indemnify such parties under certain circumstances.
      At March 31, 2007, the Company had outstanding commitments to fund investments totaling $410.8 million, including $401.9 million related to private finance investments and $8.9 related to commercial real estate finance investments.
Note 6. Shareholders’ Equity
      Sales of common stock for the three months ended March 31, 2007 and 2006, were as follows:
                   
    2007   2006
(in millions)        
Number of common shares
    3,325       3,000  
             
Gross proceeds
  $ 97,256     $ 87,750  
Less costs, including underwriting fees
    3,472       4,780  
             
 
Net proceeds
  $ 93,784     $ 82,970  
             
      The Company issued 0.1 million and 0.2 million shares of common stock upon the exercise of stock options during the three months ended March 31, 2007 and 2006, respectively.

48


 

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 6. Shareholders’ Equity, continued
      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. For the three months ended March 31, 2007 and 2006, the Company issued new shares in order to satisfy dividend reinvestment requests. Dividend reinvestment plan activity for the three months ended March 31, 2007 and 2006, was as follows:
                 
    For the Three
    Months Ended
    March 31,
     
    2007   2006
(in millions