Edgar Filing: ALLIED CAPITAL CORP

Allied Investment Corporation

Allied Capital REIT, Inc.

Allied Capital Holdings LLC

Allied Capital Beteiligungsberatung GmbH

A.C. Corporation

e10-q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

QUARTERLY REPORT PURSUANT TO

SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934






For The Quarterly Period Ended September 30, 2001		Commission File Number: 0-22832

ALLIED CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)






Maryland (State or Jurisdiction of Incorporation or Organization)		52-1081052 (IRS Employer Identification No.)

1919 Pennsylvania Avenue, N.W.

Washington, DC 20006

(Address of Principal Executive Offices)

Registrant’s telephone number, including area code: (202) 331-1112

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 12 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]

On November 13, 2001 there were 98,841,322 shares outstanding of the Registrant’s common stock, $0.0001 par value.

ALLIED CAPITAL CORPORATION

FORM 10-Q INDEX


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements




		Consolidated Balance Sheet as of September 30, 2001 (unaudited) and December 31, 2000	1




		Consolidated Statement of Operations — For the Three and Nine Months Ended September 30, 2001 and 2000 (unaudited)	2




		Consolidated Statement of Changes in Net Assets — For the Nine Months Ended September 30, 2001 and 2000 (unaudited)	3




		Consolidated Statement of Cash Flows — For the Nine Months Ended September 30, 2001 and 2000 (unaudited)	4




		Consolidated Statement of Investments as of September 30, 2001 (unaudited) and December 31, 2000	5




		Notes to Consolidated Financial Statements	20




	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30




	Item 3. Quantitative and Qualitative Disclosures about Market Risk		50

PART II. OTHER INFORMATION




	Item 1. Legal Proceedings		51




	Item 2. Changes in Securities and Use of Proceeds		51




	Item 3. Defaults Upon Senior Securities		51




	Item 4. Submission of Matters to a Vote of Security Holders		51




	Item 5. Other Information		51




	Item 6. Exhibits and Reports on Form 8-K		51




	Signatures		55

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET


			September 30,			December 31,
			2001			2000

(in thousands, except number of share amounts)			(unaudited)




ASSETS




Portfolio at value:




	Private finance (cost: 2001-$1,495,587; 2000-$1,262,529)		$	1,539,253		$	1,282,467




	Commercial real estate finance (cost: 2001-$633,139; 2000-$503,366)			635,120			505,534

		Total portfolio at value		2,174,373			1,788,001

Cash and cash equivalents				3,140			2,449




Other assets				89,320			63,367

		Total assets	$	2,266,833		$	1,853,817





LIABILITIES AND SHAREHOLDERS’ EQUITY




Liabilities:




	Notes payable and debentures		$	717,484		$	704,648




	Revolving credit facilities			207,000			82,000




	Accounts payable and other liabilities			35,112			30,477

		Total liabilities		959,596			817,125

Commitments and Contingencies




Preferred stock				7,000			7,000




Shareholders’ equity:




	Common stock, $0.0001 par value, 200,000,000 shares authorized; 96,920,973 and 85,291,696 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively			10			9




	Additional paid-in capital			1,293,396			1,043,653




	Common stock held in deferred compensation trust (0 shares and 234,977 shares at September 30, 2001 and December 31, 2000, respectively)			—			—




	Notes receivable from sale of common stock			(26,250	)		(25,083	)




	Net unrealized appreciation on portfolio			42,842			19,378




	Distributions in excess of earnings			(9,761	)		(8,265	)

		Total shareholders’ equity		1,300,237			1,029,692

		Total liabilities and shareholders’ equity	$	2,266,833		$	1,853,817

The accompanying notes are an integral part of these consolidated financial statements.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS



			For the Three Months					For the Nine Months
			Ended September 30,					Ended September 30,

			2001		2000			2001		2000
(in thousands, except per share amounts)

			(unaudited)					(unaudited)




Interest and related portfolio income:




	Interest and dividends		$	60,023	$	48,054		$	173,722	$	129,768




	Premiums from loan dispositions			339		2,909			2,070		10,752




	Fees and other income			12,272		5,029			30,652		9,334

		Total interest and related portfolio income		72,634		55,992			206,444		149,854

Expenses:




	Interest			16,093		15,054			47,974		41,645




	Employee			8,213		6,343			22,269		19,506




	Administrative			4,139		3,876			10,166		10,711

		Total operating expenses		28,445		25,273			80,409		71,862

Net operating income before net realized and unrealized gains				44,189		30,719			126,035		77,992

Net realized and unrealized gains:




	Net realized gains			3,348		8,054			8,339		23,095




	Net unrealized gains (losses)			12,166		(2,324	)		23,463		(267	)

		Total net realized and unrealized gains		15,514		5,730			31,802		22,828

Net increase in net assets resulting from operations			$	59,703	$	36,449		$	157,837	$	100,820

Basic earnings per common share			$	0.64	$	0.48		$	1.77	$	1.43

Diluted earnings per common share			$	0.63	$	0.48		$	1.74	$	1.42

Weighted average common shares outstanding — basic				92,903		75,502			89,282		70,604

Weighted average common shares outstanding — diluted				94,585		76,133			90,864		70,777

The accompanying notes are an integral part of these consolidated financial statements.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS



			For the Nine Months
			Ended September 30,

			2001			2000
(in thousands, except per share amounts)

			(unaudited)




Operations:




	Net operating income before net realized and unrealized gains		$	126,035		$	77,992




	Net realized gains			8,339			23,095




	Net unrealized gains (losses)			23,463			(267	)

		Net increase in net assets resulting from operations		157,837			100,820

Shareholder distributions:




	Common stock dividends			(135,702	)		(98,617	)




	Preferred stock dividends			(165	)		(165	)

		Net decrease in net assets resulting from shareholder distributions		(135,867	)		(98,782	)

Capital share transactions:




	Sale of common stock			237,037			250,912




	Issuance of common stock upon the exercise of stock options			7,826			1,467




	Issuance of common stock in lieu of cash distributions			4,879			3,613




	Net decrease (increase) in notes receivable from sale of common stock			(1,167	)		3,535




	Net decrease in common stock held in deferred compensation trust			—			4,814




	Other			—			(563	)

		Net increase in net assets resulting from capital share transactions		248,575			263,778

		Total increase in net assets	$	270,545		$	265,816

Net assets at beginning of period			$	1,029,692		$	667,513

Net assets at end of period			$	1,300,237		$	933,329

Net asset value per common share			$	13.42		$	11.56

Common shares outstanding at end of period				96,921			80,754

The accompanying notes are an integral part of these consolidated financial statements.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS



				For the Nine Months
				Ended September 30,

				2001			2000
(in thousands)

				(unaudited)




Cash flows from operating activities:




	Net increase in net assets resulting from operations			$	157,837		$	100,820
	Adjustments




		Net unrealized (gains) losses			(23,463	)		267




		Depreciation and amortization			724			659




		Amortization of loan discounts and fees			(11,793	)		(9,767	)




		Changes in other assets and liabilities			(8,191	)		(8,712	)

			Net cash provided by operating activities		115,114			83,267

Cash flows from investing activities:




	Portfolio investments				(544,024	)		(675,379	)




	Repayments of investment principal				52,016			117,940




	Proceeds from loan sales				129,980			151,834




	Other investing activities				(125	)		3,657

			Net cash used in investing activities		(362,153	)		(401,948	)

Cash flows from financing activities:




	Sale of common stock				237,037			250,912




	Collections of notes receivable from sale of common stock				3,293			4,617




	Common dividends and distributions paid				(130,823	)		(95,004	)




	Preferred stock dividends paid				(165	)		(165	)




	Net borrowings under notes payable and debentures				12,836			89,800




	Net borrowings under revolving lines of credit				125,000			79,500




	Other financing activities				552			(2,940	)

			Net cash provided by financing activities		247,730			326,720

Net increase in cash and cash equivalents				$	691		$	8,039

Cash and cash equivalents at beginning of period				$	2,449		$	18,155

Cash and cash equivalents at end of period				$	3,140		$	26,194

The accompanying notes are an integral part of these consolidated financial statements.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS



			September 30, 2001
Private Finance			(unaudited)
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Ability One Corporation		Loans	$	10,481	$	10,481

ACE Products, Inc.		Loans		16,000		16,000

Acme Paging, L.P.		Debt Securities		6,989		6,989
		Limited Partnership Interest		1,456		—

Allied Office Products, Inc.		Debt Securities		9,413		8,042
		Warrants		629		—

American Barbecue & Grill, Inc.		Warrants		125		—

American HomeCare Supply,		Debt Securities		6,892		6,892
	LLC	Warrants		579		579

Aspen Pet Products, Inc.		Loans		14,354		14,354
		Preferred Stock (1,860 shares)		1,944		1,944
		Common Stock (1,400 shares)		140		140

ASW Holding Corporation		Warrants		25		25

Aurora Communications, LLC		Loans		15,543		15,543
		Equity Interest		2,461		3,108

Autania AG(1)		Debt Securities		4,340		4,340
		Common Stock (250,000 shares)		2,159		2,159

Avborne, Inc.		Debt Securities		12,787		12,787
		Warrants		1,180		1,180

Bakery Chef, Inc.		Loans		16,733		16,733

Blue Rhino Corporation(1)		Debt Securities		13,796		13,796
		Warrants		1,200		1,200

Border Foods, Inc.		Debt Securities		9,301		9,301
		Preferred Stock (50,919 shares)		2,000		2,000
		Warrants		665		665

Business Loan Express, Inc.		Loan		20,000		20,000
		Debt Securities		60,388		60,388
		Preferred Stock (25,111 shares)		25,111		25,111
		Common Stock (25,503,043 shares)		104,515		120,015
		Guaranty ($50,300 — See Note 3)		—		—

Camden Partners Strategic Fund II, L.P.		Limited Partnership Interest		1,068		1,068

CampGroup, LLC		Debt Securities		2,641		2,641
		Warrants		220		220

Candlewood Hotel Company(1)		Preferred Stock (3,250 shares)		3,189		3,189

Celebrities, Inc.		Loan		248		248
		Warrants		12		662

Classic Vacation Group, Inc.(1)		Loan		6,211		6,211


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



			September 30, 2001
Private Finance			(unaudited)
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Colibri Holding Corporation		Loans	$	3,458	$	3,458
		Common Stock (3,362 shares)		1,250		1,250
		Warrants		290		290

The Color Factory Inc.		Loan		4,833		4,833
		Preferred Stock (600 shares)		600		600
		Common Stock (980 shares)		6,535		6,535

Component Hardware Group, Inc.		Debt Securities		10,655		10,655
		Preferred Stock (18,000 shares)		1,800		1,800
		Common Stock (2,000 shares)		200		200

Convenience Corporation of		Debt Securities		8,355		2,738
	America	Preferred Stock (31,521 shares)		334		—
		Warrants		—		—

Cooper Natural Resources, Inc.		Debt Securities		1,686		1,686
		Preferred Stock (6,316 shares)		1,427		1,427
		Warrants		832		832

CorrFlex Graphics, LLC		Loan		6,970		6,970
		Debt Securities		5,217		5,217
		Warrants		—		1,250
		Options		—		—

Coverall North America, Inc.		Loan		10,312		10,312
		Debt Securities		5,248		5,248
		Warrants		—		—

CPM Acquisition Corp.		Loan		9,454		9,454

Csabai Canning Factory Rt.		Hungarian Quotas (9.2%)		700		—

CTT Holdings		Loan		1,345		1,345

CyberRep		Loan		1,076		1,076
		Debt Securities		14,093		14,093
		Warrants		660		3,310

The Debt Exchange Inc.		Preferred Stock (921,829 shares)		1,250		1,250

Directory Investment Corporation		Common Stock (470 shares)		112		32

Directory Lending Corporation		Common Stock (50 shares)		30		—

Drilltec Patents & Technologies		Loan		10,918		9,262
	Company, Inc.	Debt Securities		1,500		1,500
		Warrants		—		—

eCentury Capital Partners, L.P.		Limited Partnership Interest		1,875		1,875

EDM Consulting, LLC		Debt Securities		1,875		443
		Common Stock (100 shares)		250		—

El Dorado Communications, Inc.		Loans		306		306

Elexis Beta GmbH		Options		426		526

Eparfin S.A.		Loan		29		29

Esquire Communications Ltd.(1)		Warrants		6		—

E-Talk Corporation		Debt Securities		8,852		6,509
		Warrants		1,157		—


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



			September 30, 2001
Private Finance			(unaudited)
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Executive Greetings, Inc.		Debt Securities	$	15,923	$	15,923
		Warrants		360		360

ExTerra Credit Recovery, Inc.		Preferred Stock (500 shares)		568		318
		Common Stock (2,500 shares)		—		—
		Warrants		—		—

Fairchild Industrial Products		Debt Securities		5,856		5,856
	Company	Warrants		280		2,628

Galaxy American		Debt Securities		44,967		45,717
	Communications, Inc.	Options		—		—

Garden Ridge Corporation		Debt Securities		26,890		26,890
		Preferred Stock (1,130 shares)		1,130		1,130
		Common Stock (471 shares)		613		613

Genesis Worldwide, Inc.(1)		Loan		1,067		—

Gibson Guitar Corporation		Debt Securities		16,987		16,987
		Warrants		525		2,325

Ginsey Industries, Inc.		Loans		5,000		5,000
		Debentures		500		500
		Warrants		—		504

Global Communications, LLC		Debt Securities		13,625		13,625
		Equity Interest		11,067		11,067
		Options		1,639		1,639

Grant Broadcasting Systems II		Warrants		87		5,976

Grant Television, Inc.		Equity Interest		660		660

Grotech Partners, VI, L.P.		Limited Partnership Interest		1,179		735

The Hartz Mountain Corporation		Debt Securities		27,363		27,363
		Common Stock (200,000 shares)		2,000		2,000
		Warrants		2,613		2,613

HealthASPex, Inc.		Preferred Stock (1,036,700 shares)		4,140		4,140
		Preferred Stock (414,680 shares)		760		760
		Common Stock (1,451,380 shares)		4		4

HMT, Inc.		Debt Securities		9,961		9,961
		Common Stock (300,000 shares)		3,000		3,000
		Warrants		—		—

Hotelevision, Inc.		Preferred Stock (315,100 shares)		315		315

Icon International, Inc.		Common Stock (37,821 shares)		1,219		1,518

Impact Innovations Group		Debt Securities		6,537		6,537
		Warrants		1,674		1,674

Intellirisk Management Corporation		Loans		22,090		22,090

International Fiber Corporation		Debt Securities		22,115		22,115
		Common Stock (1,029,068 shares)		5,483		5,483
		Warrants		550		550

iSolve Incorporated		Preferred Stock (14,853 shares)		874		—
		Common Stock (13,306 shares)		14		—

Jakel, Inc.		Loan		19,928		19,928


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



			September 30, 2001
Private Finance			(unaudited)
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

JRI Industries, Inc.		Debt Securities	$	1,967	$	1,967
		Warrants		74		74

Julius Koch USA, Inc.		Debt Securities		1,375		1,375
		Warrants		259		6,500

Kirker Enterprises, Inc.		Warrants		348		3,494
		Equity Interest		4		11

Kirkland’s, Inc.		Debt Securities		7,111		7,111
		Preferred Stock (917 shares)		412		412
		Warrants		96		96

Kyrus Corporation		Debt Securities		7,791		7,791
		Warrants		348		348

Liberty-Pittsburgh Systems, Inc.		Debt Securities		3,485		3,485
		Common Stock (64,535 shares)		142		142

The Loewen Group, Inc.(1)		High-Yield Senior Secured Debt		15,150		13,650

Logic Bay Corporation		Preferred Stock (1,131,222 shares)		5,000		5,000

Love Funding Corporation		Preferred Stock (26,000 shares)		359		213

Magna Card, Inc.		Debt Securities		153		153
		Preferred Stock (1,875 shares)		94		94
		Common Stock (4,687 shares)		—		—

Master Plan, Inc.		Loan		1,204		1,204
		Common Stock (156 shares)		42		2,042

MedAssets.com, Inc.		Preferred Stock (260,417 shares)		2,049		2,049
		Warrants		136		136

Mid-Atlantic Venture Fund IV, L.P.		Limited Partnership Interest		2,475		1,989

Midview Associates, L.P.		Warrants		—		—

Monitoring Solutions, Inc.		Debt Securities		1,823		153
		Common Stock (33,333 shares)		—		—
		Warrants		—		—

MortgageRamp.com, Inc.		Common Stock (800,000 shares)		4,000		4,000

Morton Grove		Loan		15,946		15,946
	Pharmaceuticals, Inc.	Preferred Stock (106,947 shares)		5,000		9,000

Most Confiserie GmbH & Co KG		Loan		965		965

MVL Group, Inc.		Debt Securities		16,213		16,213
		Warrants		643		643

NETtel Communications, Inc.		Debt Securities		13,483		6,483

Nobel Learning Communities,		Debt Securities		9,637		9,637
	Inc.(1)	Preferred Stock (265,957 shares)		2,000		2,000
		Warrants		575		575

North American		Loans		3,612		2,848
	Archery, LLC	Debentures		26		0

Northeast Broadcasting Group, L.P.		Debt Securities		321		321


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



			September 30, 2001
Private Finance			(unaudited)
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Novak Biddle Venture Partners III, LP		Limited Partnership Interest	$	330	$	330

Nursefinders, Inc.		Debt Securities		11,075		11,075
		Warrants		900		900

Onyx Television GmbH		Preferred Units (600,000 shares)		201		201

Opinion Research Corporation(1)		Debt Securities		14,146		14,146
		Warrants		996		996

Oriental Trading Company, Inc.		Loan		128		128
		Debt Securities		12,650		12,650
		Preferred Equity Interest		1,500		1,822
		Common Equity Interest		—		—
		Warrants		13		266

Outsource Partners, Inc.		Debt Securities		23,890		23,890
		Warrants		826		826

Packaging Advantage Corporation		Debt Securities		11,563		11,563
		Common Stock (200,000 shares)		2,000		2,000
		Warrants		963		963

Physicians Specialty Corporation		Debt Securities		39,580		39,580
		Common Stock (79,567,042 shares)		1,000		100

Pico Products, Inc.(1)		Loan		1,300		1,300
		Debt Securities		4,591		1,591
		Common Stock (208,000 shares)		59		—
		Warrants		—		—

Polaris Pool Systems, Inc.		Debt Securities		6,556		6,556
		Warrants		1,050		1,050

Powell Plant Farms, Inc.		Loan		16,809		16,809

Proeducation GmbH		Loan		136		136

Professional Paint, Inc.		Debt Securities		21,409		21,409
		Preferred Stock (15,000 shares)		15,000		15,000
		Common Stock (110,000 shares)		69		69

Progressive International		Debt Securities		3,956		3,956
	Corporation	Preferred Stock (500 shares)		500		500
		Common Stock (197 shares)		13		13
		Warrants		—		—

Prosperco Finaz Holding AG		Debt Securities		5,262		5,262
		Common Stock (1,528 shares)		1,059		1,059
		Warrants		—		—

Raytheon Aerospace, LLC		Debt Securities		5,013		5,013
		Common LLC Interest		—		—

Redox Brands, Inc.		Debt Securities		9,368		9,368
		Warrants		584		584

Schwinn Holdings Corporation		Debt Securities		10,206		1,835
		Warrants		395		—

Seasonal Expressions, Inc.		Preferred Stock (1,000 shares)		500		—

Simula, Inc.		Loan		24,875		24,875


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



			September 30, 2001
Private Finance			(unaudited)
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Soff-Cut Holdings, Inc.		Debt Securities	$	8,623	$	8,623
		Preferred Stock (300 shares)		300		300
		Common Stock (2,000 shares)		200		200
		Warrants		446		446

Southern Communications, LLC		Equity Interest		9,778		9,778

Southwest PCS, LLC		Loan		8,088		8,088

Spa Lending Corporation		Preferred Stock (28,625 shares)		470		368
		Common Stock (6,208 shares)		25		15

Staffing Partners Holding		Debt Securities		4,991		4,991
	Company, Inc.	Preferred Stock (414,600 shares)		2,073		2,073
		Common Stock (50,200 shares)		50		50
		Warrants		10		10

Startec Global Communications		Debt Securities		20,742		20,742
	Corporation(1)	Loan		15,156		15,156
		Common Stock (258,064 shares)		3,000		—
		Warrants		—		—

STS Operating, Inc.		Common Stock (3,000,000 shares)		3,177		3,177

SunSource Inc.		Debt Securities		39,819		39,819
		Common Stock (6,890,937 shares)		58,647		58,647

SunStates Refrigerated Services,		Loans		6,062		4,573
	Inc.	Debt Securities		2,445		877

Sure-Tel, Inc.		Loan		207		207
		Preferred Stock (1,116,902 shares)		4,624		4,624
		Warrants		662		662
		Options		—		—

Sydran Food Services II, L.P.		Debt Securities		12,973		12,973

Total Foam, Inc.		Debt Securities		264		127
		Common Stock (910 shares)		10		—

Tubbs Snowshoe Company, LLC		Debt Securities		3,910		3,910
		Warrants		54		54
		Equity Interests		500		500

United Pet Group, Inc.		Debt Securities		4,964		4,964
		Warrants		15		15

Updata Venture Partners, II, L.P.		Limited Partnership Interest		1,900		1,900

Velocita, Inc.		Debt Securities		11,638		11,638
		Warrants		3,540		3,540

Venturehouse Group, LLC		Common Equity Interest		667		459

Walker Investment Fund II, LLLP		Limited Partnership Interest		1,000		638

Warn Industries, Inc.		Debt Securities		18,663		18,663
		Warrants		1,429		3,129

Williams Brothers Lumber Company		Warrants		24		322

Wilmar Industries, Inc.		Debt Securities		32,596		32,596
		Warrants		3,169		3,169


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



		September 30, 2001
Private Finance		(unaudited)
Portfolio Company
(in thousands, except number of shares)	Investment(2)	Cost		Value

Wilshire Restaurant Group, Inc.	Debt Securities	$	15,464	$	15,464
	Warrants		—		—

Wilton Industries, Inc.	Loan		12,000		12,000

Woodstream Corporation	Debt Securities		7,620		7,620
	Equity Interests		1,700		2,372
	Warrants		450		628

Wyo-Tech Acquisition Corporation	Debt Securities		12,579		12,579
	Preferred Stock (100 shares)		3,700		3,700
	Common Stock (99 shares)		100		44,100

Total private finance (132 investments)		$	1,495,587	$	1,539,253


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



						September 30, 2001
						(unaudited)
		Interest		Number of
(in thousands, except number of loans)		Rate Ranges		Loans		Cost		Value

Commercial Real Estate Finance

Commercial Mortgage Loans			Up to 6.99%		4	$	942	$	2,642
			7.00%– 8.99%		21		40,057		42,158
			9.00%–10.99%		21		17,334		17,240
			11.00%–12.99%		12		11,641		11,641
			13.00%–14.99%		8		12,727		12,453
		15.00% and above			2		88		64

	Total commercial mortgage loans				68	$	82,789	$	86,198


			Stated
			Interest		Face

Purchased CMBS
	Mortgage Capital Funding, Series 1998-MC3			5.5%	$	54,491	$	26,640	$	26,640
	Morgan Stanley Capital I, Series 1999-RM1			6.4%		51,046		21,468		21,468
	COMM 1999-1			5.6%		74,879		35,402		35,402
	Morgan Stanley Capital I, Series 1999-FNV1			6.1%		45,527		22,231		22,231
	DLJ Commercial Mortgage Trust 1999-CG2			6.1%		96,432		44,732		44,732
	Commercial Mortgage Acceptance Corp., Series 1999-C1			6.8%		34,856		16,344		16,344
	LB Commercial Mortgage Trust, Series 1999-C2			6.7%		29,005		11,236		11,236
	Chase Commercial Mortgage Securities Corp., Series 1999-2			6.5%		43,046		20,742		20,742
	FUNB CMT, Series 1999-C4			6.5%		49,287		22,502		22,502
	Heller Financial, HFCMC Series 2000 PH-1			6.6%		45,456		18,769		18,769
	SBMS VII, Inc., Series 2000-NL1			7.2%		24,230		13,293		13,293
	DLJ Commercial Mortgage Trust, Series 2000-CF1			7.0%		40,502		19,427		19,427
	Deutsche Bank Alex. Brown, Series Comm 2000-C1			6.9%		41,084		19,383		19,383
	LB-UBS Commercial Mortgage Trust, Series 2000-C4			6.9%		31,471		11,497		11,497
	Credit Suisse First Boston Mortgage Securities Corp., Series 2001-CK1			5.9%		58,786		28,936		28,936
	Crest 2001-1, Ltd. (collateralized debt obligation)			0.0%		24,475		24,625		24,625
	JP Morgan-CIBC-Deutsche 2001			5.8%		60,889		29,479		29,479
	Lehman Brothers-UBS Warburg 2001-C4			6.4%		65,130		32,213		32,213
	SBMS VII, Inc., Series 2001-C1			6.1%		54,780		25,203		25,203
	GE Capital Commercial Mortgage Securities Corp., Series 2001-2			6.1%		57,039		27,991		27,991

		Total purchased CMBS			$	982,411	$	472,113	$	472,113

Residual CMBS							$	72,850	$	72,850
Residual Interest Spread								1,825		1,525
Real Estate Owned								3,562		2,434

		Total commercial real estate finance					$	633,139	$	635,120

Total portfolio							$	2,128,726	$	2,174,373

(1) Public company.

(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS



Private Finance			December 31, 2000
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Ability One Corporation		Loans	$	9,974	$	9,974

ACE Products, Inc.		Loans		14,276		14,276

Acme Paging, L.P.		Debt Securities		6,984		6,984
		Limited Partnership Interest		1,456		—

Allied Office Products, Inc.		Debt Securities		9,360		9,360
		Warrants		629		629

American Barbecue & Grill, Inc.		Warrants		125		—

American Home Care Supply,		Debt Securities		6,853		6,853
	LLC	Warrants		579		579

Aspen Pet Products, Inc.		Loans		13,862		13,862
		Preferred Stock (1,860 shares)		1,860		1,860
		Common Stock (1,400 shares)		140		140

ASW Holding Corporation		Warrants		25		25

Aurora Communications, LLC		Loans		14,410		14,410
		Equity Interest		1,500		3,347

Avborne, Inc.		Debt Securities		12,255		12,255
		Warrants		1,180		1,180

Bakery Chef, Inc.		Loans		15,899		15,899

Border Foods, Inc.		Debt Securities		9,904		9,904
		Preferred Stock (50,919 shares)		2,000		2,000
		Warrants		—		—

Business Loan Express, Inc.		Debt Securities		74,465		74,465
		Preferred Stock (25,111 shares)		25,111		25,111
		Common Stock (25,503,043 shares)		104,504		104,504

Camden Partners Strategic Fund II, L.P.		Limited Partnership Interest		613		613

CampGroup, LLC		Debt Securities		2,579		2,579
		Warrants		220		220

Candlewood Hotel Company(1)		Preferred Stock (3,250 shares)		3,250		3,250

Celebrities, Inc.		Loan		277		277
		Warrants		12		312

Classic Vacation Group, Inc.(1)		Debt Securities		5,688		5,688

Colibri Holding Corporation		Loans		3,438		3,438
		Common Stock (3,362 shares)		1,250		1,250
		Warrants		290		290

Component Hardware Group		Debt Securities		10,302		10,302
		Preferred Stock (18,000 shares)		1,800		1,800
		Common Stock (2,000 shares)		200		200


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



Private Finance			December 31, 2000
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Convenience Corporation of		Debt Securities	$	8,355	$	2,738
	America	Preferred Stock (31,521 shares)		334		—
		Warrants		—		—

Cooper Natural Resources, Inc.		Debt Securities		3,424		3,424
		Warrants		—		—

CorrFlex Graphics, LLC		Loan		6,952		6,952
		Debt Securities		4,954		4,954
		Warrants		—		500
		Options		—		—

Cosmetic Manufacturing		Loan		120		120
	Resources, LLC	Debt Securities		5,848		5,848
		Options		87		87

Coverall North America, Inc.		Loan		9,692		9,692
		Debt Securities		4,965		4,965
		Warrants		—		—

Csabai Canning Factory Rt.		Hungarian Quotas (9.2%)		700		—

CTT Holdings		Loan		1,224		1,224

CyberRep		Loan		949		949
		Debt Securities		10,295		10,295
		Warrants		660		1,310

Directory Investment Corporation		Common Stock (470 shares)		100		20

Directory Lending Corporation		Common Stock (50 shares)		30		—

Drilltec Patents & Technologies		Loan		10,918		8,762
	Company, Inc.	Debt Securities		1,500		1,500
		Warrants		—		—

eCentury Capital Partners, L.P.		Limited Partnership Interest		1,875		1,875

EDM Consulting, LLC		Debt Securities		1,875		343
		Common Stock (100 shares)		250		—

El Dorado Communications, Inc.		Loans		306		306

Elexis Beta GmbH		Options		424		424

Eparfin S.A.		Loan		29		29

Esquire Communications Ltd.(1)		Warrants		6		—

E-Talk Corporation		Debt Securities		8,804		8,804
		Warrants		1,157		1,157

Ex Terra Credit Recovery, Inc.		Preferred Stock (500 shares)		594		344
		Common Stock (2,500 shares)		—		—
		Warrants		—		—

Executive Greetings, Inc.		Debt Securities		15,880		15,880
		Warrants		360		360

Fairchild Industrial Products		Debt Securities		5,810		5,810
	Company	Warrants		280		3,628

FTI Consulting, Inc.(1)		Warrants		970		2,554


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



Private Finance			December 31, 2000
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Galaxy American		Debt Securities	$	33,399	$	33,399
	Communications, Inc.	Warrants		500		1,250

Garden Ridge Corporation		Debt Securities		26,537		26,537
		Preferred Stock (1,130 shares)		1,130		1,130
		Common Stock (471 shares)		613		613

Genesis Worldwide, Inc.(1)		Loan		1,067		1,067

Gibson Guitar Corporation		Debt Securities		16,441		16,441
		Warrants		525		1,525

Ginsey Industries, Inc.		Loans		5,000		5,000
		Debentures		500		500
		Warrants		—		154

Global Communications, LLC		Debt Securities		12,732		12,732
		Equity Interest		10,467		10,467
		Options		1,639		1,639

Grant Broadcasting Systems II		Warrants		87		5,976

Grant Television, Inc.		Equity Interest		660		660

Grotech Partners, VI, L.P.		Limited Partnership Interest		869		869

The Hartz Mountain Corporation		Debt Securities		27,162		27,162
		Common Stock (200,000 shares)		2,000		2,000
		Warrants		2,613		2,613

HealthASPex, Inc.		Preferred Stock (396,908 shares)		1,340		1,340
		Preferred Stock (225,112 shares)		760		760
		Common Stock (1,036,700 shares)		—		—

HMT, Inc.		Debt Securities		9,956		9,956
		Common Stock (300,000 shares)		3,000		3,000
		Warrants		—		—

Hotelevision, Inc.		Preferred Stock (315,100 shares)		315		315

Icon International, Inc.		Common Stock (37,821 shares)		1,218		1,518

Impact Innovations Group		Debt Securities		6,367		6,367
		Warrants		1,674		1,674

Intellirisk Management Corporation		Loans		21,449		21,449

International Fiber Corporation		Debt Securities		21,626		21,626
		Common Stock (1,029,068 shares)		5,483		5,483
		Warrants		550		550

iSolve Incorporated		Preferred Stock (14,853 shares)		874		874
		Common Stock (13,306 shares)		14		14

Jakel, Inc.		Loan		19,236		19,236

JRI Industries, Inc.		Debt Securities		1,953		1,953
		Warrants		74		74

Julius Koch USA, Inc.		Debt Securities		2,294		2,294
		Warrants		259		6,500


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



Private Finance			December 31, 2000
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Kirker Enterprises, Inc.		Warrants	$	348	$	4,493
		Equity Interest		4		11

Kirkland’s, Inc.		Debt Securities		6,347		6,347
		Preferred Stock (917 shares)		412		412
		Warrants		96		96

Kyrus Corporation		Debt Securities		7,734		7,734
		Warrants		348		348

Liberty-Pittsburgh Systems, Inc.		Debt Securities		3,475		3,475
		Common Stock (64,535 shares)		142		142

The Loewen Group, Inc.(1)		High-Yield Senior Secured Debt		15,150		14,150

Logic Bay Corporation		Preferred Stock (1,131,222 shares)		5,000		5,000

Love Funding Corporation		Preferred Stock (26,000 shares)		359		213

Master Plan, Inc.		Loan		2,000		2,000
		Common Stock (156 shares)		42		3,042

MedAssets.com, Inc.		Preferred Stock (227,665 shares)		2,049		2,049
		Warrants		136		136

Mid-Atlantic Venture Fund IV, L.P.		Limited Partnership Interest		2,475		2,475

Midview Associates, L.P.		Warrants		—		—

Monitoring Solutions, Inc.		Debt Securities		1,823		243
		Common Stock (33,333 shares)		—		—
		Warrants		—		—

MortgageRamp.com, Inc.		Common Stock (800,000 shares)		4,000		4,000

Morton Grove		Loan		15,356		15,356
	Pharmaceuticals, Inc.	Preferred Stock (106,947 shares)		5,000		8,500

MVL Group		Debt Securities		14,124		14,124
		Warrants		643		1,912

NETtel Communications, Inc.		Debt Securities		13,472		13,472

Nobel Learning Communities,		Debt Securities		9,571		9,571
	Inc.(1)	Preferred Stock (265,957 shares)		2,000		2,000
		Warrants		575		500

North American		Loans		1,390		811
	Archery, LLC	Debentures		2,248		1,996

Northeast Broadcasting Group, L.P.		Debt Securities		349		349

Nursefinders, Inc.		Debt Securities		11,006		11,006
		Warrants		900		900

Old Mill Holdings, Inc.		Debt Securities		140		—

Onyx Television GmbH		Common Stock (600,000 shares)		200		200

Opinion Research Corporation(1)		Debt Securities		14,033		14,033
		Warrants		996		996


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



Private Finance			December 31, 2000
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Oriental Trading Company, Inc.		Debt Securities	$	12,456	$	12,456
		Loan		128		128
		Preferred Equity Interest		1,483		1,483
		Common Equity Interest		17		17
		Warrants		—		—

Outsource Partners, Inc.		Debt Securities		23,853		23,853
		Warrants		826		826

Packaging Advantage Corporation		Debt Securities		11,497		11,497
		Common Stock (200,000 shares)		2,000		2,000
		Warrants		963		963

Physicians Specialty Corporation		Debt Securities		14,809		14,809
		Preferred Stock (850 shares)		850		—
		Preferred Stock (97,411 shares)		150		—
		Warrants		476		—

Pico Products, Inc.(1)		Loan		1,300		1,300
		Debt Securities		4,591		1,591
		Common Stock (208,000 shares)		59		—
		Warrants		—		—

Polaris Pool Systems, Inc.		Debt Securities		6,483		6,483
		Warrants		1,050		1,050

Powell Plant Farms, Inc.		Loan		15,707		15,707

Proeducation GmbH		Loan		40		40

Professional Paint, Inc.		Debt Securities		20,000		20,000
		Preferred Stock (15,000 shares)		15,000		15,000
		Common Stock (110,000 shares)		69		69

Progressive International		Debt Securities		3,949		3,949
	Corporation	Preferred Stock (500 shares)		500		500
		Common Stock (197 shares)		13		13
		Warrants		—		—

Schwinn Holdings Corporation		Debt Securities		10,367		10,367
		Warrants		395		395

Seasonal Expressions, Inc.		Preferred Stock (1,000 shares)		500		—

Soff-Cut Holdings, Inc.		Debt Securities		8,454		8,454
		Preferred Stock (300 shares)		300		300
		Common Stock (2,000 shares)		200		200
		Warrants		446		446

Southern Communications, LLC		Equity Interest		9,779		9,779

Southwest PCS, LLC		Loan		7,500		7,500

Southwest PCS, L.P.		Debt Securities		6,518		7,435

Spa Lending Corporation		Preferred Stock (28,625 shares)		547		437
		Common Stock (6,208 shares)		25		18


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



Private Finance			December 31, 2000
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Staffing Partners Holding		Debt Securities	$	4,990	$	4,990
	Company, Inc.	Preferred Stock (414,600 shares)		2,073		2,073
		Common Stock (50,200 shares)		50		50
		Warrants		10		10

Startec Global Communications,		Debt Securities		20,200		20,200
	Corporation(1)	Common Stock (258,064 shares)		3,000		3,000
		Warrants		—		—

Sunsource Inc.(1)		Debt Securities		29,850		29,850
		Warrants		—		—

SunStates Refrigerated Services,		Loans		6,062		4,573
	Inc.	Debt Securities		2,445		1,384

Sure-Tel, Inc.		Loan		207		207
		Preferred Stock (1,116,902 shares)		4,558		4,558
		Warrants		662		662
		Options		—		900

Sydran Food Services II, L.P.		Debt Securities		12,973		12,973

Total Foam, Inc.		Debt Securities		268		127
		Common Stock (910 shares)		10		—

Tubbs Snowshoe Company, LLC		Debt Securities		3,899		3,899
		Warrants		54		54
		Equity Interests		500		500

United Pet Group		Debt Securities		4,959		4,959
		Warrants		15		15

Velocita, Inc.		Debt Securities		11,532		11,532
		Warrants		3,540		3,540

Venturehouse Group, LLC		Common Equity Interest		333		333

Walker Investment Fund II, LLLP		Limited Partnership Interest		800		800

Warn Industries, Inc.		Debt Securities		19,330		19,330
		Warrants		1,429		1,929

Williams Brothers Lumber Company		Warrants		24		322

Wilmar Industries, Inc.		Debt Securities		31,720		31,720
		Warrants		3,169		3,169

Wilshire Restaurant Group, Inc.		Debt Securities		15,191		15,191
		Warrants		—		—

Wilton Industries, Inc.		Loan		12,836		12,836

Woodstream Corporation		Debt Securities		7,590		7,590
		Equity Interests		1,700		1,700
		Warrants		450		450

Wyo-Tech Acquisition Corporation		Debt Securities		15,677		15,677
		Preferred Stock (100 shares)		3,700		3,700
		Common Stock (99 shares)		100		7,100

Total private finance (122 investments)			$	1,262,529	$	1,282,467


(1) Public company.
(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.



						December 31, 2000
		Interest		Number of
(in thousands, except number of loans)		Rate Ranges		Loans		Cost		Value

Commercial Real Estate Finance

Commercial Mortgage Loans			Up to 6.99%		3	$	882	$	2,582
			7.00%– 8.99%		13		30,032		32,132
			9.00%–10.99%		17		22,302		22,190
			11.00%–12.99%		38		35,250		35,042
			13.00%–14.99%		12		14,391		14,391
		15.00% and above			2		100		76

	Total commercial mortgage loans				85	$	102,957	$	106,413


			Stated
			Interest		Face

Purchased CMBS
	Mortgage Capital Funding, Series 1998-MC3			5.5%	$	54,491	$	25,681	$	25,681
	Morgan Stanley Capital I, Series 1999-RM1			6.4%		59,640		27,429		27,429
	COMM 1999-1			5.6%		74,879		34,352		34,352
	Morgan Stanley Capital I, Series 1999-FNV1			6.1%		45,536		21,972		21,972
	DLJ Commercial Mortgage Trust 1999-CG2			6.1%		96,432		44,332		44,332
	Commercial Mortgage Acceptance Corp., Series 1999-C1			6.8%		34,856		16,397		16,397
	LB Commercial Mortgage Trust, Series 1999-C2			6.7%		29,005		10,910		10,910
	Chase Commercial Mortgage Securities Corp., Series 1999-2			6.5%		43,046		20,552		20,552
	FUNB CMT, Series 1999-C4			6.5%		49,287		22,515		22,761
	Heller Financial, HFCMC Series 2000 PH-1			6.6%		45,456		19,039		19,039
	SBMS VII, Inc., Series 2000-NL1			7.2%		30,079		17,820		18,007
	DLJ Commercial Mortgage Trust, Series 2000-CF1			7.0%		40,502		19,166		19,166
	Deutsche Bank Alex. Brown, Series Comm 2000-C1			6.9%		41,084		19,170		19,170
	LB-UBS Commercial Mortgage Trust, Series 2000-C4			6.9%		31,471		11,552		11,552

		Total purchased CMBS			$	675,764	$	310,887	$	311,320

Residual CMBS							$	78,723	$	78,723
Residual Interest Spread								3,297		2,997
Real Estate Owned								7,502		6,081

		Total commercial real estate finance					$	503,366	$	505,534

Total portfolio							$	1,765,895	$	1,788,001

(1) Public company.

(2) Common stock, preferred stock, warrants, options and equity interests are generally non-income producing and restricted.

The accompanying notes are an integral part of these consolidated financial statements.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of and for the nine months ended September 30, 2001 and 2000 is unaudited)

Note 1. Organization

Allied Capital Corporation, a Maryland corporation, is a closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”). Allied Capital Corporation (“ACC”) has a wholly owned subsidiary that has also elected to be regulated as a BDC. Allied Investment Corporation (“Allied Investment”) is licensed under the Small Business Investment Act of 1958 as a Small Business Investment Company (“SBIC”). In April 2001, ACC established a consolidated wholly owned subsidiary, A.C. Corporation (“AC Corp.”), which provides consulting, structuring and diligence services on private finance and commercial real estate transactions, as well as consulting, structuring and management services to existing portfolio companies. In addition, the Company has a real estate investment trust subsidiary, Allied Capital REIT, Inc. (“Allied REIT”) and several single-member limited liability companies established primarily to hold real estate properties.

ACC also owned Allied Capital SBLC Corporation (“Allied SBLC”), a BDC licensed by the Small Business Administration (“SBA”) as a Small Business Lending Company and a participant in the SBA Section 7(a) Guaranteed Loan Program. On December 31, 2000, ACC acquired BLC Financial Services, Inc. as a private portfolio company, which then changed its name to Business Loan Express, Inc. (“BLX”). As a part of the transaction, Allied SBLC was recapitalized as an independently managed, private portfolio company on December 28, 2000 and ceased to be a consolidated subsidiary of the Company at that time. Allied SBLC was then subsequently merged into BLX. The results of the operations of Allied SBLC are included in the consolidated financial results of ACC and its subsidiaries for 2000 through December 27, 2000.

Allied Capital Corporation and its subsidiaries, collectively, are hereinafter referred to as the “Company.”

The investment objective of the Company is to achieve current income and capital gains. In order to achieve this objective, the Company invests in private and undervalued public companies in a variety of different industries and in diverse geographic locations.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries that make investments or are operating companies that provide services to the Company. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2000 balances to conform with the 2001 financial statement presentation.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the unaudited consolidated financial results of the Company included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of and for the three and nine months ended September 30, 2001 and 2000 and the results of operations, changes in net assets, and cash flows for these periods. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the operating results to be expected for the full year.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio

Private Finance

At September 30, 2001 and December 31, 2000, the private finance portfolio consisted of the following:



		2001						2000

		Cost		Value		Yield		Cost		Value		Yield

($ in thousands)




Loans and debt securities		$	1,133,817	$	1,095,555		14.5%	$	983,887	$	966,257		14.6%




Equity interests			361,770		443,698				278,642		316,210

	Total	$	1,495,587	$	1,539,253			$	1,262,529	$	1,282,467

Private finance investments are generally structured as loans and debt securities that carry a relatively high fixed rate of interest, which may be combined with equity features, such as conversion privileges, or warrants or options to purchase a portion of the portfolio company’s equity at a nominal price.

Debt securities typically have a maturity of five to ten years, with interest-only payments in the early years and payments of both principal and interest in the later years, although debt maturities and principal amortization schedules vary.

Equity interests consist primarily of securities issued by privately owned companies and may be subject to restrictions on their resale or may be otherwise illiquid. Equity securities generally do not produce a current return, but are held for investment appreciation and ultimate gain on sale.

At September 30, 2001 and December 31, 2000, equity interests include the Company’s common stock and preferred stock investment in Business Loan Express, Inc. (“BLX”) of $120,015,000 and $25,111,000 and $104,504,000 and $25,111,000 at value, respectively. During the first quarter of 2001, BLX secured a 3-year $117.5 million unsecured revolving credit facility, which was increased to $124.0 million in October 2001. As the controlling shareholder of BLX, the Company has provided an unconditional guaranty to the BLX credit facility lenders in an amount up to 50% of the total obligations (consisting of principal, accrued interest and other fees) of BLX on the line of credit. The amount guaranteed by the Company at September 30, 2001 was $50,300,000. This guaranty can be called by the lenders only in the event of a default by BLX. BLX was in compliance with the terms of its credit facility at September 30, 2001. In consideration for providing this guaranty, BLX will pay the Company an annual guaranty fee of $2,938,000, which was increased to $3,100,000 effective October 2001.

At September 30, 2001 and December 31, 2000, approximately 97% and 98% of the Company’s private finance loan portfolio was composed of fixed interest rate loans, respectively. At September 30, 2001 and December 31, 2000, loans and debt securities with a value of $60,092,000 and $72,966,000, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

The geographic and industry compositions of the private finance portfolio at value at September 30, 2001 and December 31, 2000 were as follows:


		2001			2000

Geographic Region




Mid-Atlantic			41	%		43	%




West			18			17




Midwest			17			18




Southeast			14			12




Northeast			8			8




International			2			2

	Total		100	%		100	%

Industry




Consumer Products			28	%		26	%




Business Services			21			24




Financial Services			15			16




Industrial Products			10			9




Broadcasting & Cable			5			5




Education			5			3




Retail			4			5




Telecommunications			4			6




Other			8			6

	Total		100	%		100	%

Commercial Real Estate Finance

At September 30, 2001 and December 31, 2000, the commercial real estate finance portfolio consisted of the following:



		2001						2000

		Cost		Value		Yield		Cost		Value		Yield
($ in thousands)




Loans		$	82,789	$	86,198		8.0%	$	102,957	$	106,413		9.1%




CMBS			546,788		546,488		14.4%		392,907		393,040		14.2%




REO			3,562		2,434				7,502		6,081

	Total	$	633,139	$	635,120			$	503,366	$	505,534

Loans

The commercial mortgage loan portfolio contains loans that were originated by the Company or were purchased from third-party sellers.

At September 30, 2001 and December 31, 2000, approximately 77% and 23% and 69% and 31% of the Company’s commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. As of September 30, 2001 and December 31, 2000, loans with a value of $12,929,000 and $14,433,000, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

In December 2000, the Company purchased commercial mortgage loans with a face amount of $6.5 million for $5.5 million from Business Mortgage Investors, Inc., a company managed by ACC.

The geographic composition and the property types securing the commercial mortgage loan portfolio at value at September 30, 2001 and December 31, 2000 were as follows:


		2001			2000

Geographic Region




Southeast			42	%		39	%




Mid-Atlantic			22			22




West			16			20




Midwest			15			14




Northeast			5			5

	Total		100	%		100	%

Property Type




Office			32	%		30	%




Hospitality			30			28




Retail			19			19




Recreation			4			9




Other			15			14

	Total		100	%		100	%

CMBS

At September 30, 2001 and December 31, 2000, the CMBS portfolio consisted of the following:



		2001				2000

		Cost		Value		Cost		Value
(in thousands)
Purchased CMBS		$	472,113	$	472,113	$	310,887	$	311,320




Residual CMBS			72,850		72,850		78,723		78,723




Residual interest spread			1,825		1,525		3,297		2,997

	Total	$	546,788	$	546,488	$	392,907	$	393,040

Purchased CMBS The Company has Purchased CMBS bonds with a face amount of $982,411,000 and a cost of $472,113,000, with the difference representing original issue discount. As of September 30, 2001 and December 31, 2000, the estimated yield to maturity on the Purchased CMBS was approximately 15.2% and 15.4%, respectively. The Company’s yield on its Purchased CMBS is based upon a number of assumptions that are subject to certain business and economic uncertainties and contingencies. Examples include the timing and magnitude of credit losses on the mortgage loans underlying the Purchased CMBS that are a result of the general condition of the real estate market (including competition for tenants and their related credit quality) and changes in market rental rates. At September 30, 2001 and December 31, 2000, the yield on the Purchased CMBS portfolio was computed assuming a 1% loss estimate for its entire underlying collateral mortgage pool. As these uncertainties and contingencies are difficult to predict and are subject to future events which may alter these assumptions, no assurance can be given that the anticipated yields to maturity will be achieved.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

The non-investment grade and unrated tranches of the Purchased CMBS bonds are junior in priority for payment of principal to the more senior tranches of the related commercial securitization. Cash flow from the underlying mortgages generally is allocated first to the senior tranches, with the most senior tranches having a priority right to the cash flow. Then, any remaining cash flow is allocated, generally, among the other tranches in order of their relative seniority. To the extent there are defaults and unrecoverable losses on the underlying mortgages resulting in reduced cash flows, the subordinate tranche will bear this loss first.

The underlying rating classes of the Purchased CMBS at September 30, 2001 and December 31, 2000 were as follows:



		2001					2000

				Percentage					Percentage
		Value		of Total			Value		of Total

($ in thousands)




BB+		$	—		—	%	$	—		—	%




BB			38,705		8.2			8,472		2.7




BB-			56,519		12.0			37,061		11.9




B+			86,889		18.4			59,827		19.3




B			119,920		25.4			89,999		28.9




B-			67,538		14.3			56,665		18.2




CCC			8,863		1.9			7,857		2.5




Unrated			93,679		19.8			51,439		16.5

	Total	$	472,113		100.0	%	$	311,320		100.0	%

Residual CMBS and Residual Interest Spread. The Residual CMBS primarily consists of a retained interest from a post-Merger asset securitization whereby bonds were sold in three classes rated “AAA,” “AA” and “A.”

The Company sold $295 million of loans, and received cash proceeds, net of costs, of approximately $223 million. The Company retained a trust certificate for its residual interest in the loan pool sold, and will receive interest income from this Residual CMBS as well as the Residual Interest Spread from the interest earned on the loans sold less the interest paid on the bonds over the life of the bonds.

As a result of this securitization, the Company recorded a gain of $14.8 million, which represents the difference between the cost basis of the assets sold and the fair value of the assets received, net of the costs of the securitization and the cost of settlement of interest rate swaps. As of September 30, 2001 and December 31, 2000, the mortgage loan pool had an approximate weighted average stated interest rate of 9.3%. The three bond classes sold had an aggregate weighted average interest rate of 6.6% as of September 30, 2001, and 6.5% as of December 31, 2000.

The Company uses a discounted cash flow methodology for determining the value of its retained Residual CMBS and Residual Interest Spread (“Residual”). In determining the cash flow of the Residual, the Company assumes a prepayment speed of 15% after the applicable prepayment lockout period and credit losses of 1% of the total principal balance of the underlying collateral throughout the life of the collateral. The value of the resulting Residual cash flows is then determined by applying a discount rate of 9% which, in the Company’s view, is commensurate with the market’s perception of risk of comparable assets.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

The geographic composition and the property types of the underlying mortgage loan pools securing the CMBS calculated using the underwritten principal balance at September 30, 2001 and December 31, 2000 were as follows:


		2001			2000

Geographic Region




West			31	%		31	%




Mid-Atlantic			24			23




Midwest			21			22




Southeast			18			19




Northeast			6			5

	Total		100	%		100	%

Property Type




Retail			33	%		32	%




Housing			27			30




Office			25			21




Hospitality			7			8




Other			8			9

	Total		100	%		100	%

Small Business Finance

The Company, through its wholly owned subsidiary, Allied SBLC, participated in the SBA’s Section 7(a) Guaranteed Loan Program (“7(a) loans”). As discussed in Note 1, Allied SBLC was no longer a consolidated subsidiary of the Company as of December 31, 2000. As a result, the Company’s small business portfolio had no balance at and after December 31, 2000.

Note 4. Debt

At September 30, 2001 and December 31, 2000, the Company had the following debt:



			2001				2000

			Facility		Amount		Facility		Amount
			Amount		Drawn		Amount		Drawn

(in thousands)




Notes payable and debentures:




	Unsecured long-term notes		$	544,000	$	544,000	$	544,000	$	544,000




	SBA debentures			101,800		87,000		87,350		78,350




	Auction rate reset note			80,784		80,784		76,598		76,598




	OPIC loan			5,700		5,700		5,700		5,700

		Total notes payable and debentures		732,284		717,484		713,648		704,648

Revolving credit facilities:




	Revolving line of credit			467,500		207,000		417,500		82,000

	Total		$	1,199,784	$	924,484	$	1,131,148	$	786,648

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt, continued

Notes Payable and Debentures

Unsecured Long-Term Notes. In June 1998, May 1999, November 1999 and October 2000, the Company issued unsecured long-term notes to private institutional investors. The notes require semi-annual interest payments until maturity and have terms of five or seven years. The weighted average interest rate on the notes was 7.8% at September 30, 2001 and December 31, 2000, respectively. The notes may be prepaid in whole or in part together with an interest premium, as stipulated in the note agreement.

On October 30, 2001, the Company issued $150 million of five-year unsecured long-term debt, financed primarily by insurance companies. The five-year notes were priced at 7.16% and have substantially the same terms as the Company’s existing unsecured long-term notes.

SBA Debentures. At September 30, 2001 and December 31, 2000, the Company had debentures payable to the SBA with terms of ten years and at fixed interest rates ranging from 5.9% to 8.2%. The weighted average interest rate was 7.1% and 7.6% at September 30, 2001 and December 31, 2000, respectively. The debentures require semi-annual interest-only payments with all principal due upon maturity. The SBA debentures are subject to prepayment penalties if paid prior to maturity.

Auction Rate Reset Note. The Company has an $80,784,000 Auction Rate Reset Senior Note Series A that matures on December 2, 2002 and bears interest at the three-month London Interbank Offer Rate (“LIBOR”) plus 1.75%, which adjusts quarterly. Interest is due quarterly and the Company, at its option, may pay or defer and capitalize such interest payments. The amount outstanding on the note will increase as interest due is deferred and capitalized.

As a means to repay the note, the Company has entered into an agreement to issue $80,784,000 of debt, equity or other securities in one or more public or private transactions, or prepay the Auction Rate Reset Note, on or before August 31, 2002. If the note is prepaid, the Company will pay a fee equal to 0.5% of the aggregate amount of the note outstanding.

Scheduled future maturities of notes payable and debentures at September 30, 2001 are as follows:


Year		Amount Maturing

		(in thousands)




2001		$	—




2002			80,784




2003			140,000




2004			221,000




2005			179,000




Thereafter			96,700

	Total	$	717,484

Revolving Credit Facilities

Revolving Line of Credit. The Company has an unsecured revolving line of credit for $467,500,000. The facility may be expanded up to $600,000,000. At the Company’s option, the

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt, continued

facility bears interest at a rate equal to (i) the one-month LIBOR plus 1.25% or (ii) the higher of (a) the Bank of America, N.A. prime rate or (b) the Federal Funds rate plus 0.50%. The interest rate adjusts at the beginning of each new interest period, usually every thirty days. The interest rates were 4.5% and 7.9% at September 30, 2001 and December 31, 2000, respectively, and the facility requires an annual commitment fee equal to 0.25% of the committed amount. The line expires in August 2003, and may be extended under substantially similar terms for one additional year at the Company’s sole option. The line of credit requires monthly interest payments and all principal is due upon its expiration.

The average debt outstanding on the revolving credit facilities was $108,143,000 and $154,853,000 for the nine months ended September 30, 2001 and for the year ended December 31, 2000, respectively. The maximum amount borrowed under these facilities and the weighted average interest rate for the nine months ended September 30, 2001 and for the year ended December 31, 2000, were $213,500,000 and $257,000,000, and 5.9% and 7.6%, respectively.

Note 5. Preferred Stock

Allied Investment has outstanding a total of 60,000 shares of $100 par value, 3% cumulative preferred stock and 10,000 shares of $100 par value, 4% redeemable cumulative preferred stock issued to the SBA pursuant to Section 303(c) of the Small Business Investment Act of 1958, as amended. The 3% cumulative preferred stock does not have a required redemption date. Allied Investment has the option to redeem in whole or in part the preferred stock by paying the SBA the par value of such securities and any dividends accumulated and unpaid to the date of redemption. The 4% redeemable cumulative preferred stock has a required redemption date in June 2005.

Note 6. Shareholders’ Equity

Sales of common stock for the nine months ended September 30, 2001, and the year ended December 31, 2000 were as follows:


		2001			2000
(in thousands)
Number of common shares			11,010			14,812




Gross proceeds		$	249,639		$	263,460




Less costs including underwriting fees			(12,602	)		(12,548	)

	Net proceeds	$	237,037		$	250,912

In addition, the Company issued 4,123,407 shares of common stock to acquire BLC Financial Services, Inc. in a stock-for-stock exchange on December 31, 2000 for proceeds of $86,076,000.

The Company has a dividend reinvestment plan, whereby the Company may buy shares of its common stock in the open market or issue new shares in order to satisfy dividend reinvestment requests. If the Company issues new shares, the issue price is equal to the average of the closing sale prices reported for the Company’s common stock for the five consecutive days immediately prior to the dividend payment date.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6. Shareholders’ Equity, continued

Dividend reinvestment plan activity for the nine months ended September 30, 2001 and for the year ended December 31, 2000 was as follows:


	2001		2000

(in thousands, except per share amounts)




Shares issued		214		254




Average price per share	$	22.80	$	18.79

Note 7. Earnings Per Common Share

Earnings per common share for the nine months ended September 30, 2001 and 2000 were as follows:



	For the Nine Months
	Ended September 30,

	2001			2000
(in thousands except per share amounts)
Net increase in net assets resulting from operations	$	157,837		$	100,820




Less preferred stock dividends		(165	)		(165	)

Income available to common shareholders	$	157,672		$	100,655

Basic shares outstanding		89,282			70,604




Dilutive options outstanding to officers		1,582			173

Diluted shares outstanding		90,864			70,777

Basic earnings per common share	$	1.77		$	1.43

Diluted earnings per common share	$	1.74		$	1.42

Note 8. Cut-off Award and Formula Award

The Predecessor Companies’ existing stock option plans were canceled and the Company established a cut-off dollar amount for all existing, but unvested options as of the date of the Merger (the “Cut-off Award”). The Cut-off Award was computed for each unvested option as of the Merger date. The Cut-off Award was equal to the difference between the market price on August 14, 1997 (the Merger announcement date) of the shares of stock underlying the option less the exercise price of the option. The Cut-off Award was payable for each unvested option upon the future vesting date of that option. The Cut-off Award was designed to cap the appreciated value in unvested options at the Merger announcement date, in order to set the foundation to balance option awards upon the Merger. The Cut-off Award approximated $2.9 million in the aggregate and has been expensed as the Cut-off Award vests. For the nine months ended September 30, 2001 and for the year ended December 31, 2000, $91,000 and $535,000, respectively, of the Cut-off Award vested.

The Formula Award was established to compensate employees from the point when their unvested options would cease to appreciate in value (the Merger announcement date), up until the time at which they would be able to receive option awards in ACC post-merger. In the aggregate, the Formula Award equaled 6% of the difference between an amount equal to the combined aggregated market capitalizations of the Predecessor Companies as of the close of the market on the day before the Merger date (December 30, 1997), less an amount equal to the combined aggregate market

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 8. Cut-off Award and Formula Award, continued

capitalizations of Allied Lending and the Predecessor Companies as of the close of the market on the Merger announcement date. Advisers’ compensation committee allocated the Formula Award to individual officers on December 30, 1997. The amount of the Formula Award as computed at December 30, 1997 was $18,994,000. This amount was contributed to the Company’s deferred compensation trust and was used to purchase shares of the Company’s stock (included in common stock held in deferred compensation trust). The Formula Award vested equally in three installments on December 31, 1998, 1999 and 2000. The Formula Award has been expensed in each year in which it vested. For the year ended December 31, 2000, $5,648,000 was expensed as a result of the Formula Award. At December 31, 2000, the liability related to the Formula Award was $5,648,000 and has been included in common stock held in deferred compensation trust. Vested Formula Awards have been distributed to recipients by the Company, however, sale of the Company’s stock by the recipients is restricted. Unvested Formula Awards were forfeited upon a recipient’s separation from service and the related Company stock was retired. During 2000, $563,000 of the Formula Award was forfeited.

The Cut-off Award and the Formula Award are included in employee expenses in the Company’s consolidated statement of operations.

Note 9. Dividends and Distributions

The Company’s Board of Directors declared and the Company paid a $1.50 per common share dividend or $135,702,000 for the nine months ended September 30, 2001.


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto included herein and in the Company’s annual report on Form 10-K. This Management’s Discussion and Analysis contains certain forward-looking statements. These statements include the plans and objectives of management for future operations and financial objectives, loan portfolio growth and availability of funds. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors that could cause actual results and conditions to differ materially from those projected in these forward-looking statements are set forth below in the Investment Considerations section. Other factors that could cause actual results to differ materially include the uncertainties of economic, competitive and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements included herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Therefore, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

OVERVIEW

The Company provides private investment capital to private and undervalued public companies in a variety of different industries and in diverse geographic locations. Our lending and investment activity is focused in private finance and commercial real estate finance, primarily the purchase of commercial mortgage-backed securities.

The Company’s portfolio composition at September 30, 2001, and December 31, 2000 was as follows:


	At			At
	September 30,			December 31,
	2001			2000

Private Finance		71	%		72	%




Commercial Real Estate Finance		29	%		28	%




Small Business Finance		—	%		—	%

The Company’s earnings depend primarily on the level of interest and related portfolio income and net realized and unrealized gains earned on the Company’s investment portfolio after deducting interest paid on borrowed capital and operating expenses. Interest income results from the stated interest rate earned on a loan and the amortization of loan origination points and discounts. The level of interest income is directly related to the balance of the interest-bearing investment portfolio multiplied by the weighted average yield on the interest-bearing portfolio. The Company’s ability to generate interest income is dependent on economic, regulatory and competitive factors that influence interest rates and loan originations, and the Company’s ability to secure financing for its investment activities.

PORTFOLIO AND INVESTMENT ACTIVITY

Total portfolio investment activity and yields as of and for the three and nine months ended September 30, 2001 and 2000 and as of and for the year ended December 31, 2000 were as follows:



	At and for the Three						At and for the Nine
	Months Ended						Months Ended						At and for the
	September 30,						September 30,						Year Ended
													December 31,
	2001			2000			2001			2000			2000
($ in millions)
Portfolio at Value	$	2,174.4		$	1,638.2		$	2,174.4		$	1,638.2		$	1,788.0




Investments Funded	$	209.5		$	237.8		$	509.6		$	640.2		$	901.5




Repayments	$	7.9		$	59.1		$	52.0		$	117.9		$	154.1




Sales	$	57.5		$	34.7		$	130.0		$	151.8		$	280.2




Yield		14.1	%		13.9	%		14.1	%		13.9	%		14.1	%

Private Finance

Private finance investment activity and yields as of and for the three and nine months ended September 30, 2001 and 2000 and as of and for the year ended December 31, 2000 were as follows:



	At and for the						At and for the
	Three Months						Nine Months						At and for the
	Ended Sept. 30,						Ended Sept. 30,						Year Ended
													December 31,
	2001			2000			2001			2000			2000
($ in millions)
Portfolio at Value	$	1,539.3		$	967.5		$	1,539.3		$	967.5		$	1,282.5




Investments Funded	$	112.7		$	148.5		$	226.8		$	387.6		$	600.9




Repayments	$	5.8		$	49.6		$	29.8		$	88.8		$	117.7




Yield		14.5	%		14.6	%		14.5	%		14.6	%		14.6	%

The private finance portfolio increased 20% from December 31, 2000 to September 30, 2001, and increased 98% during the year ended December 31, 2000. In addition to the $226.8 million of funded investments for the nine months ended September 30, 2001, the Company invested an additional $31.7 million in portfolio companies through receipt of payment in-kind securities. Buyout and private finance activity across the industry has been slow during the first nine months of 2001 largely due to credit tightening among senior lenders. Since equity-focused buyout firms generally need both senior and subordinated debt to leverage private equity investments, buyout activity has been reduced due to a lower level of activity in the senior bank market, and in particular the senior syndicated loan market. As a result, the Company’s investment activity for the nine months ended September 30, 2001 has been at a slower pace than the comparable period for the prior year.

During the third quarter, the Company closed the controlled buyout of SunSource Inc. on September 26, 2001. Pursuant to the merger agreement signed on June 18, 2001, the Company paid $10.375 per SunSource common share, or $71.5 million, in cash for the outstanding common equity of SunSource. On September 28, 2001, SunSource announced that it completed the sale of its STS business unit. Pursuant to this sale, SunSource returned $15.0 million in cash to the Company, reducing the Company’s cost basis. The Company’s cost basis in the common stock of SunSource after the return of capital from the STS sale and the capitalization of deal costs was $58.6 million at September 30, 2001. The SunSource investment has been structured to provide for a current return to be earned through interest on debt and management/ consulting fees for services provided by the Company. In addition, during the third quarter of 2001, the Company earned investment banking fees of $2.8 million for the acquisition of SunSource and the sale of STS, earned a syndication fee of $1.6 million for the syndication of SunSource’s senior credit facilities and realized a gain of $2.5 million from the sale of warrants in SunSource prior to the controlled buyout transaction. As part of the STS sale, the Company invested $3.2 million in the new STS.

The Company’s increasing capital base has enabled it to make larger private finance investments, supporting the increase in originations in 2000. Key investment characteristics for new private finance mezzanine investments were as follows:


		For the Year
		Ended
		December 31,
		2000

New investment characteristics:




	Number of investments		34




	Average investment size (millions)	$	14.0




	Average current yield		14.7	%




	Average portfolio company revenue (millions)	$	153.5




	Average portfolio company years in business		36

The average investment characteristics above are computed using simple averages based upon underwriting data for investment activity for that year. As a result, any one investment may have had individual investment characteristics that may vary significantly from the stated simple average. In addition, average investment characteristics may vary from year to year.

The current yield on the private finance portfolio will fluctuate over time depending on the equity “kicker” or warrants received with each debt financing. Private finance investments are generally structured such that equity kickers may provide an additional future investment return of up to 10%.

During 2000, the Company acquired BLC Financial Services, Inc. in a going private transaction, which thereafter changed its name to Business Loan Express, Inc. (“BLX”). The Company’s investment in BLX is included in the private finance portfolio. See “Small Business Finance” discussion for more details below.

During the second quarter of 2000, the Company began an initiative to invest in and strategically partner with select private equity funds focused on venture capital investments. The strategy for these fund investments is to provide solid investment returns and build strategic relationships with the fund managers and their portfolio companies. The Company believes that it will have opportunities to co-invest with the funds as well as finance their portfolio companies as they mature.

The Company believes that the fund investment strategy is an effective means of participating in private equity investing through a diverse pooled investment portfolio. The fund concept allows the Company to participate in a pooled investment return without exposure to the risk of any single investment. Since the beginning of 2000, the Company has committed a total of $44.5 million to eight private equity funds. The committed amount is expected to be invested over the next three years. The Company funded $0.4 million, $3.5 million and $7.0 million of this commitment for the three and nine months ended September 30, 2001 and for the year ended December 31, 2000, respectively.

Commercial Real Estate Finance

Commercial real estate finance investment activity and yields as of and for the three and nine months ended September 30, 2001 and 2000 and as of and for the year ended December 31, 2000 were as follows:



	At and for the						At and for the
	Three Months Ended						Nine Months Ended						At and for the
	September 30,						September 30,						Year Ended
													December 31,
	2001			2000			2001			2000			2000
($ in millions)
Portfolio at Value	$	635.1		$	600.0		$	635.1		$	600.0		$	505.5




Investments Funded	$	96.8		$	52.6		$	282.8		$	143.7		$	149.0




Repayments	$	2.1		$	6.5		$	22.2		$	20.8		$	24.8




Sales	$	57.5		$	1.6		$	130.0		$	53.1		$	151.7




Yield		13.5	%		13.2	%		13.5	%		13.2	%		13.1	%

The commercial real estate finance portfolio increased 26% from December 31, 2000 to September 30, 2001, and decreased 3% for the year ended December 31, 2000. During 1998, the Company reduced its commercial mortgage loan origination activity for its own portfolio due to declining interest rates and began to sell its loans to other lenders. Then, beginning in the fourth quarter of 1998, the Company began to take advantage of a unique market opportunity to acquire non-investment grade commercial mortgage-backed securities (“CMBS”) at significant discounts from the face amount of the bonds. Turmoil in the capital markets at that time created a lack of liquidity for the traditional buyers of non-investment grade bonds. As a result, yields on these collateralized bonds increased, thus providing an attractive investment opportunity. The Company believes that CMBS is an attractive asset class because of the yields that can be earned on a security that is secured by commercial mortgage loans. The Company has opportunistically purchased CMBS since the fourth quarter of 1998. The Company plans to continue its CMBS investment activity, however, in order to maintain a balanced portfolio the Company expects that purchased CMBS will continue to represent approximately 20% to 25% of total assets during 2001. The Company’s CMBS investment activity level will be dependent upon its ability to purchase CMBS at attractive yields.

The Company purchases CMBS at an approximate discount of 50% from the face amount of the bonds. During the third quarter of 2001, the Company purchased $96.8 million in CMBS with a face value of $171.1 million and a weighted average yield to maturity of 15.0% after assuming a 1% loss rate on the underlying collateral mortgage pool. During the nine months ended September 30, 2001 the Company purchased $256.1 million in CMBS with a face value of $449.0 million. During the first quarter of 2001, the Company also purchased $24.6 million in non-investment grade securities related to a collateralized debt issuance secured by CMBS and investment grade real estate investment trust bonds. The weighted average yield to maturity on purchases made during the first nine months of 2001 is 15.0% after assuming a 1% loss rate on the underlying collateral mortgage pool. During 2000, the Company purchased $124.3 million in CMBS with a face amount of $244.6 million and a weighted average yield to maturity of 14.7% after assuming a 1% loss rate on the underlying collateral mortgage pool.

As a part of the Company’s strategy to maximize its return on equity capital, the Company sold CMBS bonds rated BB+, BB and BB- during the third quarter of 2001, the first nine months of 2001 and the fourth quarter of 2000 totaling $55.6 million, $124.5 million and $98.7 million, respectively. These bonds had an effective yield of 10.4%, 10.3% and 11.5%, and were sold for $56.7 million, $126.8 million and $102.5 million, respectively, resulting in realized gains on the sales. The sale of these lower-yielding bonds increased the Company’s overall liquidity. The effective yield on the Company’s remaining purchased CMBS portfolio at September 30, 2001 was 15.2%, after

assuming a 1% loss on the entire underlying mortgage loan pool. At September 30, 2001 and December 31, 2000, the value of the purchased CMBS portfolio was $472.1 million and $311.3 million and the unamortized discount was $510.3 million and $364.9 million, respectively.

The original principal balance of the underlying pool of the approximately 3,300 loans that are collateral for the Company’s CMBS had underwritten loan to value (“LTV”) and underwritten debt service coverage ratios (“DSCR”) as follows:


Loan to Value Ranges	$			%

($ in millions)




Less than 60%	$	2,060.4			11	%




60-65%		1,663.9			9	%




65-70%		2,834.0			16	%




70-75%		5,838.7			33	%




75-80%		5,332.0			30	%




Greater than 80%		214.3			1	%

	$	17,943.3			100	%

Weighted average LTV		69.7	%


Debt Service Coverage
Ratio Ranges	$		%

($ in millions)




Greater than 2.00	$	556.6		3	%




1.76-2.00		551.8		3	%




1.51-1.75		2,046.3		11	%




1.26-1.50		10,393.0		58	%




1.00-1.25		4,395.6		25	%

	$	17,943.3		100	%

Weighted average DSCR		1.40

The Company has been liquidating much of its whole commercial mortgage loan portfolio so that it can redeploy the proceeds into higher yielding assets and for the three and nine months ended September 30, 2001, the Company sold $1.9 million and $7.6 million, respectively of commercial mortgage loans. For the year ended December 31, 2000, the Company sold $53.1 million of commercial mortgage loans. At September 30, 2001, the Company’s whole commercial real estate loan portfolio had been reduced to $86.2 million from $106.4 million at December 31, 2000.

Small Business Finance

On December 31, 2000, the Company acquired 95% of BLC Financial Services, Inc. in a “going private” buyout transaction for $95.2 million. The Company issued approximately 4.1 million shares, or $86.1 million of new equity, and paid $9.1 million in cash to acquire BLC, which is now BLX.

As part of the transaction, the Company recapitalized its Allied Capital Express operations as an independently managed private portfolio company and merged it into BLX. As part of the recapitalization, the Company contributed certain assets, including the online rules-based underwriting technology and fixed assets, and transferred 37 employees into the private portfolio company. Upon completion of the transaction, the Company’s investment in BLX totaled $204.1 million and consisted of $74.5 million of 25% subordinated debt, $25.1 million of preferred stock, and $104.5 million of common stock. BLX is included in the private finance portfolio.

At September 30, 2001, BLX had a 3-year $117.5 million revolving credit facility (“BLX Credit Facility”), which was increased to $124.0 million in October 2001. As the controlling shareholder of BLX, the Company has provided an unconditional guaranty to the BLX Credit Facility lenders in an amount of up to 50% of the total obligations (consisting of principal, accrued interest and other fees) of BLX on the line of credit. The amount guaranteed by the Company at September 30, 2001 was $50.3 million. This guaranty can be called by the lenders only in the event of a default by BLX. BLX was in compliance with the terms of the BLX Credit Facility at September 30, 2001.

Prior to its contribution to BLX, Allied Capital Express loan activity and yields as of and for the year ended December 31, 2000 was as follows:


($ in millions)	2000

Portfolio at Value	$	—




New Investments	$	151.6




Repayments	$	11.6




Sales	$	128.5




Yield		—

Allied Capital Express loan origination activity for 2000 increased due to the opening of new regional office locations and from opportunities created by the Company’s Internet site launched in the fall of 1999. Loans in the Allied Capital Express program were originated for sale; therefore, the increase in loan sales was the result of the increase in originations. In addition, beginning in 1999, the Company began to sell 90% of the unguaranteed portion of SBA 7(a) loans through a structured finance agreement with a commercial paper conduit. Allied Capital Express targeted small commercial real estate loans that were, in many cases, originated in conjunction with SBA 7(a) loans. SBA 7(a) loans were originated with variable interest rates priced at spreads ranging from 1.75% to 2.75% over the prime lending rate.

RESULTS OF OPERATIONS

Comparison of Nine Months Ended September 30, 2001 and 2000

The following table summarizes Allied Capital’s operating results for the nine months ended September 30, 2001 and 2000.



			For the Nine
			Months Ended
			September 30,
											Percent
			2001		2000			Change			Change
($ in thousands, except per share amounts)
Interest and Related Portfolio Income




	Interest and dividends		$	173,722	$	129,768		$	43,954			34	%




	Premiums from loan dispositions			2,070		10,752			(8,682	)		(81	%)




	Fees and other income			30,652		9,334			21,318			228	%

		Total interest and related portfolio income		206,444		149,854			56,590			38	%

Expenses




	Interest			47,974		41,645			6,329			15	%




	Employee			22,269		19,506			2,763			14	%




	Administrative			10,166		10,711			(545	)		(5	%)

		Total operating expenses		80,409		71,862			8,547			12	%

		Net operating income before net realized and unrealized gains		126,035		77,992			48,043			62	%

Net Realized and Unrealized Gains




	Net realized gains			8,339		23,095			(14,756	)		(64	%)




	Net unrealized gains			23,463		(267	)		23,730			8,888	%

		Total net realized and unrealized gains		31,802		22,828			8,974			39	%

Net increase in net assets resulting from operations			$	157,837	$	100,820		$	57,017			57	%

Diluted net operating income per share			$	1.39	$	1.10		$	0.29			26	%

Diluted earnings per share			$	1.74	$	1.42		$	0.32			23	%

Weighted average shares outstanding — diluted				90,864		70,777			20,087			28	%

Total interest and related portfolio income is primarily a function of the level of interest income earned and the balance of portfolio assets. In addition, total interest and related portfolio income includes dividend income, premiums from loan dispositions, prepayment premiums, and fees and other income.



	For the Nine
	Months Ended
	September 30,

	2001		2000
($ in millions, except per share amounts)
Total Interest and Related Portfolio Income	$	206.4	$	149.9




Per share	$	2.27	$	2.11

The increase in interest income earned results primarily from continued growth of the Company’s investment portfolio and the Company’s focus on increasing its overall portfolio yield. The Company’s investment portfolio, excluding non-interest bearing equity interests in portfolio companies, increased by 17% to $1,732.0 million at September 30, 2001 from $1,485.0 million at September 30, 2000. The weighted average yield on the interest bearing investments in the portfolio at September 30, 2001 and 2000 was as follows:



	September 30,

	2001		2000

Private Finance		14.5%		14.6%




Commercial Real Estate Finance		13.5%		13.2%




Small Business Finance		—%		12.3%




Total Portfolio		14.1%		13.9%

Included in premiums from loan dispositions are premiums from loan sales and premiums received on the early repayment of loans. Premiums from loan sales were $0.5 million and $8.7 million for the nine months ended September 30, 2001 and 2000, respectively. Premium income results from the premium paid by purchasers on loans sold less the origination commissions associated with the loans sold. For the nine months ended September 30, 2000, premiums from loan sales resulted primarily from the sale of loans originated through Allied Capital Express. Upon the merger of the Allied Capital Express operations into BLX, the premium from loan sales earned historically is intended to be replaced with interest income earned by the Company from its subordinated debt investment in BLX as well as fees earned from its guaranty of the BLX Credit Facility and its management contract with BLX.

Prepayment premiums were $1.6 million and $2.1 million for the nine months ended September 30, 2001 and 2000, respectively. While the scheduled maturities of private finance and commercial real estate loans range from five to ten years, it is not unusual for the Company’s borrowers to refinance or pay off their debts to the Company ahead of schedule. Because the Company seeks to finance primarily seasoned, performing companies, such companies at times can secure lower cost financing as their balance sheets strengthen, or as more favorable interest rates become available. Therefore, the Company generally structures its loans to require a prepayment premium for the first three to five years of the loan.

Fees and other income include diligence, financial structuring, management and guaranty fees of $29.7 million and $5.4 million for the nine months ended September 30, 2001 and 2000, respectively. Fees and other income for the nine months ended September 30, 2001 include fees earned from the SunSource buyout transaction totaling $4.4 million discussed above. The Company continues to emphasize new financial structuring, diligence and portfolio management activity that generates additional fee income. Because individual fees for any one activity can vary in size, fee income may vary substantially from quarter to quarter.

Operating expenses include interest, employee and administrative expenses. The Company’s single largest expense is interest on indebtedness. The fluctuations in interest expense during the nine months ended September 30, 2001 and 2000 are attributable to changes in the level of borrowings by the Company and its subsidiaries under various notes payable and debentures and revolving credit

facilities. The Company’s borrowing activity and weighted average interest cost, including fees and closing costs, were as follows:



	At and for the
	Nine Months
	Ended
	September 30,

	2001			2000
($ in millions)
Total Outstanding Debt	$	924.5		$	762.2




Average Outstanding Debt	$	821.9		$	684.3




Weighted Average Cost		7.1	%		8.1	%




BDC Asset Coverage*		255	%		236	%


*	As a BDC, the Company is generally required to maintain a ratio of 200% of total assets to total borrowings.

Employee expenses include salaries, employee benefits and formula and cut-off awards. The increase in salaries and employee benefits for the periods presented reflects wage increases and the experience level of employees hired. Total employees were 95 and 136 at September 30, 2001 and 2000, respectively. As part of the recapitalization of Allied Capital Express discussed above, employees of the Company were transferred to the portfolio company at the end of 2000. Expenses related to employees dedicated to Allied Capital Express are reflected in employee expense for the nine months ended September 30, 2000. The formula and cut-off awards totaled $4.8 million for the nine months ended September 30, 2000. The formula award vested over a three-year period which ended on December 31, 2000.

Administrative expenses include the leases for the Company’s headquarters in Washington, DC, and its regional offices, travel costs, stock record expenses, directors’ fees, legal and accounting fees and various other expenses. Administrative expenses for the nine months ended September 30, 2000 included expenses related to Allied Capital Express regional offices. The cost of these regional offices was transferred to BLX at the beginning of 2001. For the nine months ended September 30, 2001 and 2000, employee and administrative costs as a percentage of total interest and related portfolio income less interest expense plus net realized and unrealized gains was 17% and 19%, respectively.

Net realized gains resulted from the sale of equity securities associated with certain private finance investments and the realization of unamortized discount resulting from the sale and early repayment of private finance loans, commercial mortgage loans and Purchased CMBS bonds, offset by losses on investments. Realized gains and losses were as follows:



	For the Nine
	Months Ended
	September 30,

	2001			2000
($ in millions)
Realized Gains	$	9.9		$	24.7




Realized Losses		(1.6	)		(1.6	)

Net Realized Gains	$	8.3		$	23.1

Net Unrealized Gains	$	23.5		$	(0.3	)

Realized gains for the nine months ended September 30, 2001 primarily resulted from transactions involving three private finance portfolio companies, FTI Consulting, Inc. ($4.6 million),

SunSource Inc. ($2.5 million) as discussed above, and Southwest PCS, LLC ($0.8 million), and the sale of Purchased CMBS BB bonds ($1.7 million). Realized gains for the nine months ended September 30, 2000 resulted primarily from transactions involving seven portfolio companies. The Company reversed previously recorded unrealized appreciation totaling $3.8 million and $6.2 million when gains were realized for the nine months ended September 30, 2001 and 2000, respectively.

Realized losses for the nine months ended September 30, 2001 and 2000 resulted from the continued liquidation of the Company’s whole loan commercial real estate portfolio, as well as other small losses in the private finance portfolio. The Company reversed previously recorded unrealized depreciation totaling $1.5 million and $1.3 million when the related losses were realized in the nine months ended September 30, 2001 and 2000, respectively.

Net unrealized gains for the nine months ended September 30, 2001 and 2000 consisted of valuation changes resulting from the Board of Directors’ valuation of the Company’s assets and the effect of reversals of unrealized appreciation or depreciation resulting from realized gains or losses.

The Company increased the value of its equity investment in BLX by $15.5 million at March 31, 2001. During the first quarter, BLX secured a 3-year $117.5 million revolving credit facility and completed a $65 million securitization of unguaranteed SBA 7(a) loans. As a result of the elimination of the refinancing risk that existed at the time of the merger, and BLX’s progress in merger integration, the Company increased the value of its equity investment. The Company also increased the value of its investment in Wyo-Tech Acquisition Corporation by $8.8 million and $28.3 million at March 31, 2001 and September 30, 2001, due to its continued growth and positive performance. In addition to BLX and Wyo-Tech, the Company increased the value of other portfolio companies by $11.3 million in total for the nine months ended September 30, 2001. These companies increased in value because of continued positive performance, and valuation data that would indicate that a valuation increase was necessary.

During the nine months ended September 30, 2001, the Company reversed previously recorded unrealized appreciation totaling $8.9 million on investments that the Company believed required adjustment based upon the portfolio company’s performance in a weaker economy or a lower valuation multiple at which these companies would be expected to be sold in today’s economy.

During the nine months ended September 30, 2001, the Company decreased the value of its common equity investments in Startec Global Communications Corporation by $3.0 million at March 31, 2001, and decreased the value of its debt investment in NETtel Communications, Inc. by $5.0 million at March 31, 2001 and $2.0 million at September 30, 2001. In addition, the Company decreased the value of other portfolio companies by a total of $19.2 million for the nine months ended September 30, 2001.

At September 30, 2001, net unrealized appreciation in the portfolio totaled $42.8 million and was composed of unrealized appreciation of $97.1 million, resulting primarily from appreciated equity interests in portfolio companies, and unrealized depreciation of $54.3 million, resulting primarily from underperforming loan and equity interests in the portfolio. Net realized and unrealized gains can vary substantially on a quarterly basis.

The Company employs a standard grading system for the entire portfolio. Grade 1 is used for those investments from which a capital gain is expected. Grade 2 is used for investments performing in accordance with plan. Grade 3 is used for investments that require closer monitoring; however, no loss of interest or principal is expected. Grade 4 is used for investments for which some loss of contractually due interest is expected, but no loss of principal is expected. Grade 5 is used for investments for which some loss of principal is expected and the investment is written down to net realizable value.

At September 30, 2001, the Company’s portfolio was graded as follows:


	Portfolio		Percentage of
Grade	at Value		Total Portfolio

	(in millions)




1	$	479.4		22.1	%




2		1,561.7		71.8	%




3		57.3		2.6	%




4		48.0		2.2	%




5		28.0		1.3	%

	$	2,174.4		100.0	%

Grade 5 private finance investments at September 30, 2001, totaled $26.0 million, at value, or 1.2%, of the Company’s total portfolio. Total Grade 4 and 5 assets as a percentage of the total portfolio at value at September 30, 2001 and December 31, 2000 were 3.5% and 5.7%, respectively. The Company expects that a certain number of portfolio companies will be in the Grade 4 or 5 category from time to time. Part of the business of private finance is working with troubled portfolio companies to improve their businesses and protect the Company’s investment. The number of portfolio companies and related investment amount included in Grade 4 and 5 may fluctuate significantly from quarter to quarter as the Company helps these companies work through their problems. The Company continues to follow its historical practices of working with a troubled portfolio company in order to recover the maximum amount of the Company’s investment, but records unrealized depreciation for the expected full amount of the potential loss when such exposure is identified.

At September 30, 2001, delinquencies in the underlying collateral pool for the Company’s CMBS portfolio were 0.30%. The yield used to accrue interest on this portfolio assumes a 1% loss rate on the entire underlying collateral mortgage pool, and as of September 30, 2001, no losses have been realized. The Company has been closely monitoring the performance of all of the loans in the underlying collateral pools securing its CMBS investments since September 11, 2001, particularly the hospitality properties which constitute 7% of the collateral loans. The Company has surveyed and analyzed the performance of the hotel properties and has currently determined that an increase in delinquencies for this property type should be expected in the near term. The Company will continue to closely monitor this asset class as well as all of the loans securing its CMBS investments. The Company believes that the current performance of the underlying loans would not require an adjustment to its yield assumptions, but these assumptions will continue to be monitored and adjusted in the future, if necessary.

For the total investment portfolio, loans greater than 120 days delinquent were $61.6 million at value at September 30, 2001, or 2.8% of the total portfolio. Included in this category are loans valued at $10.4 million that are fully secured by real estate. Loans greater than 120 days delinquent generally do not accrue interest. Loans greater than 120 days delinquent at December 31, 2000 were $56.4 million at value, or 3.2% of the total portfolio, which included $13.3 million that were fully secured by real estate. As a provider of long-term privately negotiated investment capital, it is not atypical to defer payment of principal or interest from time to time. As a result, the amount of the portfolio that is greater than 120 days delinquent may vary from quarter to quarter. The terms of the private finance agreements frequently provide an opportunity for portfolio companies to restructure their debt and equity capital. During such restructuring, the Company may not receive or accrue interest or dividend payments. The investment portfolio is priced to provide current returns for our shareholders assuming that a portion of the portfolio at any time may not be accruing interest

currently. The Company also prices its investments for a total return including current interest or dividends plus capital gains from the sale of equity securities. Therefore, the amount of loans greater than 120 days delinquent is not necessarily an indication of future principal loss or loss of anticipated investment return. The Company’s portfolio grading system is used as a means to assess loss of investment return (Grade 4 assets) or loss of investment principal (Grade 5 assets).

The Company has elected to be taxed as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (“Code”). As long as the Company qualifies as a RIC, the Company is not taxed on its investment company taxable income or realized capital gains, to the extent that such income or gains are distributed, or deemed to be distributed, to shareholders on a timely basis. Annual tax distributions may differ from NIA for the fiscal year due to timing differences in the recognition of income and expenses, returns of capital and net unrealized appreciation or depreciation, which are not included in taxable income.

In order to maintain its RIC status, the Company must, in general, (1) continue to qualify as a BDC; (2) derive at least 90% of its gross income from dividends, interest, gains from the sale of securities and other specified types of income; (3) meet investment diversification requirements as defined in the Code; and (4) distribute annually to shareholders at least 90% of its investment company taxable income as defined in the Code. The Company intends to take all steps necessary to continue to meet the RIC qualifications. However, there can be no assurance that the Company will continue to qualify for such treatment in future years.

The weighted average common shares outstanding used to compute basic earnings per share were 89.3 million and 70.6 million for the nine months ended September 30, 2001 and 2000, respectively. The increases in the weighted average shares reflect the issuance of new shares and the issuance of shares pursuant to a dividend reinvestment plan.

All per share amounts included in management’s discussion and analysis have been computed using the weighted average shares used to compute diluted earnings per share, which were 90.9 million and 70.8 million for the nine months ended September 30, 2001 and 2000, respectively.

RESULTS OF OPERATIONS

Comparison of Three Months Ended September 30, 2001 and 2000

The following table summarizes Allied Capital’s operating results for the three months ended September 30, 2001 and 2000.



			For the Three
			Months Ended
			September 30,
											Percent
			2001		2000			Change			Change
($ in thousands, except per share amounts)
Interest and Related Portfolio Income




	Interest and dividends		$	60,023	$	48,054		$	11,969			25	%




	Premiums from loan dispositions			339		2,909			(2,570	)		(88	%)




	Fees and other income			12,272		5,029			7,243			144	%

		Total interest and related portfolio income		72,634		55,992			16,642			30	%

Expenses




	Interest			16,093		15,054			1,039			7	%




	Employee			8,213		6,343			1,870			29	%




	Administrative			4,139		3,876			263			7	%

		Total operating expenses		28,445		25,273			3,172			13	%

		Net operating income before net realized and unrealized gains		44,189		30,719			13,470			44	%

Net Realized and Unrealized Gains




	Net realized gains			3,348		8,054			(4,706	)		(58	%)




	Net unrealized gains			12,166		(2,324	)		14,490			(623	%)

		Total net realized and unrealized gains		15,514		5,730			9,784			171	%

Net increase in net assets resulting from operations			$	59,703	$	36,449		$	23,254			64	%

Diluted net operating income per share			$	0.47	$	0.40		$	0.07			18	%

Diluted earnings per share			$	0.63	$	0.48		$	0.15			31	%

Weighted average shares outstanding — diluted				94,585		76,133			18,452			24	%

Net increase in net assets resulting from operations (NIA) results from total interest and related portfolio income earned, less total expenses incurred in the operations of the Company, plus net realized and unrealized gains or losses. In addition to the discussion of the comparison of the three months ended September 30, 2001 to the three months ended September 30, 2000 that follows, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Comparison of Nine Months Ended September 30, 2001 and 2000” above for additional discussion regarding the nature of and reasons for fluctuations in income and expense items in the Company’s operating results.

includes dividend income, premiums from loan dispositions, prepayment premiums, and fees and other income.



	For the Three
	Months Ended
	September 30,

	2001		2000
($ in millions, except per share amounts)
Total Interest and Related Portfolio Income	$	72.6	$	56.0




Per share	$	0.77	$	0.73

Included in premiums from loan dispositions are premiums from loan sales and premiums received on the early repayment of loans. Premium income results from the premium paid by purchasers on loans sold less the origination commissions associated with the loans sold. For the three months ended September 30, 2000, premiums from loan sales resulted primarily from the sale of loans originated through Allied Capital Express. Upon the merger of the Allied Capital Express operations into BLX, the premium from loan sales earned historically is intended to be replaced with interest income earned by the Company from its subordinated debt investment in BLX as well as fees earned from its guaranty of the BLX Credit Facility and its management contract with BLX.

Fees and other income include diligence, financial structuring, management and guaranty fees of $11.6 million and $3.4 million for the three months ended September 30, 2001 and 2000, respectively. During the three months ended September 30, 2001 the Company received fees related to the SunSource buyout transaction of $4.4 million as discussed above. Management and guaranty fees from other controlled portfolio companies were $4.5 million and other diligence, structuring and advisory fees were $2.7 million for the three months ended September 30, 2001.

Operating expenses include interest, employee and administrative expenses. The Company’s single largest expense is interest on indebtedness. The fluctuations in interest expense during the three months ended September 30, 2001 and 2000 are attributable to changes in the level of borrowings by the Company and its subsidiaries under various notes payable and debentures and revolving credit facilities. The Company’s borrowing activity and weighted average interest cost, including fees and closing costs, were as follows:



	At and for the
	Three Months
	Ended
	September 30,

	2001			2000
($ in millions)
Total Outstanding Debt	$	924.5		$	762.2




Average Outstanding Debt	$	862.4		$	734.3




Weighted Average Cost		7.1	%		8.1	%




BDC Asset Coverage*		255	%		236	%


*	As a BDC, the Company is generally required to maintain a ratio of 200% of total assets to total borrowings.

Administrative expenses include the leases for the Company’s headquarters in Washington, DC, and its regional offices, travel costs, stock record expenses, directors’ fees, legal and accounting fees and various other expenses. Administrative expenses for the three months ended September 30, 2000 included expenses related to Allied Capital Express regional offices. The cost of these regional offices was transferred to BLX at the beginning of 2001. For the three months ended September 30, 2001 and 2000, employee and administrative costs as a percentage of total interest and related portfolio income less interest expense plus net realized and unrealized gains were 17% and 19%, respectively.



	For the Three
	Months Ended
	September 30,

	2001			2000
($ in millions)
Realized Gains	$	3.3		$	8.7




Realized Losses		(0.0	)		(0.7	)

Net Realized Gains	$	3.3		$	8.0

Net Unrealized Gains	$	12.2		$	(2.3	)

For further discussion of net realized and unrealized gains and losses, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Comparison of Nine Months Ended September 30, 2001 and 2000” above.

The weighted average common shares outstanding used to compute basic earnings per share were 92.9 million and 75.5 million for the three months ended September 30, 2001 and 2000, respectively. The increases in the weighted average shares reflect the issuance of new shares and the issuance of shares pursuant to a dividend reinvestment plan.

All per share amounts included in management’s discussion and analysis have been computed using the weighted average shares used to compute diluted earnings per share, which were 94.6 million and 76.1 million for the three months ended September 30, 2001 and 2000, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

At September 30, 2001, the Company had $3.1 million in cash and cash equivalents. The Company invests otherwise uninvested cash in U.S. government-or agency-issued or guaranteed securities that are backed by the full faith and credit of the United States, or in high quality, short-

term repurchase agreements fully collateralized by such securities. The Company’s objective is to manage to a low cash balance and fund new originations with its credit facilities.

Debt

The Company had outstanding debt at September 30, 2001 as follows:


								Annual
				Facility		Amount		Interest
				Amount		Outstanding		Cost(1)
($ in millions)
Notes payable and debentures:




	Unsecured long-term notes			$	544.0	$	544.0		7.9%




	SBA debentures				101.8		87.0		8.0%




	Auction rate reset note				80.8		80.8		5.4%




	OPIC loan				5.7		5.7		6.6%

			Total notes payable and debentures	$	732.3	$	717.5		7.6%

Revolving credit facilities:




		Revolving line of credit			467.5		207.0		5.5%

			Total debt	$	1,199.8	$	924.5		7.1%


(1)	The annual interest cost includes the cost of commitment fees and other facility fees.

Unsecured Long-term Notes. The Company has issued long-term debt to institutional lenders, primarily insurance companies. The notes have five- or seven-year maturities, with maturity dates beginning in 2003. The notes require payment of interest only semi-annually, and all principal is due upon maturity.

SBA Debentures. The Company, through its SBIC subsidiary, has debentures payable to the SBA with terms of ten years. The notes require payment of interest only semi-annually, and all principal is due upon maturity. The Company may currently borrow up to $101.8 million from the SBA under the SBIC program. At September 30, 2001, the Company has a commitment to borrow up to an additional $14.8 million above the amount outstanding from the SBA. The commitment expires on September 30, 2005.

Auction Rate Reset Note. The Company has a $80.8 million Auction Rate Reset Senior Note Series A that matures on December 2, 2002 and bears interest at the three-month London Inter-Bank Offer Rate (“LIBOR”) plus 1.75% which adjusts quarterly. Interest is due quarterly and the Company, at its option, may pay or defer and capitalize such interest payments. The amount outstanding on the note will increase as interest due is deferred and capitalized. As a means to repay the note, the Company has entered into an agreement to issue $80.8 million of debt, equity or other securities in one or more public or private transactions, or prepay the Auction Rate Reset Note, on or before August 31, 2002. If the note is prepaid, the Company will pay a fee equal to 0.5% of the aggregate amount of the note outstanding.

Revolving Line of Credit. As of September 30, 2001, the Company has a $467.5 million unsecured revolving line of credit that expires in August 2003 with the right to extend maturity for one additional year at the Company’s sole option, under substantially similar terms. This facility may be expanded up to $600 million. At the Company’s option, the credit facility bears interest at a rate equal to (i) the one-month LIBOR plus 1.25% or (ii) the higher of (a) the Bank of America, N.A. prime rate or (b) the Federal Funds rate plus 0.50%. The credit facility requires monthly payments of interest, and all principal is due upon maturity.

Equity Capital and Dividends

The Company raises debt and equity capital for continued investment in its portfolio. Because the Company is a RIC, it distributes its income and requires external capital for growth. Because the Company is a BDC, it is limited in the amount of debt capital it may use to fund its growth, since it is generally required to maintain a ratio of 200% of total assets to total borrowings, or approximately 1 to 1 debt to equity capital ratio.

To support its growth during the nine months ended September 30, 2001, the Company raised $237.0 million in new equity capital primarily through the sale of shares from its shelf registration statement. The Company issues equity from time to time when it has a clear use of proceeds for attractive investment opportunities. Historically, this process has enabled the Company to raise equity on an accretive basis for existing shareholders. At September 30, 2001, total shareholders’ equity had increased to $1.3 billion.

The Company’s Board reviews the dividend rate quarterly, and adjusts the quarterly dividend rate throughout the year as the Company’s earnings momentum builds. For the first, second and third quarter of 2001, the Board declared a $0.49, $0.50 and $0.51 per common share dividend, respectively. For the fourth quarter of 2001, the Board has declared a dividend of $0.51 per common share. Dividends are paid from the Company’s taxable income.

As a result of growth in ordinary taxable income combined with the increased size and diversity of the Company’s portfolio and its projected future capital gains, the Company’s Board of Directors will continue to evaluate whether to retain or distribute capital gains as they occur. The Company’s dividend policy allows the Company to continue to distribute some capital gains, but will also allow the Company to retain gains that exceed a normal capital gains distribution level, and therefore avoid any unusual spike in dividends in any one year. The dividend policy also enables the Board to selectively retain gains to support future growth.

The Company plans to maintain a strategy of financing its operations, dividend requirements and future investments with cash from operations, through borrowings under short- or long-term credit facilities or other debt securities, through asset sales, or through the sale or issuance of new equity capital. The Company maintains a matched-funding philosophy that focuses on matching the estimated maturities of its loan and investment portfolio to the estimated maturities of its borrowings. The Company will utilize its short-term credit facilities only as a means to bridge to long-term financing, which may result in temporary differences in the matching of estimated maturities. The Company evaluates its interest rate exposure on an ongoing basis. To the extent deemed necessary, the Company may hedge variable and short-term interest rate exposure through interest rate swaps or other techniques. At September 30, 2001, the Company’s debt to equity ratio was 0.71 to 1 and weighted average cost of funds was 7.1%. There are no significant maturities of long-term debt until 2003. The Company believes that it has access to capital sufficient to fund its ongoing investment and operating activities, and from which to pay dividends.

INVESTMENT CONSIDERATIONS

Investing in the Company involves a number of significant risks and other factors relating to the structure and investment objective of the Company. As a result, there can be no assurance that the Company will achieve its investment objective.

Investing in Private Companies Involves a High Degree of Risk. Our portfolio consists primarily of long-term loans to and investments in private companies. Investments in private businesses involve a high degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. There is generally no publicly available information about the companies in which we invest, and we rely significantly on the diligence of our employees and agents to obtain information in connection with our investment decisions. In addition, some smaller businesses have narrower product lines and market shares than their competition, and may be more vulnerable to customer preferences, market conditions or economic downturns, which may adversely affect the return on, or the recovery of, our investment in such businesses.

Economic Recessions or Downturns Could Impair Our Portfolio Companies and Harm Our Operating Results. Although our investment strategy focuses on investment in companies in less cyclical industries, some of the companies in which we have made or will make investments may be susceptible to economic slowdowns or recessions. An economic slowdown may impact the ability of a company to engage in a liquidity event or repay our loans. These conditions could lead to financial losses in our portfolio and a decrease in our revenues, net income and assets.

On September 11, 2001, a terrorist attack occurred at the World Trade Center in New York City and the Pentagon in Washington, D.C. This incident has had pervasive negative impacts on several U.S. industries and on the U.S. economy in general. While we were not directly impacted by the event, we believe that we could be impacted indirectly. The indirect impacts may include our need to provide a deferral of interest payments to certain portfolio companies that may be affected by the resulting economic slow down and a decrease in the pace of our investment activity.

Our business of making private equity investments and positioning them for liquidity events also may be impacted by current and future market conditions. The absence of a robust bank lending environment may slow the amount of private equity investment activity generally. As a result, the pace of our investment activity may slow. In addition, significant changes in the capital markets could have an effect on the valuations of private companies and on the potential for liquidity events involving such companies. This could affect the amount and timing of gains realized on our investments. We cannot assure you that the events of September 11, 2001 and the reaction to them may not have other material and adverse implications for us and for the market in general.

Our Financial Results Could Be Negatively Affected if BLX Fails to Perform as Expected. Business Loan Express, Inc. (“BLX”) is our largest portfolio investment. Our financial results could be negatively affected if BLX, as a portfolio company, fails to perform as expected. At September 30, 2001, the investment totaled $225.5 million, or 10% of total assets. In addition, as controlling shareholder of BLX, we have provided an unconditional guaranty to BLX’s credit facility lenders in an amount equal to 50% of BLX’s total obligations on its $117.5 million unsecured revolving credit facility. The amount we have guaranteed at September 30, 2001 was $50.3 million. This guaranty can only be called in the event of a default by BLX.

Our Borrowers May Default on Their Payments. We make unsecured, subordinated loans and invest in equity securities, which may involve a higher degree of repayment risk. We primarily invest in and lend to companies that may have limited financial resources and that may be unable to obtain financing from traditional sources. Numerous factors may affect a borrower’s ability to repay its loan, including the failure to meet its business plan, a downturn in its industry or negative economic

conditions. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in any collateral for the loan.

Our Portfolio of Investments is Illiquid. We acquire most of our investments directly from private companies. The majority of the investments in our portfolio will be subject to restrictions on resale or otherwise have no established trading market. The illiquidity of most of our portfolio may adversely affect our ability to dispose of loans and securities at times when it may be advantageous for us to liquidate such investments.

Our Private Finance Investments May Not Produce Capital Gains. Private finance investments are typically structured as debt securities with a relatively high fixed rate of interest and with an equity feature such as conversion rights, warrants or options. As a result, private finance investments generate interest income from the time they are made, and may also produce a realized gain from an accompanying equity feature. We cannot be sure that our portfolio will generate a current return or capital gains.

Investments in Non-Investment Grade Commercial Mortgage-Backed Securities May Be Illiquid and May Have a Higher Risk of Default. The commercial mortgage-backed securities (“CMBS”) in which we invest are non-investment grade, which means that nationally recognized statistical rating organizations rate them below the top four investment-grade rating categories (i.e., “AAA” through “BBB”), and are sometimes referred to as “junk bonds.” The non-investment grade CMBS tend to be less liquid, may have a higher risk of default and may be more difficult to value. Non-investment grade securities usually provide a higher yield than do investment-grade bonds, but with the higher return comes greater risk. Non-investment grade securities are considered speculative, and their capacity to pay principal and interest in accordance with the terms of their issue is not ensured.

Our Portfolio Investments are Recorded at Fair Value as Determined by the Board of Directors in Absence of Readily Ascertainable Public Market Values. Pursuant to the requirements of the Investment Company Act of 1940 (“1940 Act”), the Board of Directors is required to value each asset quarterly, and we are required to carry our portfolio at fair value as determined by the Board of Directors. Since there is typically no public market for the loans and equity securities of the companies in which we make investments or the CMBS that we purchase, our Board of Directors estimates the fair value of these investments pursuant to a written valuation policy and a consistently applied valuation process. Unlike banks, we are not permitted to provide a general reserve for anticipated loan losses; we are instead required by the 1940 Act to specifically value each individual investment and record an unrealized loss for an asset that we believe has become impaired. Without a readily ascertainable market value, the estimated value of our portfolio of investments may differ significantly from the values that would be placed on the portfolio if there existed a ready market for the investments. We adjust quarterly the valuation of our portfolio to reflect the Board of Directors’ estimate of the current fair value of each investment in our portfolio. Any changes in estimated value are recorded in the Company’s statement of operations as “Net unrealized gains (losses).”

We Borrow Money Which Magnifies the Potential for Gain or Loss on Amounts Invested and May Increase the Risk of Investing in Our Company. We borrow from, and issue senior debt securities to, banks, insurance companies and other lenders. Lenders of these senior securities have fixed dollar claims on our consolidated assets that are superior to the claims of our common shareholders. Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. If the value of our consolidated assets increases, then leveraging would cause the net asset value attributable to the Company’s common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset value

to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our consolidated income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.

At September 30, 2001, the Company had $924.5 million of outstanding indebtedness, bearing a weighted annual interest cost of 7.1%. In order for us to cover these annual interest payments on indebtedness, we must achieve annual returns on our assets of at least 2.9%.

We May Not Borrow Money Unless We Maintain Asset Coverage for Indebtedness of at Least 200% Which May Affect Returns to Shareholders. We must maintain asset coverage for a class of senior security representing indebtedness of at least 200%. Our ability to achieve our investment objective may depend in part on our continued ability to maintain a leveraged capital structure by borrowing from banks or other lenders on favorable terms. There can be no assurance that we will be able to maintain such leverage. If asset coverage declines to less than 200%, we may be required to sell a portion of our investments when it is disadvantageous to do so. As of September 30, 2001, our asset coverage for senior indebtedness was 255%.

Changes in Interest Rates May Affect Our Cost of Capital and Net Operating Income. Because we borrow money to make investments, our net operating income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our portfolio income. In periods of sharply rising interest rates, our cost of funds would increase, which would reduce our net operating income before net realized and unrealized gains. However, there would be no effect on the return, if any, that could be generated from our equity interests. We use a combination of long-term and short-term borrowings and equity capital to finance our investing activities. The Company utilizes its short-term credit facilities only as a means to bridge to long-term financing. Our long-term fixed-rate investments are financed primarily with long-term fixed-rate debt and equity. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

Because We Must Distribute Income, We Will Continue to Need Additional Capital to Grow. We will continue to need capital to fund incremental growth in our investments. Historically, we have borrowed from financial institutions and have issued equity securities. A reduction in the availability of new capital could limit our ability to grow. We must distribute at least 90% of our taxable net operating income excluding net realized long-term capital gains to our stockholders to maintain our regulated investment company (“RIC”) status. As a result such earnings will not be available to fund investment originations. We expect to continue to borrow from financial institutions and sell additional equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, it could limit our ability to grow, which could have a material adverse effect on the value of the Company’s common stock. In addition, as a business development company (“BDC”), we are generally required to maintain a ratio of at least 200% of total assets to total borrowings, which may restrict our ability to borrow in certain circumstances.

Loss of Pass-Through Tax Treatment Would Substantially Reduce Net Assets and Income Available for Dividends. We have operated the Company so as to qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (“Code”). If we meet source of income, diversification and distribution requirements, the Company qualifies for effective pass-through tax treatment. The Company would cease to qualify for such pass-through tax treatment

if it were unable to comply with these requirements, or if it ceased to qualify as a BDC under the 1940 Act. We also could be subject to a 4% excise tax and/or corporate level income tax if we fail to make required distributions as a RIC. If the Company ceased to qualify as a RIC, the Company would become subject to federal income tax as if it were an ordinary corporation, which would substantially reduce our net assets and the amount of income available for distribution to our shareholders.

We Operate in a Competitive Market for Investment Opportunities. We compete for investments with many other companies and individuals, some of whom have greater resources than we do. Increased competition would make it more difficult for us to purchase or originate investments at attractive prices. As a result of this competition, sometimes we may be precluded from making otherwise attractive investments.

Changes in the Law or Regulations that Govern the Company Could Have a Material Impact on the Company or Our Operations. We are regulated by the Securities and Exchange Commission and the SBA. In addition, changes in the laws or regulations that govern BDCs, RICs, real estate investment trusts (“REITs”) and SBICs may significantly affect our business. Any change in the law or regulations that govern our business could have a material impact on the Company or its operations. Laws and regulations may be changed from time to time, and the interpretations of the relevant laws and regulations also are subject to change.

Quarterly Results May Fluctuate and May Not Be Indicative of Future Quarterly Performance. The Company’s quarterly operating results could fluctuate and therefore, you should not rely on quarterly results to be indicative of the Company’s performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in the investment origination volume and fee income earned, variation in timing of prepayments, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the quantitative or qualitative disclosures about market risk since December 31, 2000.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is party to certain lawsuits in the normal course of business. While the outcome of these legal proceedings cannot at this time be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon the Company’s financial condition or results of operations.

Item 2. Changes in Securities and Use of Proceeds

During the three months ended September 30, 2001 ACC issued a total of 66,094 shares pursuant to a dividend reinvestment plan. This plan is not registered and relies on an exemption from registration in the Securities Act of 1933.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) List of Exhibits


Exhibit
Number		Description

	3(i)(a)(21)	Articles of Amendment and Restatement of the Articles of Incorporation.
	3(i)(b)(16)	Articles of Merger.
	3(i)(c)(17)	Amendment to the Amended and Restated Articles of Incorporation.
	3(ii)(10)	Bylaws.
	4.1(4)	Specimen certificate of the Company’s Common stock, par value $0.0001 per share. See exhibits 3(i) and 3(ii) for other instruments defining the rights of security holders.
	4.2(2)	Form of debenture between certain subsidiaries of the Company and the U.S. Small Business Administration.
	5	Not applicable.
	9	Not applicable.
	10.1(15)	Second Amended and Restated Credit Agreement, dated August 3, 2001.
	10.2(5)	Note Agreement dated as of April 30, 1998.
	10.3(3)	Loan Agreement between Allied I and Overseas Private Investment Corporation, dated April 10, 1995. Letter dated December 11, 1997 evidencing assignment of Loan Agreement from Allied I to the Company.
	10.4(8)	Note Agreement dated as of May 1, 1999.
	10.4a(10)	Note Agreement dated as of November 15, 1999.
	10.4b(13)	Note Agreement dated as of October 15, 2000.


Exhibit
Number		Description

	10.4c(18)	Auction Rate Reset Note Agreement, dated as of August 31, 2000 between the Company and Intrepid Funding Master Trust, a Delaware business trust administered by Banc of America Securities LLC; Forward Issuance Agreement, dated as of August 31, 2000, between the Company and Banc of America Securities LLC; Remarketing and Contingency Purchase Agreement, dated as of August 31, 2000 between the Company and Banc of America Securities LLC.
	10.4d(22)	Note Agreement, dated as of October 15, 2001.
	10.5(17)	Amendment and Consent Agreement to the Amended and Restated Credit Agreement dated December 11, 2000.
	10.6(4)	Sale and Servicing Agreement dated as of January 1, 1998 among Allied Capital CMT, Inc., Allied Capital Commercial Mortgage Trust 1998-1 and the Company and LaSalle National Bank Inc. and ABN AMRO Bank N.V.
	10.7(4)	Indenture dated as of January 1, 1998 between Allied Capital Commercial Mortgage Trust 1998-1 and LaSalle National Bank.
	10.8(4)	Amended and Restated Trust Agreement dated January 1, 1998 between Allied Capital CMT, Inc., LaSalle National Bank, Inc. and Wilmington Trust Company.
	10.9(4)	Guaranty dated as of January 1, 1998 by the Company.
	10.10a(14)	Employment agreement dated June 15, 2000 between the Company and William L. Walton.
	10.10b(14)	Employment agreement dated June 15, 2000 between the Company and Joan M. Sweeney.
	10.10c(17)	Employment agreement dated June 15, 2000 between the Company and John M. Scheurer.
	10.11(7)	Amended and Restated Deferred Compensation Plan dated December 30, 1998.
	10.11a(19)	Amendment to Deferred Compensation Plan dated October 18, 2000.
	10.11.b(22)	Amended and Restated Deferred Compensation Plan, dated May 15, 2001.
	10.12(6)	Amended Stock Option Plan.
	10.12a(9)	Allied Capital 401(k) Plan dated September 1, 1999.
	10.12b(19)	Amendment to 401(k) Plan dated December 31, 2000.
	10.13a(4)	Form of Custody Agreement with Riggs Bank N.A. with respect to safekeeping.
	10.13b(4)	Form of Custody Agreement with LaSalle National Bank.
	10.13(15)	Custodian agreement with LaSalle Bank National Association, dated July 9, 2001.
	10.14a(15)	Agreement and Plan of Merger dated June 18, 2001 by and among the Company, Allied Capital Lock Acquisition Corporation, and SunSource Inc.
	10.15(20)	Control Investor Guaranty Agreement, dated as of March 28, 2001, between the Company and Fleet National Bank, in its capacity as Administrative Agent for the Lenders and Business Loan Express, Inc.
	10.18(1)	Dividend Reinvestment Plan.
	11	Statement regarding computation of per share earnings is incorporated by reference to Note 8 to the Company’s Notes to the Consolidated Financial Statements contained in the Company’s 2000 Annual Report on Form 10-K for the year ended December 31, 2000.


Exhibit
Number		Description

	21	Subsidiaries of the Company and jurisdiction of incorporation/organization:


	(1)	Incorporated by reference to the exhibit of the same name filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.

	(2)	Incorporated by reference to the exhibit of the same name filed with Allied I’s Annual Report on Form 10-K for the year ended December 31, 1996.

	(3)	Incorporated by reference to Exhibit f.7 of Allied I’s Pre-Effective Amendment No. 2 filed with the registration statement on Form N-2 on January 24, 1996 (File No. 33-64629). Assignment to Company is incorporated by reference to Exhibit 10.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.

	(4)	Incorporated by reference to the exhibit of the same name to the Company’s registration statement on Form N-2 filed on the Company’s behalf with the Commission on May 5, 1998 (File No. 333-51899).

	(5)	Incorporated by reference to the exhibit of the same name filed with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 1998.

	(6)	Incorporated by reference to Exhibit A of the Company’s definitive proxy materials for the Company’s 2000 Annual Meeting of Stockholders filed with the Commission on March 29, 2000.

	(7)	Incorporated by reference to the exhibit of the same name filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1998.

	(8)	Incorporated by reference to the exhibit of the same name filed with the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 1999.

	(9)	Incorporated by reference to Exhibit 4.4 of the Allied Capital 401(k) Plan registration statement on Form S-8, filed on behalf of such Plan on October 8, 1999 (File No. 333-88681).


	(10)	Incorporated by reference to the exhibit of the same name filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 1999.

	(11)	Incorporated by reference to Appendix A to the Company’s registration statement on Form N-14 filed on the Company’s behalf with the Commission on November 6, 2000.

	(12)	Incorporated by reference to the exhibit of the same name to the Company’s registration statement on Form N-14 filed on the Company’s behalf with the Commission on November 6, 2000.

	(13)	Incorporated by reference to the exhibit of the same name to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2000.

	(14)	Incorporated by reference to the exhibit of the same name to the Company’s registration statement on Form N-2 (File No. 333-43534) filed on August 11, 2000.

	(15)	Incorporated by reference to the exhibit of the same name to the Company’s registration statement on Form N-2 filed on August 10, 2001 (File No. 333-67336).

	(16)	Incorporated by reference from Appendix B to the Company’s registration statement on Form N-14 filed on September 26, 1997 (File No. 333-36459).

	(17)	Incorporated by reference to the exhibit of the same name filed with the Company’s Post-Effective Amendment No. 2 to the registration statement on Form N-2 filed on March 21, 2001 (File No. 333-43534).


	(18)	Incorporated by reference to the exhibit of the same name filed with the Company’s Pre-Effective Amendment No. 1 to the registration statement on Form N-2 filed on September 12, 2000 (File No. 333-43534).

	(19)	Incorporated by reference to the exhibit of the same name filed with the Company’s Post-Effective Amendment No. 1 to the registration statement on Form N-2 filed on January 19, 2001 (File No. 333-43534).

	(20)	Incorporated by reference to the exhibit of the same name filed with the Company’s Post-Effective Amendment No. 3 to the registration statement on Form N-2 filed on May 15, 2001 (File No. 333-43534).

	(21)	Incorporated by reference to exhibit 3(i) filed with Allied Lending’s Annual Report on Form 10-K for the year ended December 31, 1996.

	(22)	Incorporated by reference to the exhibit of the same name filed with the Company’s Post-Effective Amendment No. 1 to the registration statement on Form N-2 filed on November 14, 2001 (File No. 333-67336).

(b) Reports on Form 8-K.

The Company filed no reports on Form 8-K during the quarter ended September 30, 2001.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.


	ALLIED CAPITAL CORPORATION
	(Registrant)


Dated: November 14, 2001		/s/ PENNI F. ROLL --------------------------------------------------- Chief Financial Officer