-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HAXIENJbxEvYeoj8nkqan1y/neTjpA7fqB22GYDN5m3dFsmSRAqt2ZuIt6Kk8zQ+ aWo5+H4p0UGl0W2bZ/Qppg== 0000950133-97-001062.txt : 19970329 0000950133-97-001062.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950133-97-001062 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLIED CAPITAL COMMERCIAL CORP CENTRAL INDEX KEY: 0000887429 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 521777868 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20357 FILM NUMBER: 97566376 BUSINESS ADDRESS: STREET 1: 1666 K ST N W STE 901 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 2023311112 MAIL ADDRESS: STREET 1: 1666 K STREET NW STREET 2: 9TH FLOOR CITY: WASHINGTON STATE: DC ZIP: 20006 10-K405 1 ALLIED CAPITAL COMMERICAL FORM 10-K405 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-20352 ALLIED CAPITAL COMMERCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) ------ MARYLAND 52-1777868 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION) IDENTIFICATION NO.) C/O ALLIED CAPITAL ADVISERS, INC. 1666 K STREET, NW, NINTH FLOOR WASHINGTON, D.C. 20006 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 331-1112 ------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.0001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] The aggregate market value of the registrant's common stock held by non-affiliates of the registrant as of March 19, 1997 was approximately $343,787,830 based upon the average bid and asked price for the registrant's common stock on that date. As of March 19, 1997 there were 14,288,771 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference into Parts I, II and IV of this Report. Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 13, 1997 are incorporated by reference into Part III of this Report. 2 =============================================================================== PART I ITEM 1. BUSINESS. Allied Capital Commercial Corporation (the "Company") was incorporated in Maryland in June 1992. The Company's existence as a corporation is perpetual; however, stockholders holding more than two-thirds of the Company's shares outstanding and entitled to vote in 2000, 2003 or 2006 can elect to have the Company's Board of Directors liquidate the Company. Allied Capital Advisers, Inc. ("Advisers"), a registered investment adviser, serves as the Company's investment manager. The Company has elected to qualify as a real estate investment trust ("REIT") for federal tax purposes which allows the Company to pass through earnings to its stockholders without the incidence of corporate income tax. To qualify as a REIT, the Company must distribute at least 95% of its taxable income to its stockholders. The Company invests primarily in commercial loans to small businesses secured by liens or mortgages on real estate ("business loans"). Such loans are purchased or originated by the Company in accordance with established underwriting criteria discussed below. The Company believes that it competes successfully in the commercial mortgage finance market due to the creativity and flexibility of its terms and because it specializes in mortgage financing for entrepreneurs whose business is a source of revenue in addition to the real estate itself. The Company derives income from interest on its business loans and temporary investments and from discounts on its portfolio of purchased and originated business loans. When purchasing or originating business loans, the Company generally participates with Business Mortgage Investors, Inc. ("BMI"), a company privately owned by institutional and other accredited investors, for which Advisers also serves as investment manager. The Company and BMI have agreed to co-invest in the same loans, based upon agreed upon percentages, unless either elects not to participate in a particular investment. The co-investment percentages were 77% and 23% for the Company and BMI, respectively, at December 31, 1996. Effective January 1, 1997, BMI is no longer purchasing or originating mortgage loans and is in liquidation. Following the Company's initial public offering in July 1992, it began purchasing loans from the Resolution Trust Corporation (the "RTC") and the Federal Deposit Insurance Corporation (the "FDIC"). In 1993, the Company continued to purchase business loans from the RTC and FDIC, and also purchased business loans from banks, life insurance companies and other financial institutions as well. The Company generally was able to purchase such loans at a discount, which permitted it to produce a higher yield for its stockholders. In 1994, the Company began to originate business loans. The Company continues to make investments in mortgage loans by either purchasing loans from various sources or by originating loans. In November 1995, a securitization of approximately $121 million of the Company's mortgage loans was effected through Allied Capital Funding, L.L.C. ("Funding"), a limited liability company owned through financing subsidiaries of the Company and BMI. The debt financing provided a total of approximately $79 million to the Company and allowed the Company to achieve long-term financing on a portion of its loan portfolio at a lower interest rate than was available under alternative financing arrangements. The Company plans to securitize additional loan pools if favorable pricing can be obtained. In 1996, the Company also commenced development of a higher credit quality commercial real estate loan program intended for purposes of expanding its market focus and becoming more competitive in its existing markets. The Company currently intends to continue to increase its origination of business loans and to explore the possibility of providing other long-term financing to businesses, such as sale-leaseback financing. At December 31, 1996, approximately 57% of the Company's portfolio of business loans carried a fixed rate of interest and approximately 43% had adjustable rates of interest tied to various indices. The proportion of the Company's portfolio of business loans which carry a fixed rate increased during 1996 from approximately 43% at December 31, 1995. Business loans originated by the Company generally have a final maturity of five to seven years. Occasionally, these loans may require payments of interest only or level payments of principal and interest calculated to amortize principal on a 10- to 30-year basis with a balloon payment at maturity. At December 31, 1996, the effective -2- 3 yield on the Company's portfolio of business loans was approximately 15%, which reflects amortization of discounts on loans over the expected life of the loan and the stated interest rate. Business loans purchased or originated by the Company are not intentionally concentrated in any particular geographical area or region or in any particular industry. Information on certain concentrations of business loans as of December 31, 1996 by state and industry is incorporated by reference to Notes 4 and 16 of the Notes to Consolidated Financial Statements of the Company specified in Item 8 below. Business loans purchased or originated by the Company are secured by various properties, including hotels and motels, office buildings, retail establishments, industrial warehouses and nursing homes. Loan Underwriting Procedures and Criteria When the Company evaluates business loans for purchase, it generally is provided with an information package that typically includes underwriting information that was developed by the original lending institution at the inception of the subject loan, such as the loan application, financial statements of the borrower and property appraisals ("original underwriting information"), as well as the loan documents and additional information, such as payment histories. The original underwriting information can be out-of-date, and Advisers, as the Company's investment manager, seeks to supplement this information with additional, current data, such as commercial credit reports on borrowers, geographic and industry demographic and economic data and current property appraisals or site visits. When the Company seeks to purchase business loans through a bidding process, its representatives generally are prohibited from having direct contact with the borrowers during the bidding process, which limits Advisers' ability to obtain current information about borrowers. Advisers has developed a set of specific due diligence procedures to obtain accurate current information about borrowers and the property securing the loan in these situations which reduces the degree to which Advisers and the Company must rely on out-of-date underwriting information. Decisions as to whether to bid on, purchase or originate business loans are made by Advisers' credit committee. Leverage During 1994, the Company, in conjunction with BMI, established a $40 million credit facility with a bank. At December 31, 1996, the Company had borrowings in an aggregate principal amount of $21.3 million outstanding under such credit facility. In January 1995, the Company, again in conjunction with BMI, established a credit facility with an investment bank and at December 31, 1996 this facility provided $150 million in available credit to the Company and BMI, of which $85.8 million and $1.5 million had been drawn by the Company and BMI, respectively. The Company's long-term indebtedness pursuant to the debt offered and sold by Funding was $54 million at December 31, 1996, of which $10.5 million related to BMI's minority interest. Competition A large number of entities and individuals compete for the opportunity to make the kinds of investments made by the Company. Many of these entities and individuals have greater financial resources than the combined resources of the Company. As a result of this competition, the Company may from time to time be precluded from making otherwise attractive investments on terms considered to be prudent in light of the risks to be assumed. Investment Manager Advisers is the investment manager of the Company pursuant to an investment management agreement. Under that agreement, Advisers manages the loans made by the Company, subject to the supervision and control of the Board of Directors of the Company, and identifies, evaluates, structures, closes and monitors the transactions in which the Company purchases or originates such loans. The Company will not make any loan or other investment that has not been recommended by Advisers. Except as to those investment decisions that require specific approval or ratification by the Company's Board of Directors, Advisers has the authority to effect loans, and purchases and sales of loans, for the Company's account. Some of the directors and officers of Advisers are also directors and officers of the Company. The Company pays all of its operating expenses except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of its investment officers and the cost of office space, equipment and -3- 4 other personnel necessary for day-to-day operations. The expenses that are paid by the Company include its share of transaction costs incident to the acquisition and disposition of loans, legal and auditing fees and expenses, the fees and expenses of the Company's directors, costs of printing and distributing proxy statements, public relations and other communications to stockholders and the fees and expenses of the Company's custodian and transfer agent. The Company also pays expenses associated with litigation and other extraordinary or non-recurring expenses with respect to its operations and investments, as well as expenses of required and optional insurance and bonding. All fees paid to Advisers by any person in connection with an investment transaction in which the Company participates or proposes to participate are paid over to the Company. Advisers is, however, entitled to retain for its own account any fees paid by or for the account of a company, including a portfolio company, for special investment banking or consulting work performed for that company which is not related to such investment transaction. As compensation for its services to the Company, Advisers is entitled to be paid, quarterly in arrears, a management fee. The fee schedule tiers the management fee percentages payable to Advisers, based upon certain characteristics of the outstanding loans held in the Company's loan portfolio. The fee schedule is based upon credit quality and other factors associated with the loans, and fees range from approximately 0.5% per annum to 3.5% per annum on each individual loan. The fee schedule places a quarterly cap at a rate of approximately 2.5% per annum, on the total management fees payable to Advisers with respect to the Company's investment in loans. The fee schedule in effect for loans originated or purchased in 1995 and prior years requires a fee on all loans at a rate of approximately 2.5% per annum. The fee schedule requires a quarterly fee of 0.125% on cash, temporary investments or other assets of the Company. The Company understands that the fee provided for by the investment management agreement with Advisers is comparable to that frequently paid by private investment funds engaged in similar types of investments, as compensation for the efforts and resources devoted by Advisers to identify, evaluate, structure, close and monitor the types of private investments in which the Company specializes. Change of Chairman and Chief Executive Officer After 22 years with the Allied Capital companies, David Gladstone stepped down as Chairman and Chief Executive Officer of the Company in early 1997, and the Board appointed William L. Walton to be the Company's new Chairman and Chief Executive Officer. Mr. Gladstone also resigned as a director on March 19, 1997 and will not stand for election to the board of directors. Mr. Walton has been affiliated with the Allied Capital companies for more than ten years, both as a director of Advisers and as a past director of Allied Capital Corporation. Mr. Walton's extensive experience in the investment industry combined with his performance as an entrepreneur provide an excellent mix of talent for the Company. He previously served as Managing Director of New York-based Butler Capital Corporation and was the personal venture capital advisor for William S. Paley, founder and Chairman of CBS. More recently, Mr. Walton founded two private companies dedicated to improving education for children with a focus on reading and languages. Mr. Walton has been a commercial banker, an investment banker with Lehman Brothers Kuhn Loeb, a private investor and an entrepreneur, and throughout his career has been involved in the growth and finance of small business. Employees The Company has no employees as all of its personnel are furnished by Advisers. ITEM 2. PROPERTIES. The Company does not own or lease any materially important properties or other tangible assets. ITEM 3. LEGAL PROCEEDINGS. The Company is not a defendant in any material pending legal proceeding, and no such material proceedings are known by the Company to be contemplated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -4- 5 None. EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names, ages and positions of the executive officers of the Company as of March 1, 1997, as well as certain other information with respect to those persons:
Positions Currently Principal Occupations Name Age Held with the Company During Past Five Years - ---- --- --------------------- ---------------------- William L. Walton 47 Chairman and Chief Employed by Advisers since 1997; Executive Officer Chairman and Chief Executive Officer of Allied Capital Corporation ("Allied I"), Allied Capital Corporation II ("Allied II"), Allied Capital Lending Corporation ("Allied Lending") and Advisers; Manager of Allied Capital Midwest LLC ("Allied Midwest"); Chief Executive Officer of Success Lab, Inc. (children's educational services) from 1993 to 1996; Chief Executive Officer of Language Odyssey (educational publishing and services) from 1992 to 1996; and Managing Director of Butler Capital Corporation from 1987 to 1991. John M. Scheurer 44 President and Chief Employed by Advisers since 1991; Operating Officer Executive Vice President of Allied I, Allied II, Allied Lending, Advisers, Allied Capital Mortgage, LLC ("Allied Mortgage") and Allied Midwest; President of Business Mortgage Investors, Inc. ("BMI"). Joan M. Sweeney 37 Executive Vice President Employed by Advisers since 1993; President and Chief Operating Officer of Advisers; Executive Vice President of Allied I, Allied II, Allied Lending, BMI, Allied Mortgage and Allied Midwest; Senior Manager at Ernst & Young from 1990 to 1993. Jon A. DeLuca 34 Executive Vice President, Employed by Advisers since 1994; Treasurer and Chief Executive Vice President, Treasurer and Financial Officer Chief Financial Officer of Allied I, Allied II, Allied Lending, BMI, Allied Mortgage, Allied Midwest and Advisers since 1994; Manager of Entrepreneurial Services at Coopers & Lybrand from 1986 to 1994.
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Information in response to this Item is incorporated by reference to the "Shareholder Information" and "Quarterly Stock Price and Distributions to Shareholders" sections of the Company's Annual Report to Shareholders for the year ended December 31, 1996 (the "1996 Annual Report") and to Notes 9 and 10 of the Notes to Consolidated Financial Statements contained therein. ITEM 6. SELECTED FINANCIAL DATA. Information in response to this Item is incorporated by reference to the table in the "Selected Consolidated Financial Data" section of the 1996 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Information in response to this Item is incorporated by reference to the "Management's Discussion and Analysis" section of the 1996 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information in response to this Item is incorporated by reference to the financial statements, notes thereto and Reports of Independent Public Accountants thereon contained in the 1996 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information in response to this Item is incorporated by reference to the identification of directors and nominees in the "Election of Directors" section and the subsection captioned "Compliance with Reporting Requirements of Section 16(a) of the Securities Exchange Act of 1934" of the Company's definitive proxy statement in connection with its 1997 Annual Meeting of Stockholders, scheduled to be held on May 13 1997 (the "1997 Proxy Statement"). Information in response to this Item also is included under the caption "Executive Officers of the Registrant" included in Part I of this Report. -5- 6 ITEM 11. EXECUTIVE COMPENSATION. Information in response to this Item is incorporated by reference to the "Compensation of Directors and Executive Officers," "Incentive Stock Options" and "Compensation of Directors" subsections of the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information in response to this Item is incorporated by reference to the "Beneficial Ownership of Common Stock" subsection of the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information in response to this Item is incorporated by reference to the "Indebtedness of Management" and "Investment Management Agreement" subsections of the 1997 Proxy Statement. -6- 7 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1. A. The following financial statements are incorporated by reference to the 1996 Annual Report: Consolidated Balance Sheet as of December 31, 1996 and 1995. Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994. Consolidated Statement of Shareholders' Equity as of December 31, 1996, 1995 and 1994. Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Consolidated Schedule of Loans on Real Estate as of December 31, 1996. B. The Report of Independent Public Accountants with respect to the financial statements listed in A. above are incorporated by reference to the 1996 Annual Report. 2. No financial statement schedules are filed herewith because (i) such schedules are not required or (ii) the information required has been presented in the aforementioned financial statements. 3. The following exhibits are filed herewith or incorporated by reference as set forth below: Exhibit Number Description - -------------- ----------- 3(i)(1) Articles of Incorporation 3(ii)(2) By-Laws 4.1 Instruments defining rights of security holders -- See Exhibits 3(i) and 3(ii). 4.2(3) Indenture between the Allied Capital Funding, LLC and LaSalle National Bank and ABN AMRO Bank N.V., dated November 1, 1995. 10.1(1) Investment Management Agreement between the Company and Allied Capital Advisers, Inc., dated June 10, 1992. 10.2(4) Stock Option Plan 10.3(5) Dividend Reinvestment Plan 10.4(2) Mortgage Loan Conveyance Agreement dated between the Company and ALCC Acceptance Corporation, November 1, 1995. 11* Statement regarding computation of per share earnings. 13* Excerpts from the 1996 Annual Report to Shareholders. 21 Subsidiaries of the Company and jurisdiction of incorporation: ALCC Holdings, Inc. . Maryland Allied Capital Funding, LLC Delaware ALCC Acceptance Corporation Maryland Allied Capital Mortgage, LLC Delaware -7- 8 23* Consents of Arthur Andersen LLP, independent accountants. 27* Financial Data Schedule - ------------- * Filed herewith. (1) Incorporated by reference to an exhibit of the same name filed with Amendment No. 1 to the Company's Registration Statement on Form S-11 filed June 11, 1992 (File No. 33-47791). (2) Incorporated by reference to an exhibit of the same name filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to an exhibit of the same name filed with the Company's Annual Report on Form 10-K for Allied Capital Funding, LLC for the year ended December 31, 1995. (4) Incorporated by reference to Exhibit A to the Company's definitive proxy statement with respect to the Company's 1995 Annual Meeting of Stockholders on May 25, 1995. (5) Incorporated by reference to an exhibit of the same name filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (b) Reports on Form 8-K. No reports on Form 8-K have been filed for the three months ended December 31, 1996. -8- 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 27, 1997. /s/ WILLIAM L. WALTON --------------------------------------- William L. Walton Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Title Signature (Capacity) Date - --------- ---------- ---- /s/ WILLIAM L. WALTON Chairman and March 27, 1997 - --------------------------------------- Chief Executive Officer William L. Walton (Principal Executive Officer) /s/ JOHN M. SCHEURER Director, President and March 27, 1997 - --------------------------------------- Chief Operating Officer John M. Scheurer /s/ GEORGE C. WILLIAMS Director March 27, 1997 - --------------------------------------- George C. Williams /s/ CHARLES L. PALMER Director March 27, 1997 - --------------------------------------- Charles L. Palmer /s/ ANTHONY T. GARCIA Director March 27, 1997 - --------------------------------------- Anthony T. Garcia /s/ JOHN D. REILLY Director March 27, 1997 - --------------------------------------- John D. Reilly /s/ LAURA W. VAN ROIJEN Director March 27, 1997 - --------------------------------------- Laura W. van Roijen /s/ JON A. DELUCA Executive Vice President, Treasurer March 27, 1997 - --------------------------------------- and Chief Financial and Accounting Jon A. DeLuca Officer (Principal Financial and Accounting Officer)
-9- 10 EXHIBIT INDEX Exhibit Number Description 11 Statement regarding computation of per share earnings. 13 Excerpts from the 1996 Annual Report to Shareholders. 23 Consents of Arthur Andersen LLP, independent accountants. 27 Financial Data Schedule EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11 Allied Capital Commercial Corporation Exhibit 11 Computation of Earnings Per Common Share Form 10-K For the Years Ended December 31, 1996, 1995 and 1994
For the Year Ended December 31, --------------------------------------------- 1996 1995 1994 --------------------------------------------- Primary Earnings Per Common Share: Net Income $27,901,000 $24,225,000 $18,314,000 ============================================= Weighted average of common shares outstanding 13,950,887 13,419,518 12,911,136 Weighted average of common shares issuable on exercise of outstanding stock options 96,768 33,206 23,182 --------------------------------------------- Weighted average of common shares outstanding, as adjusted 14,047,655 13,452,724 12,934,318 ============================================= Net Income per share $1.99 $1.80 $1.42 ============================================= Fully Diluted Earnings Per Common Share: Net Income $27,901,000 $24,225,000 $18,314,000 ============================================= Weighted average common shares and common share equivalents as computed for primary earnings per share 14,047,655 13,452,724 12,934,318 Weighted average of additional shares issuable on exercise of outstanding stock options 56,796 58,223 2,937 --------------------------------------------- Weighted average of common shares outstanding, as adjusted 14,104,451 13,510,947 12,937,255 ============================================= Net Income per share assuming full dilution $1.98 $1.79 $1.42 =============================================
EX-13 3 ANNUAL REPORT EXCERPTS 1 Allied Capital Commercial Corporation SHAREHOLDER INFORMATION CORPORATE OFFICE c/o Allied Capital Advisers, Inc. 1666 K Street, NW, 9th Floor Washington, DC 20006 Telephone: (202) 331-1112 Facsimile: (202) 659-2053 News-On-Demand: (888) 329-5519 Investor Relations: (202) 973-6334 Investor Relations E-mail: ir@alliedcapital.com Marketing: (202) 331-2439 Marketing E-mail: info@alliedcapital.com Internet Address: http://www.alliedcapital.com STOCK TRANSFER AGENT AND REGISTRAR Inquiries on transferring securities, replacing a lost or stolen certificate, participating in the Dividend Reinvestment Plan, requesting Direct Deposit information or processing a change of address should be directed to: American Stock Transfer & Trust Company 40 Wall Street, 46th Floor New York, NY 10005 In the United States: (800) 937-5449 Outside the United States: (212) 936-5100 E-mail: info@amstock.com Internet Address: http://www.amstock.com FORM 10-K REPORT A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Securities and Exchange Commission, will be furnished without charge to shareholders upon written request to the Investor Relations Department at the Company's corporate office. This information is also available on Allied Capital's Internet site: http://www.alliedcapital.com 1997 ANNUAL MEETING OF SHAREHOLDERS Montgomery Room at The Residence Inn by Marriott, 7335 Wisconsin Avenue, Bethesda, Maryland 20814 Tuesday, May 13, 1997 10 a.m. (EST) All shareholders are welcome to attend. INDEPENDENT ACCOUNTANTS Arthur Andersen LLP Washington, DC STOCK MARKET LISTING Allied Capital Commercial Corporation common stock is quoted on the Nasdaq National Market under the ticker symbol ALCC. Most newspapers list the Company's stock as "AldCapC." The Company has approximately 1,500 shareholders of record and 16,800 beneficial shareholders. DIVIDENDS AND DISTRIBUTIONS Generally, quarterly dividends on common stock are paid on the last business day of each quarter. The Company has also paid a fifth distribution at year-end since 1993. STOCK PRICE
High Low Close ---- --- ----- 1995 Q1 16.88 14.75 16.50 Q2 17.75 15.34 17.63 Q3 19.13 17.13 18.13 Q4 19.88 17.38 19.75 1996 Q1 20.00 18.25 18.88 Q2 20.25 18.63 19.75 Q3 23.50 19.63 21.88 Q4 24.25 21.50 23.25
TOTAL DISTRIBUTIONS PER SHARE
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- $ 0.40 $ 1.00 $ 1.47 $ 1.78 $ 1.98
AVERAGE ANNUAL TOTAL RETURN
Value of $10,000 Investment at IPO - ---------------------------------- Year-End Value -------- ----- 1992* $12,198 1993 $12,007 1994 $13,131 1995 $17,215 1996 $22,242
* The Commpany's IPO was in July 1992. A $10,000 investment in Allied Capital Commercial Corporation in 1992 at its initial public offering, with all dividends reinvested, was worth $22,242 at the end of 1996, a 19.4% average annual total return over this period. 2 Allied Capital Commercial Corporation COMPANY PROFILE Allied Capital Commercial Corporation offers shareholders the opportunity to profit from a nationwide portfolio of commercial real estate loans secured by a variety of property types. Managed by Allied Capital Advisers, Inc., the company seeks to provide current income and long-term capital appreciation for its shareholders. FINANCIAL HIGHLIGHTS
December 31, (in thousands, except per share amounts) 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Investments in Real Estate Loans $355,461 $273,510 Total Assets $370,304 $297,891 Total Debt Outstanding $161,254 $ 98,625 Shareholders' Equity $195,329 $186,724 Net Margin on Investments $ 32,919 $ 28,305 Net Income $ 27,901 $ 24,225 Net Income Per Share $ 1.99 $ 1.80 Distributions Per Share* $ 1.98 $ 1.78 Weighted Average Number of Shares and Share Equivalents Outstanding 14,048 13,453
*Represents the cumulative dividends declared by the board of directors in the year of declaration. Allied Capital Commercial Corporation 1 3 Allied Capital Commercial Corporation SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands, except per share amounts) 1996 1995 1994 1993 1992* - --------------------------------------------------------------------------------------------------------------------------- DIVIDENDS AND DISTRIBUTIONS Total distributions $ 27,734 $ 24,000 $ 19,043 $ 12,805 $ 5,113 Distributions per share (tax basis): Ordinary income $ 1.75 $ 1.62 $ 1.21 $ 0.93 $ 0.29 Capital gains 0.23 0.16 0.26 0.07 0.01 Return of capital -- -- -- -- 0.10 ---------------------------------------------------- Total distributions declared per share $ 1.98 $ 1.78 $ 1.47 $ 1.00 $ 0.40 ==================================================== Distribution in cash $ 1.54 $ 1.29 $ 1.16 $ 1.00 $ 0.40 Distribution in stock through the dividend reinvestment plan $ 0.44 $ 0.49 $ 0.31 $ -- $ -- - -------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Total investment income $ 45,638 $ 33,542 $ 22,545 $ 14,505 $ 3,855 ==================================================== Net margin on investments $ 32,919 28,305 20,932 14,450 3,820 Operating expenses 8,297 6,582 5,051 3,111 107 Gains from dispositions of real estate loans 5,706 3,048 2,433 861 70 Minority interest 2,427 546 -- -- -- ---------------------------------------------------- Net income $ 27,901 $ 24,225 $ 18,314 $ 12,200 $ 3,783 ==================================================== Net income per share $ 1.99 $ 1.80 $ 1.42 $ 0.95 $ 0.30 ==================================================== Weighted average number of shares and share equivalents outstanding 14,048 13,453 12,934 12,846 12,788 - -------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET Investments in real estate loans, net $355,461 $273,510 $198,514 $112,255 $ 59,824 Total assets $370,304 $297,891 $233,555 $178,374 $176,714 Bonds payable $ 54,123 $ 98,625 $ -- $ -- $ -- Notes payable $107,131 $ -- $ 50,101 $ -- $ -- Shareholders' equity $195,329 $186,724 $178,839 $175,960 $176,560
*Represents operations from July 9, 1992 (date of inception) through December 31, 1992. Allied Capital Commercial Corporation 9 4 Allied Capital Commercial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. ORGANIZATION Allied Capital Commercial Corporation is a Maryland corporation and its term as a corporation is perpetual; however, the board of directors will include in the proxy statement in the years 2000, 2003 and 2006 a resolution to be voted on by the shareholders to liquidate the corporation. The corporation will be liquidated if holders of two-thirds of the shares approve the resolution at any of the above dates. Allied Capital Commercial Corporation has elected to be taxed as a real estate investment trust (REIT) under Subchapter M of the Internal Revenue Code, as amended. Allied Capital Commercial Corporation and Business Mortgage Investors, Inc. (BMI), a private REIT, have coinvested with each other in certain business loans secured by real estate since January 1993. The coinvestment rate of these business loans between Allied Capital Commercial Corporation and BMI has been approximately 77% and 23%, respectively. The consolidated financial statements of Allied Capital Commercial Corporation include the accounts of Allied Capital Commercial Corporation and its wholly owned subsidiaries, ALCC Holdings, Inc. and ALCC Acceptance Corporation, and its majority owned subsidiary Allied Capital Mortgage LLC (Allied Mortgage). The accounts of ALCC Acceptance Corporation include the accounts of its majority owned subsidiary Allied Capital Funding, LLC (Funding). Allied Capital Commercial Corporation and its subsidiaries are hereinafter referred to as the "Company." The Company is managed by Allied Capital Advisers, Inc. (Advisers) pursuant to an investment management agreement. LOAN PORTFOLIO The Company purchases or originates small business loans that are generally secured by real estate and used in owner-operated or owner-managed small businesses. The Company generally seeks a business loan size between $1 million and $15 million that meets certain underwriting requirements. The Company's loan terms include both fixed and variable rate type loans. As of December 31, 1996, the Company's loan portfolio consisted of 57% fixed rate loans and 43% variable rate loans, as compared to 43% fixed rate loans and 57% variable rate loans as of December 31, 1995. The Company has financed and continues to finance many different property types including hotels and motels, office buildings, retail and convenience stores, warehouses, medical offices, nursing homes and factories. The Company makes investments across the nation and its loan portfolio has been segregated into five regions: Northeast; Southeast; Central; Southwest and West. As of December 31, 1996, the Company's loan concentration by region was 20%, 40%, 5%, 13% and 22%, respectively. This compares to the Company's loan concentration by region as of December 31, 1995 of 38%, 28%, 3%, 14% and 17% for the Northeast, Southeast, Central, Southwest and West regions, respectively. The Company invested $161.9 million in real estate loans for the year ended December 31, 1996 as compared to $102.1 million and $107.8 million invested for the years ended December 31, 1995 and 1994, respectively. After considering normal principal payments and early payoffs of certain loans, the net increases in the Company's loan portfolio were $81.9 million, $75.0 million and $86.3 million, for the years ended December 31, 1996, 1995 and 1994, respectively. Loan payoffs received prior to their maturity resulted in realized gains of $5.7 million, $3.3 million and $2.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. As of December 31, 1996, 39%, 21% and 12% of the Company's loan portfolio was invested in properties secured by hotels and motels, office buildings and retail space, respectively, as compared to 38%, 16% and 16% for the same categories as of December 31, 1995. In addition to industry concentration, the Company has made investments in which the underlying properties are subject to certain risk factors that could impair the collateral value. The Company evaluates the risks associated with its loans in terms of potential contingencies associated with environmental, hurricane and seismic risks. Depending on the nature of the risk factors, the Company may require the borrower to have the appropriate insurance coverage for these types of contingencies. Loans greater than 120 days past due are considered to be impaired. The Company does not accrue interest on these loans and does not accrue interest for certain other loans Allied Capital Commercial Corporation 10 5 Allied Capital Commercial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS that may be considered impaired. As of December 31, 1996 and 1995, the loans that were not accruing interest totaled $11.0 million and $5.1 million, respectively. The Company generally makes every effort to work with the borrower in order to restore the loan to a performing status before exercising other alternatives, such as foreclosure on the property. The Company's loan loss reserve at December 31, 1996 was approximately $1.5 million as compared to $1.0 million at December 31, 1995. During 1996, the Company increased its provision for loan losses by $1.0 million, and two loans were charged off against the reserve in the amount of $558,000. For the years ended December 31, 1995 and 1994, no loans were charged off against the reserve, and increases to the provision equaled $500,000 and $512,000, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company uses its cash from operations to provide working capital to pay its operating expenses, interest expense on outstanding indebtedness and to pay dividends to its shareholders. The Company funds new loans from loan repayments and through borrowings on its credit facilities. The Company has two primary credit facilities that it shares with BMI. The first is a $40 million revolving line of credit with a bank (line of credit). The second is a $150 million repurchase agreement (repurchase facility), with an investment bank. At December 31, 1996 the Company had borrowed $21 million and $86 million under the line of credit and repurchase facility, respectively. The Company uses the line of credit and the repurchase facility to warehouse loans until they can be permanently financed through the public offering of debt, or through other means. In November 1995 the Company, through Funding, financed a pool of its loans through the public offering of debt securities. At December 31, 1996 the bonds outstanding related to this offering totaled $54 million. The Company entered into a five-year interest rate swap agreement in July 1996 in an effort to manage its exposure to fluctuations in interest rates in anticipation of a future long-term financing. The swap agreement has a notional amount equal to $50 million whereby the Company pays a third party a fixed rate equal to 6.92%, and the Company receives from the third party a rate equal to the 90-day LIBOR, semi-annually. This swap agreement has the effect of providing a hedge for fixed rate loans temporarily financed with the variable rate warehouse facilities, and provides a hedge against changes in long-term interest rates until such time as the loans are permanently financed. Management anticipates obtaining long-term financing during late 1997. During 1996, the Company issued approximately 309,000 common shares at an average price of $20.69 per share to existing shareholders who participated in the dividend reinvestment plan. The Company also issued approximately 224,000 shares for approximately $4.0 million, through the exercise of stock options for which the Company provided loans for approximately $3.1 million. Management of the Company believes that the cash flow from operations, and the availability of its existing line of credit and repurchase facility is sufficient to enable the Company to meet its current and anticipated future liquidity requirements including payment of dividends to its shareholders. The Company plans to increase its outstanding indebtedness during the upcoming year in order to finance new real estate investments. The Company is currently exploring several new sources of debt capital. RESULTS OF OPERATIONS The consolidated financial statements include the operations of Funding for the entire year of 1996 and the operations of Allied Mortgage since October 1, 1996. The amounts in 1995 only include the consolidation of Funding's operations from November 1, 1995. In early 1996, Advisers identified a market opportunity to originate or purchase higher credit quality loans with lower stated interest rates. The Company's primary focus is hard-to-finance real estate lending; however, Advisers determined that the Company could make profitable loans in a narrow segment of the marketplace focused on borrowers with strong credit characteristics. These borrowers lack some of the criteria generally required by low-rate lenders, such as banks or real estate mortgage conduits. In order for the Company to compete for these lower-rate loans, Advisers and the Company revised the Company's expense structure through a revision to the investment management fee. The fee schedule was first revised on May 3, 1996 and that schedule applied to all loans originated or purchased on or after January 1, 1996. Allied Capital Commercial Corporation 11 6 Allied Capital Commercial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS Advisers and the Company modified the fees again in January 1997 for loans originated or purchased on or after January 1, 1997. The revised fee schedule tiers the management fee percentages payable to Advisers, based upon certain characteristics of the outstanding loans held in the Company's loan portfolio. The revised fee schedule is based upon credit quality and other factors associated with the loans, and fees range from approximately 0.5% per annum to 3.5% per annum on each individual loan. The revised fee schedule places a quarterly cap, at a rate of approximately 2.5% per annum, on the total management fees payable to Advisers with respect to the Company's investment in loans. The fee schedule in effect in 1995 and prior years required a fee on all loans at a rate of approximately 2.5% per annum. The new fee schedule does not alter the fees charged on cash, temporary investments or other assets of the Company. COMPARISON OF 1996 WITH 1995 Net income for the year ended December 31, 1996 equaled $27.9 million or $1.99 per share as compared to $24.2 million or $1.80 per share for 1995, a 15% increase. Net income increased as a result of the Company being able to increase its loan portfolio over 1995 levels, which generated more interest income, and due to increased realized gains from repayments of loans prior to their maturity. For the year ended December 31, 1996, the Company's loan portfolio had a weighted average stated rate of approximately 10.3% as compared to 10% for the year ended December 31, 1995. At December 31, 1996, loans totaled $355.5 million, compared to $273.5 million at the end of 1995. Amortization of loan discount increased 35% to $6.5 million in 1996 as compared to $4.9 million in 1995. The portfolio's weighted average yield, which includes stated interest and loan discount amortization, was 13.4% at December 31, 1996 as compared to 15% at December 31, 1995. Net margin on investments after deducting interest expense and provision for loan losses was $32.9 million for the year ended December 31, 1996 as compared to $28.3 million for the year ended December 31, 1995, an increase of 16%. Net margin on investments as a percentage of total investment income was 72% and 84% for 1996 and 1995, respectively. Net margin on investments as a percent of total income is expected to decrease as the Company leverages its equity capital with debt in order to increase its loan portfolio. As the overall net margin on investments increases, the return on equity and returns to shareholders should increase. Interest expense increased $6.3 million to $11.0 million in 1996 from $4.7 million in 1995. During 1996, the Company modified its credit facilities to provide for more favorable interest rates and borrowing levels. The interest rate on the line of credit is LIBOR plus 190 basis points or 7.5%, as of December 31, 1996, as compared to LIBOR plus 220 basis points or 7.9%, as of December 31, 1995. The interest rate on the repurchase facility is LIBOR plus 112 basis points, or 6.7%, at December 31, 1996, as compared to LIBOR plus 190, or 7.6%, at December 31, 1995. Investment management fees increased to $7.3 million in 1996 from $6.0 million in 1995, or 21% because of the increase in the Company's loan portfolio. Other expenses of the Company increased to $1.8 million in 1996 from $672,000 in 1995. This increase is a function of the growth in the loan portfolio and includes expenses such as legal costs associated with portfolio transactions, directors fees, shareholder services and other miscellaneous costs. Realized gains result when a loan that was initially purchased at a discount is repaid in excess of its net amortized cost. For the year ended December 31, 1996, realized gains equaled $5.7 million as compared to $3.3 million in 1995. The Company distributed $1.98 per share to shareholders in 1996, an increase of 11% over 1995 distributions of $1.78 per share. The 11% increase in the per share distribution is after effecting for a 3.9% increase in the common shares outstanding from December 31, 1995 to December 31, 1996. The Company increased its regular quarterly dividend in each quarter of 1996, and the fourth quarter dividend of 1996 equaled $0.50 per share as compared to $0.42 per share for the fourth quarter of 1995. The Company is required to distribute at least 95% of its taxable income to shareholders. It has been the Company's objective to distribute all of its taxable income to shareholders. Income for financial reporting purposes differs from taxable income due to timing differences in the recognition of loan discount amortization, realized gains and the provision for loan losses. Allied Capital Commercial Corporation 12 7 Allied Capital Commercial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARISON OF 1995 WITH 1994 Net income for the year ended December 31, 1995 equaled $24.2 million or $1.80 per share as compared to $18.3 million or $1.42 per share for 1994, a 32% increase. Net income, which includes interest from loans, discount amortization and realized gains and is reduced for the minority interest in income, increased as a result of the Company continuing to increase its investments in loans during 1995. For the year ended December 31, 1995, the Company's loan portfolio had a weighted average stated interest rate of approximately 10%, which remained constant when compared to 1994. The increase in the stated interest was primarily due to the increase in the principal amount of loans. At December 31, 1995 loans totaled $273.5 million, compared to $198.5 million at December 31, 1994. Amortization of loan discount increased 59% to $4.9 million for the year ended December 31, 1995 as compared to $3.1 million for 1994. Including stated interest and discount amortization, the weighted average yield in the loan portfolio at December 31, 1995 and 1994 was approximately 15%. The Company continued to leverage its equity in 1995 and increased its total outstanding indebtedness by $48.5 million to $98.6 million at December 31, 1995. As a result, interest expense increased $3.6 million to $4.7 million in 1995. Net margin on investments after interest expense and provision for loan losses increased to $28.3 million or 35% over the prior year. Net margin on investments as a percent of total investment income was 84% and 93% for 1995 and 1994, respectively. Investment management fees increased to $6 million in 1995 from $4.4 million in 1994 or 37%. The Company paid quarterly fees to its investment manager equal to 0.625% per quarter on total assets excluding temporary investments and cash, and 0.125% per quarter on temporary investments and cash. The increase in management fees resulted from the increase in the loan portfolio. Other operating expenses of the Company remained relatively constant in 1995 as compared to 1994. The Company provided for an increase in the allowance for loan losses of $0.5 million in 1995. Realized gains on the early repayments of loans purchased at a discount totaled $3.3 million in 1995 as compared to $2.6 million in 1994. Total distributions to shareholders, including four regular quarterly dividends and an extra distribution, were $1.78 per share, an increase of 21% over 1994 dividends of $1.47 per share. The growth in profits allowed the Company to continue to increase its regular quarterly dividend throughout 1995, from $0.35 per share for the fourth quarter of 1994 to $0.42 per share for the fourth quarter of 1995. FACTORS AFFECTING THE COMPANY'S BUSINESS Interest rate fluctuations. Loans with variable interest rates may become unattractive to some borrowers as market interest rates increase. Substantial changes in market interest rates could result in greater rates of prepayments of or defaults on outstanding loans and may inhibit the expansion of the Company's business and reduce its profitability. The Company also originates or purchases loans with fixed rates of interest. Loans with fixed interest rates that are financed with variable rate debt capital could expose the Company to reduced net margins on its loans as interest rates increase. The Company carefully monitors this exposure and endeavors to match fixed rate loans on a long-term basis with fixed rate financing. Competition. A large number of entities and individuals compete for the opportunity to make the kinds of investments made by the Company. Many of these entities and individuals have greater financial resources than the combined resources of the Company. As a result of this competition, the Company may from time to time be precluded from making otherwise attractive investments on terms considered to be prudent in light of the risks to be assumed. Statements included in this report concerning the Company's future prospects are "forward looking statements" under the Federal securities laws. There can be no assurance that future results will be achieved and actual results could differ materially from forecasts and estimates. Allied Capital Commercial Corporation 13 8 Allied Capital Commercial Corporation CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------- December 31, (in thousands, except number of shares) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Investments in real estate loans, net $355,461 $273,510 Cash and cash equivalents 2,025 12,668 Note receivable from affiliate 203 4,751 Accrued interest receivable 3,496 3,804 Deferred financing costs, net 957 1,650 Other assets 8,162 1,508 ----------------------- Total assets $370,304 $297,891 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bonds payable $ 54,123 $ 98,625 Notes payable 107,131 -- Accrued interest payable 994 570 Dividends payable 1,420 2,323 Investment management fee payable 1,930 1,628 Other liabilities 1,219 1,981 Minority interest 8,158 6,040 Commitments and Contingencies Shareholders' Equity: Common stock, $.0001 par value, 50,000,000 shares authorized; 14,266,514 and 13,733,787 issued and outstanding at December 31, 1996 and 1995 1 1 Additional paid-in capital 202,615 192,251 Notes receivable from sale of common stock (6,345) (4,419) Accumulated distributions in excess of net income (942) (1,109) ----------------------- Total shareholders' equity 195,329 186,724 ----------------------- Total liabilities and shareholders' equity $370,304 $297,891 =======================
The accompanying notes are an integral part of these financial statements. Allied Capital Commercial Corporation 14 9 Allied Capital Commercial Corporation CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31, (in thousands, except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Investment Income: Income from real estate loans: Stated interest $36,335 $26,884 $17,203 Discount amortization 6,544 4,860 3,058 Other investment income 1,450 601 31 ------------------------------- Total income from real estate loans 44,329 32,345 20,292 Interest on temporary investments 1,309 1,197 2,253 ------------------------------- Total investment income 45,638 33,542 22,545 Interest and related expenses: Interest expense 10,960 4,661 1,078 Provision for loan losses 1,000 500 512 Other 759 76 23 ------------------------------- Net margin on investments 32,919 28,305 20,932 Operating Expenses: Investment management fees 7,269 5,986 4,369 Other 1,028 596 682 ------------------------------- Income before gains and minority interest 24,622 21,723 15,881 Gains from dispositions of real estate loans, net 5,706 3,048 2,433 ------------------------------- Income before minority interest 30,328 24,771 18,314 Minority interest 2,427 546 -- ------------------------------- Net income $27,901 $24,225 $18,314 =============================== Net income per share $1.99 $1.80 $1.42 =============================== Weighted average number of shares and share equivalents outstanding 14,048 13,453 12,934 ===============================
The accompanying notes are an integral part of these financial statements. Allied Capital Commercial Corporation 15 10 Allied Capital Commercial Corporation Consolidated Statement of Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Common Additional Unrealized Distributions Number Stock at Paid-in Notes Depreciation in Excess of (in thousands) of Shares Par Value Capital Receivable on Investments Net Income Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 12,829 $ 1 $177,319 $ (755) $-- $ (605) $175,960 Share issuances through dividend reinvestment plan 242 -- 4,006 -- -- -- 4,006 Incentive stock options exercised 90 -- 1,400 (1,300) -- -- 100 Payments on notes receivable -- -- -- 25 -- -- 25 Unrealized depreciation on investments -- -- -- -- (523) -- (523) Net income -- -- -- -- -- 18,314 18,314 Dividends declared -- -- -- -- -- (19,043) (19,043) --------------------------------------------------------------------------- Balance, December 31, 1994 13,161 1 182,725 (2,030) (523) (1,334) 178,839 Share issuances through dividend reinvestment plan 353 -- 6,126 -- -- -- 6,126 Incentive stock options exercised 220 -- 3,400 (2,654) -- -- 746 Payments on notes receivable -- -- -- 265 -- -- 265 Reversal of unrealized depreciation on investments -- -- -- -- 523 -- 523 Net income -- -- -- -- -- 24,225 24,225 Dividends declared -- -- -- -- -- (24,000) (24,000) --------------------------------------------------------------------------- Balance, December 31, 1995 13,734 1 192,251 (4,419) -- (1,109) 186,724 Share issuances through dividend reinvestment plan 309 -- 6,399 -- -- -- 6,399 Incentive stock options exercised 224 -- 3,965 (3,050) -- -- 915 Payments on notes receivable -- -- -- 1,124 -- -- 1,124 Net income -- -- -- -- -- 27,901 27,901 Dividends declared -- -- -- -- -- (27,734) (27,734) --------------------------------------------------------------------------- Balance, December 31, 1996 14,267 $ 1 $202,615 $(6,345) $-- $ (942) $195,329 ===========================================================================
The accompanying notes are an integral part of these financial statements. Allied Capital Commercial Corporation 16 11 Allied Capital Commercial Corporation CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, (in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 27,901 $ 24,225 $ 18,314 Adjustments to reconcile net income to net cash provided by operating activities: Discount amortization (6,544) (4,860) (3,058) Gains from disposition of loans (5,706) (3,297) (2,591) Provision for loan losses 1,000 500 512 Loss on sale of investments -- 249 158 Minority interest 2,427 546 -- Amortization of deferred financing costs 693 72 -- Changes in assets and liabilities: Accrued interest receivable 308 (458) (374) Other assets (6,654) (1,267) 104 Investment management fee payable 302 352 479 Accrued interest payable 424 495 -- Other liabilities (762) 1,594 (1,155) ------------------------------------ Net cash provided by operating activities 13,389 18,151 12,389 ------------------------------------ Cash flows from investing activities: Investment in loans (161,963) (102,147) (107,842) Collections of loan principal 93,244 57,268 25,691 Collections (advances) under note receivable from affiliate 4,548 2,747 (7,498) Collection of notes receivable from sale of common stock 1,124 265 25 Proceeds from the sale of government securities -- 24,055 29,304 ------------------------------------ Net cash used in investing activities (63,047) (17,812) (60,320) ------------------------------------ Cash flows from financing activities: Net proceeds from long-term debt -- 79,321 -- Payments of long-term debt (44,502) (185) -- Net (payments) borrowings under revolving line of credit 107,131 (26,891) 26,891 Net (payments) borrowings against government securities available for sale -- (23,210) 23,210 Cash dividends paid (22,238) (18,431) (12,160) Issuance of common stock 915 746 100 Minority interest distributions (2,291) -- -- ------------------------------------ Net cash provided by financing activities 39,015 11,350 38,041 ------------------------------------ Net (decrease) increase in cash and cash equivalents (10,643) 11,689 (9,890) Cash and cash equivalents at beginning of period 12,668 979 10,869 ------------------------------------ Cash and cash equivalents at end of period $ 2,025 $ 12,668 $ 979 ====================================
The accompanying notes are an integral part of these financial statements. Allied Capital Commercial Corporation 17 12 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION ORGANIZATION. Allied Capital Commercial Corporation (Allied Commercial) is a Maryland corporation and was formed to invest in loans secured primarily by first liens on commercial real estate. Allied Commercial has elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code, as amended. Commencing in January 1993, Allied Commercial and Business Mortgage Investors, Inc. (BMI), a private REIT, agreed to coinvest with each other in certain real estate loans. The coinvestment rate of these loans between Allied Commercial and BMI has been approximately 77% and 23%, respectively. Allied Commercial and BMI both have investment management agreements with Allied Capital Advisers, Inc. (Advisers) and certain officers and directors of Advisers are also officers and directors of Allied Commercial and BMI. Allied Commercial's term as a corporation is perpetual; however, the board of directors will include in the proxy statement in the years 2000, 2003 and 2006 a resolution to be voted on by the shareholders to liquidate Allied Commercial. If holders of two-thirds of the shares approve the resolution at any of the above dates, Allied Commercial will be liquidated. BASIS OF PRESENTATION. The consolidated financial statements of Allied Commercial include the accounts of Allied Commercial and its wholly owned subsidiaries, ALCC Holdings, Inc. and ALCC Acceptance Corporation, and its majority-owned subsidiary Allied Capital Mortgage, LLC (Allied Mortgage). The accounts of ALCC Acceptance Corporation include the accounts of its majority-owned subsidiary, Allied Capital Funding, LLC (Funding). All significant intercompany accounts and transactions have been eliminated in consolidation. Allied Capital Commercial Corporation and its subsidiaries are hereinafter referred to as the "Company". NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES. Generally, a REIT will not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent that it distributes at least 95 percent of its taxable income to its shareholders and complies with certain other requirements of the Internal Revenue Code. Accordingly, no provision has been made for federal income taxes for the Company in the accompanying consolidated financial statements. Net income for financial reporting purposes of the Company may differ from taxable income for the periods presented due to timing differences in the recognition of loan discount amortization, realized gains from modification of loan terms and loan losses. INVESTMENTS IN LOANS. The Company's investments in loans consist of commercial real estate loans that are either purchased from unrelated third parties or originated directly with the borrower. Generally, loans that are purchased are obtained at an amount less than face value creating market discount. Loans that are originated generally require the borrower to pay loan origination and closing fees at the time the transaction is completed. The Company accounts for its investments in loans, purchased or originated, at their amortized cost. The difference between the cost and the unpaid principal balance is carried as a discount or premium. The Company generally amortizes original issue and market discounts over the remaining term of the loan using the effective interest method. Investment income is comprised of the stated interest discount amortization and other investment income. PROVISION FOR LOAN LOSSES. The Company measures the impairment of its loans based upon the fair value of the underlying collateral which is determined on an individual loan basis. In arriving at the fair value of the collateral, many factors are considered, including market evaluations of the underlying collateral, operating cash flow from the Allied Capital Commercial Corporation 18 13 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS property and credit concentrations. When the fair value of the underlying collateral securing the loan is less than the amortized cost in the loan, an allowance is generally established for the deficiency including an estimate of selling cost with a corresponding charge to expense. The existing allowances will be either increased or decreased based upon future valuations by a charge to income, through a provision for loan losses or by charge-offs (net of recoveries), respectively. DERIVATIVE FINANCIAL INSTRUMENTS. The Company uses derivative financial instruments to reduce interest rate risks. The Company has established a control environment which includes policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold or issue derivative financial instruments for trading purposes. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash in banks and all highly liquid investments with original maturities of three months or less. DEFERRED FINANCING COSTS. Financing costs are based on actual costs incurred in obtaining the financing and are deferred and amortized as part of interest expense over the term of the related debt instrument. PER SHARE INFORMATION. Net income per share is calculated using the weighted average number of shares and share equivalents outstanding for the periods presented. Share equivalents included in the computation represent shares issuable upon the assumed exercise of options which would have a dilutive effect in years in which there were earnings. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with 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. NEW ACCOUNTING STANDARDS. In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It also establishes criteria for the recognition of either a servicing asset or servicing liability for servicing contracts to service financial assets. This standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. The Company believes adoption of the new standard, effective January 1, 1997, will not have a material impact on its consolidated financial position or results of operations. In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of SFAS No. 125" which amends the previously issued SFAS No. 125 and deferred implementation of the standards enumerated in SFAS No. 125 for repurchase agreements and dollar rolls, securities lending and similar transactions to transfers of financial assets that occur after December 31, 1997. RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and 1994 data to conform to the 1996 presentation. NOTE 3. MINORITY INTEREST FUNDING. In November 1995, the Company, through one of its wholly owned subsidiaries, contributed an aggregate of $121,068,000 in loans to Funding in exchange for a majority equity interest. Additionally, BMI, through its wholly owned subsidiary, contributed an aggregate of $27,073,000 in loans to Funding in exchange for a minority equity interest. Funding is a limited purpose finance company that issued $98,810,000 of 6.92 percent Commercial Mortgage Collateralized Bonds, Series 1995-C1 (the Bonds) in November 1995. Following the issuance of the Bonds, Funding distributed the proceeds to the Company's and BMI's respective wholly owned subsidiaries which reduced Allied Capital Commercial Corporation 19 14 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS their respective equity interests in Funding. The net equity in Funding represents the Company's and BMI's respective wholly owned subsidiaries' subordinated interest in the loans contributed. For financial reporting purposes, the assets and liabilities of Funding have been consolidated with those of the Company, and BMI's interest in Funding is included in the Company's financial statements as a minority interest. BMI's minority interest in the balance of the loans, interest income and discount amortization are equivalent to BMI's original coinvestment ownership percentage at the time the investments in the loans were made with the Company. The Company and BMI have agreed to allocate the expenses incurred by Funding based on the ratio of the outstanding principal amount of the loans contributed to Funding in exchange for their respective equity interests. In addition, the Company and BMI have agreed that the liability for Bonds payable should be allocated using this same percentage. The allocation percentages for the Company and BMI are approximately 82 percent and 18 percent, respectively. ALLIED MORTGAGE. On October 1, 1996, the Company contributed an aggregate of $9,384,000 in loans to Allied Mortgage in exchange for a majority equity interest. The Company's ownership of Allied Mortgage at December 31, 1996 equaled 79 percent. The assets, liabilities and operating results for the period October 1, 1996 to December 31, 1996 of Allied Mortgage have been consolidated into the Company and have been reduced by the interests of the minority owners. NOTE 4. INVESTMENTS IN LOANS As of December 31, 1996, approximately 57 percent and 43 percent of the Company's portfolio of loans carried fixed and adjustable interest rate loans, respectively. In addition, approximately 19 percent, 11 percent and 10 percent of the the Company's portfolio as of December 31, 1996, were located in California, Virginia and Maryland, respectively. In addition, loans for hotels, office buildings, retail and industrial warehouses equaled 39 percent, 21 percent, 12 percent and 10 percent respectively, or 82 percent of the Company's portfolio as of December 31, 1996. As of December 31, 1996 and 1995, the unamortized discount balance was $37,124,000 and $37,821,000, respectively, and has been included with investments in loans in the accompanying consolidated balance sheet. The Company generally defines impaired loans as those that are past due 120 days or more or loans that have been specifically identified. The Company measures loan impairment based on the fair value of the loan collateral less estimated selling expenses. Specific reserves for impaired loans totaled $1,454,000, and $1,012,000, as of December 31, 1996 and 1995, respectively. In 1996, 1995 and 1994, the Company increased its provision for loan losses by $1,000,000, $500,000 and $512,000, respectively. These increases were offset by charge-offs totaling $558,000 for the year ended December 31, 1996, with no charge-offs recorded for the years ended December 31, 1995 and 1994. The Company's policy is to recognize interest income on impaired loans on the cash basis with cash payments applied to the loan principal balance. As of December 31, 1996 and 1995, loans that were not accruing interest equaled $10,978,000 and $5,134,000, respectively. Of the total impaired loans identified by the Company, $3,721,000 and $2,588,000, of the recorded investment in these loans were specifically reserved for as of December 31, 1996 and 1995, respectively. The average recorded investment in impaired loans during 1996 and 1995 was $8,056,000 and $4,091,000, respectively. Interest income on impaired loans was $566,000 and $269,000, respectively. NOTE 5. NOTE RECEIVABLE FROM AFFILIATE As of December 31, 1996 and 1995, the Company had outstanding advances to BMI of $203,000 and $4,751,000, respectively. The advances to BMI allow BMI the opportunity to participate in the purchase or origination of loans with the Company. All advances made to BMI are collateralized by the underlying loans in which the Company holds a Allied Capital Commercial Corporation 20 15 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS majority ownership interest and are due on demand. The maximum amount that may be advanced to BMI is $7,500,000. The Company's advances to BMI earn interest at the Wall Street Journal prime rate plus 2 percent, which equaled 10.25 percent and 10.5 percent as of December 31, 1996 and 1995. Interest income recorded by the Company from this source for the years ended December 31, 1996, 1995 and 1994 was $194,000, $170,000 and $287,000, respectively. NOTE 6. INVESTMENTS AVAILABLE FOR SALE During 1995, the Company liquidated its investment in a security collateralized by a pool of mortgage loans with the Federal National Mortgage Association, guaranteed by the Government National Mortgage Association, and realized a loss of $249,000, which has been included in gains from the disposition of real estate loans on the accompanying consolidated statement of income. NOTE 7. BONDS AND NOTES PAYABLE BONDS PAYABLE. On November 20, 1995, Funding issued $98,810,000 of 6.92 percent Series 1995-C1 Commercial Mortgage Collateralized Bonds. The Bonds have been rated "AA" by Fitch Investors Service, L.P. The Bonds were secured by a trust estate consisting primarily of a pool of 64 loans that were secured by first liens on various types of commercial properties and were nonrecourse to the Company. As of November 1, 1995, the cut-off date (date on which the Bonds were issued), the loans in the pool had an aggregate principal balance of approximately $148,141,000, after adjusting the principal balance for principal due on or before November 1, 1995. The loans included in the pool were either originated or acquired by the Company or originated or acquired jointly by the Company and BMI. The Company conveyed its interest in each loan to ALCC Acceptance Corporation and BMI conveyed its interest in each loan to BMI Acceptance Corporation (collectively, the Finance Companies). The Finance Companies in turn conveyed their interests to Funding. The Bonds pay interest and principal monthly on the 25th day of each month commencing in December 1995, with respect to interest accrued through the last day of the preceding month. The minimum required payment to bond holders on a monthly basis equals the sum of the total scheduled principal payments for the loans in the pool and interest due on the Bonds. The stated maturity for the Bonds is February 25, 2003. Funding received $97,449,000 in net proceeds from the issuance of the Bonds. The respective portions of the proceeds were distributed by Funding to the Company and BMI through the Finance Companies. As of December 31, 1996, based on the scheduled principal payments of the loans, scheduled principal payments on an aggregate basis for the Bonds are expected to be as follows: 1997--$6,856,000; 1998--$3,656,000; 1999--$11,437,000; 2000--$9,745,000; 2001--$1,485,000; and thereafter $20,944,000. NOTES PAYABLE. The Company, in conjunction with BMI, has a $40,000,000 revolving line of credit with a bank. The revolving line of credit bears interest at LIBOR plus 190 basis points, or 7.5 percent as of December 31, 1996, and expires in August 1997. At December 31, 1996, the Company had borrowings under this revolving line of credit of $21,356,000. The Company had no outstanding borrowings as of December 31, 1995. The Company, again in conjunction with BMI, has an approved credit facility with Merrill Lynch Mortgage Capital, Inc., whereby the Company and BMI can borrow up to $150,000,000 through repurchase agreements using its investments in loans as collateral. As of December 31, 1996, the Company's recorded investment in these loans pledged as collateral totaled $96,014,000, which approximated their market value. The terms of the repurchase agreements are interest only with all principal due at maturity. The repurchase agreements bear interest at LIBOR plus 112 basis points, or 6.7 percent, as of December 31, 1996. At December 31, 1996, the Company had borrowed $85,775,000 under the repurchase agreements. The repurchase agreements mature on March 21, 1997 and it is anticipated that the repurchase agreements will be extended with similar terms. Allied Capital Commercial Corporation 21 16 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. INTEREST RATE SWAP AGREEMENT The Company entered into an interest rate swap agreement (the "swap agreement") with Morgan Guaranty Trust Company of New York in anticipation of a future long-term financing of its loans on July 22, 1996. The swap agreement has a notional amount of $50 million, and the Company pays a fixed rate of 6.92% and receives a rate equal to the 90-day LIBOR semi-annually on the notional amount. The swap agreement terminates July 22, 2001. Net differences under the swap agreement are recognized as an adjustment to interest expense currently. NOTE 9. SHAREHOLDERS' EQUITY The authorized capital of the Company includes 5,000,000 shares of Preferred Stock with a par value of $0.0001, none of which is currently issued. The Company has a dividend reinvestment plan (the Plan). Under the Plan, shareholders of record are automatically enrolled and may opt out at any time. The Company may instruct the stock transfer agent to buy shares in the open market or the Company may issue new shares. When the Company issues new shares, the price at which shares are allocated to participant accounts is equal to the average of the closing sales prices reported for the shares for the five days on which trading in the shares took place immediately prior to and including the payment date. During 1996 and 1995, the Company issued 309,283 and 352,707 shares at an average price of $20.69 and $17.36 per share, respectively. The Company has an incentive stock option plan (ISO plan) that allows the granting of options to the Company's officers. The vesting provisions for individual option grants are determined at issuance by the board of directors, Under the ISO plan, as amended, a maximum of 1,486,349 options may be granted at a price not less than the market value of the underlying shares on the date of grant and are exercisable over a period not to exceed ten years. Holders of ten percent or more of the Company's outstanding shares must exercise their options within a period not to exceed five years. Officers may borrow from the Company the funds necessary to exercise vested stock options. The loans have varying terms not exceeding ten years, bear interest at the applicable federal interest rate in effect at the date of issue and have been recorded as a reduction in shareholders' equity. For the years ended December 31, 1996, 1995 and 1994, officers of the Company borrowed $3,050,000, $2,654,000, and $1,300,000, respectively, from the Company in order to exercise their options and made principal payments of $1,124,000, $265,000, and $25,000, respectively, during the same periods. The Company recognized interest income of $303,000, $179,000, and $56,000 for the years ended December 31, 1996, 1995 and 1994, respectively. A summary of the status of the Company's incentive stock option plan as of December 31, 1996, 1995 and 1994, and changes during the years ending on those dates is presented below:
- ----------------------------------------------------------------------------------------------------------------------------- (shares in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVG. Weighted Avg. Weighted Avg. Options SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 712 $17.32 629 $16.80 602 $16.72 Granted 137 19.25 323 17.08 117 16.25 Exercised (224) 17.74 (220) 15.44 (90) 15.55 Forfeited (68) 17.33 (20) 17.61 -- -- --- --- --- Outstanding at end of year 557 17.63 712 17.32 629 16.80 === === === Options exercisable at year-end 186 265 263 - -----------------------------------------------------------------------------------------------------------------------------
Allied Capital Commercial Corporation 22 17 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about incentive stock options outstanding at December 31, 1996:
- --------------------------------------------------------------------------------------------------------------------------- (shares in thousands) Options Outstanding Options Exercisable ------------------------------------------------- -------------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices As of 12/31/96 Contractual Life Exercise Price As of 12/31/96 Exercise Price - --------------------------------------------------------------------------------------------------------------------------- $15.25-$17.38 188 6.7 years $16.06 73 $16.42 $17.75-$17.75 175 8.6 17.75 45 17.75 $18.75-$19.25 194 8.0 19.04 68 19.02 --- --- $15.25-$19.25 557 7.7 17.63 186 17.69 === === - ---------------------------------------------------------------------------------------------------------------------------
The company accounts for the ISO plan as required by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and no compensation cost has been recognized. Had compensation cost for the plan been determined consistent with Statement of Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), the Company's net income and net income per share would have been reduced to the following pro forma amounts:
- ------------------------------------------------------------ Year Ended December 31, 1996 1995 - ------------------------------------------------------------ Net income: As reported $27,901 $24,225 Pro forma $27,637 $23,858 Net income per share: As reported $ 1.99 $ 1.80 Pro forma $ 1.97 $ 1.77 - ------------------------------------------------------------
Because the method of accounting required by SFAS No. 123 has not been applied to options granted prior to January 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants; risk-free interest rates of 6 percent for both 1996 and 1995; expected dividend yield of 8 percent for 1996 and 1995; expected life of 5 years for all options granted in 1995 and 1996; expected volatility of 29 percent for 1996 and 1995. NOTE 10. DIVIDENDS AND DISTRIBUTIONS For the years ended December 31, 1996, 1995 and 1994, the Company's board of directors declared the following distributions:
- ------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 TOTAL Total Total TOTAL PER Total Per Total Per (In Thousands, Except Per Share Amounts) AMOUNT SHARE Amount Share Amount Share - ------------------------------------------------------------------------------------------------------------------------ First Quarter $ 6,061 $0.44 $5,046 $0.38 $3,464 $0.27 Second Quarter 6,388 0.46 5,353 0.40 3,855 0.30 Third Quarter 6,764 0.48 5,540 0.41 4,270 0.33 Fourth Quarter 7,101 0.50 5,738 0.42 4,577 0.35 Annual Extra Distribution 1,420 0.10 2,323 0.17 2,877 0.22 -------------------------------------------------------------- Total $27,734 $1.98 $24,000 $1.78 $19,043 $1.47 ============================================================== - ------------------------------------------------------------------------------------------------------------------------
Allied Capital Commercial Corporation 23 18 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For income tax purposes, distributions for 1996, 1995 and 1994 were 88 percent, 91 percent and 83 percent ordinary income and 12 percent, 9 percent and 17 percent net capital gains, respectively. The following table summarizes the differences between taxable income and financial reporting income for the years ended December 31, 1996, 1995 and 1994:
- ----------------------------------------------------------------------- (in thousands) 1996 1995 1994 - ----------------------------------------------------------------------- Financial statement net income $27,901 $24,225 $18,314 Adjustments: Amortization of discount (694) (1,229) (632) Gains from dispositions of loans (795) 475 849 Expenses not deductible for tax 1,294 562 512 ------------------------------ Taxable income $27,706 $24,033 $19,043 ============================== - -----------------------------------------------------------------------
NOTE 11. INVESTMENT MANAGEMENT AGREEMENT The Company has an investment management agreement with Advisers. Advisers, under the supervision of the Company's board of directors, identifies, evaluates, structures and closes the investments to be made by the Company, arranges debt and equity capital for the Company, and is responsible for monitoring the investments made by the Company, including portfolio management and servicing. The investment management agreement may be terminated at any time, without penalty, on sixty days' notice to Advisers if holders of two-thirds of the Company's shares vote to terminate the agreement. In addition, this agreement will terminate automatically in the event of its assignment. Certain officers and directors of Advisers are also officers and directors of the Company. The Company pays all operating expenses, except those specifically required to be borne by Advisers. The expenses paid by Advisers include the compensation of the Company's officers and the cost of office space, equipment and other personnel required for the Company's day-to-day operations. The expenses that are paid by the Company include its share of transaction costs incident to the acquisition and disposition of investments, professional fees and expenses, the fees and expenses of the Company's directors, the costs of printing and mailing reports to shareholders, costs associated with promoting the Company's stock and the fees and expenses of the Company's custodian and transfer agent. The Company is also required to pay expenses associated with litigation and other extraordinary or non-recurring expenses, as well as expenses related to insurance and bonding. Under the stated terms of its investment management agreement with Advisers, the Company is obligated to pay fees on its consolidated invested assets at a rate that approximates 2.5 percent per annum. In order for the Company to provide loans to borrowers at lower interest rates and increase its competitiveness in the marketplace, Advisers revised its fee schedule on May 3, 1996 and January 9, 1997 with the Company for all loans that were originated or purchased on or after January 1, 1996 and January 1, 1997, respectively. The revised fee schedules agreed to on these dates reflect different types of management fee percentages payable to Advisers based upon certain characteristics of the outstanding loans held in the Company's investment portfolio. The revised fees ranged from 0.5 percent of invested assets to 3.5 percent of invested assets with a quarterly cap, at a rate of 2.5 percent per annum, on the total management fees payable to Advisers. Management fees payable to Advisers with respect to the Company's holdings of cash and interim investments have not been affected by the revisions to the fee schedule. Management fees on cash and interim investments are payable quarterly in arrears, at a rate of approximately 0.5 percent per annum. NOTE 12. PRO FORMA FINANCIAL DATA (UNAUDITED) As a result of forming Funding and its issuance of the Bonds in November 1995 and the Company's majority ownership, the Company consolidated Funding's operations Allied Capital Commercial Corporation 24 19 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS into its financial statements. As a result, the historical results of operations and earnings per share may not be indicative of future results of operations. The following represents the pro forma condensed statement of income as if Funding issued the Bonds and the Company consolidated Funding's operations as of the beginning of the year in which the transaction occurred, as well as at the beginning of the preceding year. The pro forma condensed statement of income is not necessarily indicative of what actual results of operations of the Company would have been assuming this transaction had been completed as of January 1, 1995 and 1994, respectively, nor does it purport to represent the results of operations for future periods.
- ------------------------------------------------------------ For the Years Ended December 31, (in thousands, except per share amounts) 1995 1994 - ------------------------------------------------------------ Total investment income $38,853 $32,531 Total expenses 14,305 12,844 Net realized gains 3,048 2,433 Minority interest 2,650 2,660 ------------------ Net income $24,946 $19,460 ================== Net income per share $ 1.85 $ 1.50 ================== - ------------------------------------------------------------
NOTE 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Fair Value of Financial Instruments," requires disclosures about the fair value for all financial instruments. All of the Company's financial instruments are held or issued for purposes other than trading. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value: CASH AND CASH EQUIVALENTS AND OTHER SHORT-TERM INSTRUMENTS. The carrying amount approximates fair value because of the short maturity of these instruments. NOTE RECEIVABLE FROM AFFILIATES. The fair value of the note receivable is estimated using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As of December 31, 1996 and 1995, the Company considered the recorded amount to approximate the fair value. INVESTMENTS IN REAL ESTATE LOANS. The fair value of the Company's real estate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated fair value of the Company's investments in loans approximated the carrying amount as of December 31, 1996 and 1995. NOTES PAYABLE. This debt is at floating interest rates which approximate current rates available to the Company for such debt, and accordingly the fair value of such floating rate debt approximates the current carrying amount. BONDS PAYABLE. The estimated fair value of the Company's fixed rate bonds payable approximates its current carrying amount based upon the subordination amount of this transaction. INTEREST RATE SWAP AGREEMENT. The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Company would receive or pay to terminate the swap agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparty. As of December 31, 1996, the Company would have incurred a loss of approximately $961,000 to terminate the swap agreement. COMMITMENTS TO EXTEND CREDIT. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of the commitments as of December 31, 1996 totaled $33,675,000. Allied Capital Commercial Corporation 25 20 Allied Capital Commercial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -------------------------------------------------------------------- December 31, (in thousands) 1996 1995 1994 - -------------------------------------------------------------------- Non-cash financing activities: Consolidation of long-term debt related to minority interest $ -- $18,062 $ -- Issuance of common shares in exchange for notes receivable $3,050 $ 2,654 $1,300 Issuance of common shares in lieu of cash for dividends $6,399 $ 6,126 $4,006 Non-cash investing activities: Consolidation of mortgage loans related to minority interest $2,004 $23,490 $ -- Interest paid $9,843 $ 4,166 $1,003 - --------------------------------------------------------------------
NOTE 15. COMMITMENTS AND CONTINGENCIES The Company had commitments outstanding of $33,675,000 at December 31, 1996 for new loan originations and purchases. NOTE 16. CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to loans are limited due to a large base and geographic dispersion. The Company makes investments across the nation and its loan portfolio can be segregated into five regions: Northeast, Southeast, Central, Southwest and West. As of December 31, 1996, the Company's loan concentration by these regions was 20%, 40%, 5%, 13% and 22%, respectively. This compares to the Company's loan concentration by region as of December 31, 1995 of 38%, 28%, 3%, 14% and 17%, respectively. The Company places its cash with financial institutions and, at times, cash held in checking accounts in financial institutions may be in excess of the Federal Deposit Insurance Corporation insured limit. At December 31, cash and cash equivalents consisted of the following:
- ---------------------------------------------------------- (in thousands) 1996 1995 - ---------------------------------------------------------- Cash equivalents $ 5,928 $14,440 Less escrows held (3,903) (1,772) ----------------- Total $ 2,025 $12,668 ================= - ----------------------------------------------------------
NOTE 17. QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------ 1996 (in thousands, except per share amounts) QTR 1 QTR 2 QTR 3 QTR 4 - ------------------------------------------------------------------------------------------------------------------------ Total investment income $10,093 $11,266 $11,794 $12,485 Net income $ 6,855 $ 7,683 $ 6,391 $ 6,972 Net income per share $ 0.50 $ 0.55 $ 0.45 $ 0.49 - ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------ 1995 Qtr 1 Qtr 2 Qtr 3 Qtr 4 - ------------------------------------------------------------------------------------------------------------------------ Total investment income $7,280 $8,202 $8,765 $9,295 Net income $5,877 $5,547 $6,333 $6,468 Net income per share $ 0.44 $ 0.41 $ 0.47 $ 0.47 - ------------------------------------------------------------------------------------------------------------------------
Allied Capital Commercial Corporation 26 21 Allied Capital Commercial Corporation CONSOLIDATED SCHEDULE OF LOANS ON REAL ESTATE AS OF DECEMBER 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------- (in thousands, except number of loans) Loan Principal Amount Subject to Delinquent Current Final Periodic Carrying Principal Principal or Description Interest Rate Maturity Payment Terms Amount Amount Interest* - ----------------------------------------------------------------------------------------------------------------------------------- First mortgage on commercial property 10% 2003 Level principal $ 12,711 $ 12,764 $ -- Cupertino, California and interest payments, Office/research complex amortizing to maturity; paydown in 2003 - ----------------------------------------------------------------------------------------------------------------------------------- First mortgages on commercial property, each having a carrying amount less than 3% of total carrying amount: Auto services, 18 loans 8.00%-12.50% 1996-2020 Various 3,227 3,864 -- Churches, 3 loans 6.75%- 8.50% 1997-2011 Various 419 571 -- Convenience/gas stations, 4 loans 11.00%-13.75% 1997-2010 Various 10,926 11,153 -- Hotels-full service, 32 loans 7.50%-14.75% 1996-2006 Various 97,241 100,885 1,473 Hotels-limited service, 16 loans 8.25%-13.00% 1996-2021 Various 29,438 31,668 -- Hotels-resorts/suites, 4 loans 7.25%-10.50% 1998-2005 Various 12,138 12,918 1,856 Marinas, 3 loans 6.66%-12.75% 1998-2012 Various 1,184 1,392 555 Mini-storage facilities, 3 loans 8.19%- 9.75% 1998-2017 Various 2,382 2,751 -- Mixed use, 7 loans 5.25%-16.00% 1996-2013 Various 5,117 5,238 -- Hospitals, nursing homes & medical offices, 18 loans 7.50%-12.75% 1996-2027 Various 17,698 20,969 -- Office buildings, 67 loans 5.00%-13.00% 1996-2021 Various 75,953 86,968 775 Restaurants, 15 loans 7.91%-10.50% 1996-2020 Various 3,315 3,923 420 Retail operations, 44 loans 4.00%-12.00% 1996-2019 Various 44,477 53,296 2,513 Warehouses, 31 loans 8.72%-12.50% 1996-2017 Various 21,094 23,234 -- Other, 26 loans 2.00%-16.00% 1996-2024 Various 19,595 22,444 3,386 - ------------------------------------------------------------------------------------------------------------------------------------ Totals 356,915 394,038 10,978 - ------------------------------------------------------------------------------------------------------------------------------------ Loan loss reserve 1,454 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL MORTGAGE LOANS AT AMORTIZED COST AFTER LOAN LOSS RESERVE $355,461 $394,038 $10,978 ====================================================================================================================================
* These accounts reflect the principal amount of loans where the payments are three months or more past due. Allied Capital Commercial Corporation 27 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Allied Capital Commercial Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of Allied Capital Commercial Corporation and Subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allied Capital Commercial Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Consolidated Schedule of Loans on Real Estate is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Washington, DC February 6, 1997 Allied Capital Commercial Corporation 28 23 Allied Capital Commercial Corporation DIRECTORS AND OFFICERS*
DIRECTORS William L. Walton(1) Katherine C. Marien Julie E. Svoboda Chairman of the Board & Executive Vice President Vice President, Controller & Chief Executive Officer Assistant Treasurer Joan M. Sweeney David Gladstone Executive Vice President Christina L. DelDonna Vice Chairman Vice President & Assistant Controller G. Cabell Williams III John M. Scheurer(1) Executive Vice President Jeff E. Erhardt President & Chief Operating Officer Assistant Vice President Arthur S. Cooper Anthony T. Garcia(2) Senior Vice President Mohamoud M. Garad Financial Consultant Assistant Vice President Robert J. Corry Charles L. Palmer(1,2) Senior Vice President Alexandra M. Johns President/Managing General Partner, Assistant Vice President North American Company Tricia B. Daniels Senior Vice President & Secretary Kristine M. Lansing John D. Reilly(1,3) Assistant Vice President & Chairman, Reilly Investment Corporation Michael J. Grisius Assistant Secretary Senior Vice President Laura W. van Roijen(2,3) Donna B. Natale Private Real Estate Investor John J. Hall, Jr. Assistant Vice President & Senior Vice President Assistant Secretary George C. Williams Financial Consultant George Stelljes III Peter M. Ramsey Senior Vice President Assistant Vice President (1) Executive Committee (2) Audit Committee Kelly A. Anderson James P. Shevlin (3) Compensation Committee Vice President, Corporate Controller & Assistant Vice President Assistant Treasurer *As of March 1, 1997 Michael R. Sifers John W. Benton Assistant Vice President OFFICERS Vice President Thomas R. Salley III William L. Walton Michael G. Carey Assistant Secretary Chairman of the Board & Vice President Chief Executive Officer Thomas H. Westbrook Suzanne V. Sparrow Assistant Secretary John M. Scheurer Vice President, Investor Relations & President & Chief Operating Officer Assistant Secretary Jon A. DeLuca Executive Vice President, Treasurer & Chief Financial Officer
QUARTERLY STOCK PRICE AND DISTRIBUTIONS TO SHAREHOLDERS The following table sets forth the high and low bid prices of the Company's common stock by calendar quarter during 1996 and 1995 and the distributions paid per share. The quotations represent interdealer quotations and do not include markups, markdowns or commissions and may not necessarily represent actual transactions.
- ------------------------------------------------------------------------------------------------------ 1996 1995 DISTRIBUTIONS Distributions HIGH LOW PER SHARE High Low Per Share - ------------------------------------------------------------------------------------------------------ First Quarter $20.00 $18.25 $0.44 $16.88 $14.75 $0.38 Second Quarter $20.25 $18.63 $0.46 $17.75 $15.34 $0.40 Third Quarter $23.50 $19.63 $0.48 $19.13 $17.13 $0.41 Fourth Quarter $24.25 $21.50 $0.50 $19.88 $17.38 $0.42 Annual Extra Distribution $0.10 $0.17 ----- ----- Total Distribution $1.98 $1.78 ===== ===== - ------------------------------------------------------------------------------------------------------
EX-23 4 CONSENTS OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 6, 1997 included in Allied Capital Commercial Corporation's Annual Report to security holders. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. /s/ ARTHUR ANDERSEN LLP Washington, D.C. March 26, 1997 2 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants we hereby consent to the incorporation by reference in the registration statement on Form S-8 File No. 33-79422, of our report dated February 6, 1997 incorporated by reference in Allied Capital Commercial Corporation's Form 10-K for the year ended December 31, 1996 and to all references to our Firm included in such registration statement. /s/ ARTHUR ANDERSEN LLP Washington, D.C. March 26, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,025 0 356,915 1,454 0 12,818 0 0 370,304 5,563 161,254 0 0 1 195,328 370,304 45,638 45,638 0 0 8,774 1,282 10,960 27,901 0 27,901 0 0 0 27,901 1.99 1.98
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