Edgar Filing: ALLIED CAPITAL CORP

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FORM 10-Q/A

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 March 31, 2002		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 May 2, 2002 there were 101,930,554 shares outstanding of the Registrant’s common stock, $0.0001 par value.

EXPLANATORY NOTE

This Form 10-Q/A amends the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2002, as filed with the Securities and Exchange Commission on May 8, 2002, and is being filed to include a report of the Registrant’s independent auditors regarding the review of the Registrant’s interim financial statements. In addition, the Form 10-Q/A includes disclosure regarding the filing of several class action lawsuits against the Registrant alleging violations of the securities laws.

ALLIED CAPITAL CORPORATION

FORM 10-Q INDEX


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements




		Consolidated Balance Sheet as of March 31, 2002 (unaudited) and December 31, 2001	1




		Consolidated Statement of Operations — For the Three Months Ended March 31, 2002 and 2001 (unaudited)	2




		Consolidated Statement of Changes in Net Assets — For the Three Months Ended March 31, 2002 and 2001 (unaudited)	3




		Consolidated Statement of Cash Flows — For the Three Months Ended March 31, 2002 and 2001 (unaudited)	4




		Consolidated Statement of Investments as of March 31, 2002 (unaudited) and December 31, 2001	5




		Notes to Consolidated Financial Statements	21




		Independent Accountants’ Review Report	36

PART II. OTHER INFORMATION




	Item 1. Legal Proceedings		37




	Item 6. Exhibits and Reports on Form 8-K		37




	Signatures		38

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET


			March 31,			December 31,
			2002			2001

(in thousands, except share amounts)			(Unaudited)




ASSETS




Portfolio at value:
	Private finance (cost: 2002-$1,568,704; 2001-$1,553,966)		$	1,604,891		$	1,595,072




	Commercial real estate finance (cost: 2002-$648,940; 2001-$732,636)			649,169			734,518

		Total portfolio at value		2,254,060			2,329,590

Other assets				142,500			130,234




Cash and cash equivalents				2,297			889

		Total assets	$	2,398,857		$	2,460,713





LIABILITIES AND SHAREHOLDERS’ EQUITY




Liabilities:




	Notes payable and debentures		$	876,056		$	876,056




	Revolving credit facility			57,000			144,750




	Accounts payable and other liabilities			77,460			80,784

		Total liabilities		1,010,516			1,101,590

Commitments and Contingencies




Preferred stock				7,000			7,000




Shareholders’ equity:




	Common stock, $0.0001 par value, 200,000,000 shares authorized; 100,764,535 and 99,607,396 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively			10			10




	Additional paid-in capital			1,380,501			1,352,688




	Notes receivable from sale of common stock			(27,272	)		(26,028	)




	Net unrealized appreciation on portfolio			32,468			39,981




	Distributions in excess of earnings			(4,366	)		(14,528	)

		Total shareholders’ equity		1,381,341			1,352,123

		Total liabilities and shareholders’ equity	$	2,398,857		$	2,460,713

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 Ended
			March 31,

			2002			2001
(in thousands, except per share amounts)

			(unaudited)




Interest and related portfolio income:




	Interest and dividends		$	64,973		$	54,875




	Premiums from loan dispositions			1,613			821




	Fees and other income			15,805			9,375

		Total interest and related portfolio income		82,391			65,071

Expenses:




	Interest			17,469			15,930




	Employee			8,035			6,446




	Administrative			3,018			2,967

		Total operating expenses		28,522			25,343

Net investment income before net realized and unrealized gains				53,869			39,728

Net realized and unrealized gains:




	Net realized gains			9,605			1,154




	Net unrealized gains (losses)			(7,513	)		11,146

		Total net realized and unrealized gains		2,092			12,300

Net increase in net assets resulting from operations			$	55,961		$	52,028

Basic earnings per common share			$	0.56		$	0.61

Diluted earnings per common share			$	0.55		$	0.60

Weighted average common shares outstanding — basic				99,977			85,504

Weighted average common shares outstanding — diluted				102,364			87,059

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 Three Months
			Ended March 31,

			2002			2001
(in thousands, except per share amounts)

			(unaudited)




Operations:




	Net investment income before net realized and unrealized gains		$	53,869		$	39,728




	Net realized gains			9,605			1,154




	Net unrealized gains (losses)			(7,513	)		11,146

		Net increase in net assets resulting from operations		55,961			52,028

Shareholder distributions:




	Common stock dividends			(53,259	)		(42,081	)




	Preferred stock dividends			(55	)		(55	)

		Net decrease in net assets resulting from shareholder distributions		(53,314	)		(42,136	)

Capital share transactions:




	Sale of common stock			19,950			9,950




	Issuance of common stock upon the exercise of stock options			6,293			2,904




	Issuance of common stock in lieu of cash distributions			1,572			1,785




	Net (increase) decrease in notes receivable from sale of common stock			(1,244	)		22

		Net increase in net assets resulting from capital share transactions		26,571			14,661

		Total increase in net assets	$	29,218		$	24,553

Net assets at beginning of period			$	1,352,123		$	1,029,692

Net assets at end of period			$	1,381,341		$	1,054,245

Net asset value per common share			$	13.71		$	12.26

Common shares outstanding at end of period				100,765			85,956

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

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS



				For the Three Months
				Ended March 31,

				2002			2001
(in thousands)

				(unaudited)




Cash flows from operating activities:




	Net increase in net assets resulting from operations			$	55,961		$	52,028
	Adjustments




		Portfolio investments			(80,040	)		(150,758	)




		Repayments of investment principal			31,013			30,281




		Proceeds from investment sales			125,099			35,187




		Change in accrued or reinvested interest and dividends			(13,258	)		(14,577	)




		Changes in other assets and liabilities			(10,033	)		(2,060	)




		Amortization of loan discounts and fees			(3,883	)		(2,668	)




		Depreciation and amortization			266			257




		Realized losses			3,320			746




		Net unrealized (gains) losses			7,513			(11,146	)

			Net cash provided by (used in) operating activities		115,958			(62,710	)

Cash flows from financing activities:




	Sale of common stock				19,950			9,950




	Collections of notes receivable from sale of common stock				217			1,501




	Common dividends and distributions paid				(51,687	)		(40,296	)




	Preferred stock dividends paid				(55	)		(55	)




	Net borrowings under notes payable and debentures				—			10,628




	Net borrowings under (repayments on) revolving line of credit				(87,750	)		86,500




	Other financing activities				4,775			1,425

			Net cash provided by (used in) financing activities		(114,550	)		69,653

Net increase in cash and cash equivalents				$	1,408		$	6,943

Cash and cash equivalents at beginning of period				$	889		$	2,449

Cash and cash equivalents at end of period				$	2,297		$	9,392

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

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INVESTMENTS



		March 31, 2002

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

ACE Products, Inc.	Loans	$	17,164	$	17,164

Acme Paging, L.P.	Loan		750		750
	Debt Securities		6,993		6,993
	Limited Partnership Interest		3,640		2,184

Advantage Mayer, Inc.	Debt Securities		10,947		10,947
	Warrants		—		—

Alderwoods Group, Inc.(1)	Debt Securities		6,129		6,129
	Common Stock (357,568 shares)		5,006		3,006

Allied Office Products, Inc.	Debt Securities		7,477		7,477
	Warrants		629		629

American Barbecue & Grill, Inc.	Warrants		125		—

American Healthcare Services, Inc.	Debt Securities		40,780		40,780
	Common Stock (79,567,042 shares)		1,000		100
	Guaranty ($915)		—		—

American Home Care Supply, LLC	Debt Securities		6,920		6,920
	Warrants		579		1,579

Aspen Pet Products, Inc.	Loans		14,816		14,816
	Preferred Stock (2,021 shares)		1,981		1,981
	Common Stock (1,400 shares)		140		140

ASW Holding Corporation	Warrants		25		25

Autania AG(1)	Debt Securities		4,460		4,460
	Common Stock (250,000 shares)		2,193		2,193

Avborne, Inc.	Debt Securities		12,959		6,584
	Warrants		1,180		—

Bakery Chef, Inc.	Loans		17,306		17,306

Blue Rhino Corporation(1)	Debt Securities		13,864		13,864
	Warrants		1,200		5,750

Border Foods, Inc.	Debt Securities		9,329		9,329
	Preferred Stock (50,919 shares)		2,000		2,000
	Warrants		665		665

Business Loan Express, Inc.	Loan		6,000		6,000
	Debt Securities		78,481		78,481
	Preferred Stock (25,111 shares)		25,111		25,111
	Common Stock (25,503,043 shares)		104,596		120,096
	Guaranty ($51,460 — See Note 3)		—		—

Camden Partners Strategic Fund II, L.P.	Limited Partnership Interest		1,785		1,829

CampGroup, LLC	Debt Securities		2,711		2,711
	Warrants		220		220


(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.



			March 31, 2002

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

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

Celebrities, Inc.		Loan		240		240
		Warrants		12		550

Colibri Holding Corporation		Loans		3,471		3,471
		Preferred Stock (237 shares)		248		248
		Common Stock (3,362 shares)		1,250		1,250
		Warrants		290		290

The Color Factory Inc.		Loan		6,882		6,882
		Preferred Stock (1,000 shares)		1,000		1,000
		Common Stock (980 shares)		6,535		8,035

Component Hardware Group, Inc.		Debt Securities		10,909		10,909
		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 (22,301 shares)		334		—
		Warrants		—		—

Cooper Natural Resources, Inc.		Debt Securities		1,782		1,782
		Preferred Stock (6,316 shares)		1,427		1,427
		Warrants		832		832

CorrFlex Graphics, LLC		Debt Securities		2,346		2,346
		Warrants		—		6,674
		Options		—		576

Coverall North America, Inc.		Loan		10,335		10,335
		Debt Securities		5,325		5,325
		Warrants		—		—

CPM Acquisition Corporation		Loan		9,754		9,754

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

CTT Holdings		Loan		1,432		1,432

Cumulus Media, Inc. (1)		Common Stock (397,922 shares)		7,131		7,131
		Warrants		186		186

CyberRep		Loan		1,145		1,145
		Debt Securities		14,375		14,375
		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		Series A Common Stock (34 shares)		—		—
		Series B Common Stock (6 shares)		8		—
		Series C Common Stock (10 shares)		22		—

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

eCentury Capital Partners, L.P.		Limited Partnership Interest		1,875		1,800


(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.



			March 31, 2002

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

EDM Consulting, LLC		Debt Securities	$	1,875	$	443
		Common Stock (140 shares)		250		—

El Dorado Communications, Inc.		Loans		306		306

Elexis Beta GmbH		Options		426		526

Elmhurst Consulting, LLC		Loan		9,767		9,767
		Common Stock (74 shares)		5,165		5,165
		Guaranty ($2,800)		—		—

Eparfin S.A.		Loan		29		29

E-Talk Corporation		Debt Securities		8,852		4,509
		Warrants		1,157		—

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

Executive Greetings, Inc.		Debt Securities		16,658		16,658
		Warrants		360		360

Fairchild Industrial Products		Debt Securities		5,889		5,889
	Company	Warrants		280		2,378

Foresite Towers, LLC		Equity Interest		15,500		15,500

Galaxy American		Debt Securities		48,863		39,211
	Communications, LLC	Options		—		—
		Guaranty ($750)		—		—

Garden Ridge Corporation		Debt Securities		27,006		27,006
		Preferred Stock (1,130 shares)		1,130		1,130
		Common Stock (188,400 shares)		613		613

GC-Sun Holdings II, LP (Kar Products, LP)		Loans		8,167		8,167

Gibson Guitar Corporation		Debt Securities		17,369		17,369
		Warrants		525		2,325

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

Global Communications, LLC		Loan		1,996		1,996
		Debt Securities		15,068		15,068
		Equity Interest		11,067		11,067
		Options		1,639		1,639

Grant Broadcasting Systems II		Warrants		87		5,976

Grotech Partners, VI, L.P.		Limited Partnership Interest		1,463		1,029

The Hartz Mountain Corporation		Debt Securities		27,474		27,474
		Common Stock (200,000 shares)		2,000		2,000
		Warrants		2,613		2,613


(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.



		March 31, 2002

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

HealthASPex, Inc.	Preferred Stock (1,451,380 shares)	$	4,900	$	4,011
	Preferred Stock (1,000,000 shares)		731		620
	Common Stock (1,451,380 shares)		4		—

The Hillman Companies Inc.	Debt Securities		40,546		40,546
	Common Stock (6,890,937 shares)		57,156		57,156

HMT, Inc.	Debt Securities		9,015		9,015
	Common Stock (300,000 shares)		3,000		3,000
	Warrants		1,155		1,155

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

Icon International, Inc.	Common Stock (35,228 shares)		1,219		1,519

Impact Innovations Group, LLC	Debt Securities		6,661		6,661
	Warrants		1,674		1,674

Intellirisk Management Corporation	Loans		22,568		22,568

International Fiber Corporation	Debt Securities		22,423		22,423
	Common Stock (1,029,069 shares)		5,483		6,982
	Warrants		550		700

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

Jakel, Inc.	Loan		23,369		23,369

JRI Industries, Inc.	Debt Securities		1,977		1,977
	Warrants		74		74

Julius Koch USA, Inc.	Debt Securities		759		759
	Warrants		259		7,000

Kirker Enterprises, Inc.	Warrants		348		3,501
	Equity Interest		4		4

Kirkland’s, Inc.	Debt Securities		7,200		7,200
	Preferred Stock (917 shares)		412		412
	Warrants		96		96

Kyrus Corporation	Debt Securities		7,595		7,595
	Warrants		348		348

Liberty-Pittsburgh Systems, Inc.	Debt Securities		3,491		3,491
	Common Stock (123,929 shares)		142		142

Litterer Beteiligungs-GmbH	Debt Securities		1,070		1,070
	Equity Interest		358		358

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		42


(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.



			March 31, 2002

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

Matrics, Inc.		Preferred Stock (511,876 shares)	$	500	$	500
		Warrants		—		—

MedAssets.com, Inc.		Debt Securities		15,114		15,114
		Preferred Stock (260,418 shares)		2,049		2,049
		Warrants		136		136

Mid-Atlantic Venture Fund IV, L.P.		Limited Partnership Interest		2,475		1,528

Midview Associates, L.P.		Warrants		—		—

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

MortgageRamp.com, Inc.		Common Stock (772,000 shares)		3,860		3,860

Morton Grove		Loan		16,356		16,356
	Pharmaceuticals, Inc.	Preferred Stock (106,947 shares)		5,000		9,000

Most Confiserie GmbH & Co KG		Loan		943		943

MVL Group, Inc.		Loan		16,138		15,916
		Debt Securities		14,924		14,924
		Warrants		643		643

NetCare, AG		Loan		760		760
		Common Stock (262,784 shares)		230		230

NETtel Communications, Inc.		Debt Securities		11,334		4,334

Nobel Learning Communities,		Debt Securities		9,679		9,679
	Inc.(1)	Preferred Stock (1,063,830 shares)		2,000		2,000
		Warrants		575		575

North American Archery, LLC		Loans		1,390		840
		Convertible Debentures		2,248		2,008
		Guaranty ($645)		—		—

Northeast Broadcasting Group, L.P.		Debt Securities		295		295

Novak Biddle Venture Partners III, L.P.		Limited Partnership Interest		420		420

Nursefinders, Inc.		Debt Securities		11,373		11,373
		Warrants		900		1,500

Onyx Television GmbH		Preferred Units (120,000 shares)		201		201

Opinion Research Corporation(1)		Debt Securities		14,227		14,227
		Warrants		996		996

Oriental Trading Company, Inc.		Loan		128		128
		Debt Securities		12,788		12,788
		Preferred Equity Interest		1,500		1,822
		Common Equity Interest		—		—
		Warrants		13		265


(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.



			March 31, 2002

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

Outsource Partners, Inc.		Debt Securities	$	24,021	$	24,021
		Warrants		826		826

Packaging Advantage		Debt Securities		11,610		11,610
	Corporation	Common Stock (200,000 shares)		2,000		2,000
		Warrants		963		963

Pico Products, Inc.		Loan		1,406		1,406

Polaris Pool Systems, Inc.		Debt Securities		10,658		10,658
		Warrants		1,050		1,050

Powell Plant Farms, Inc.		Loan		18,152		18,152

Proeducation GmbH		Loan		321		321

Professional Paint, Inc.		Debt Securities		22,086		22,086
		Preferred Stock (15,000 shares)		18,309		18,309
		Common Stock (110,000 shares)		69		3,069

Progressive International		Debt Securities		3,961		3,961
	Corporation	Preferred Stock (500 shares)		500		500
		Common Stock (197 shares)		13		13
		Warrants		—		—

Prosperco Finanz Holding AG		Debt Securities		5,276		5,276
		Common Stock (1,528 shares)		1,059		1,059
		Warrants		—		—

Raytheon Aerospace, LLC		Debt Securities		5,090		5,090
		Equity Interest		—		—

Redox Brands, Inc.		Debt Securities		9,556		9,556
		Warrants		584		584

Schwinn Holdings Corporation		Debt Securities		10,195		1,835

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

Simula, Inc.(1)		Loan		20,223		20,223

Soff-Cut Holdings, Inc.		Debt Securities		8,587		8,587
		Preferred Stock (300 shares)		300		300
		Common Stock (2,000 shares)		200		200
		Warrants		446		446

Southwest PCS, LLC		Loan		8,401		8,401

Spa Lending Corporation		Preferred Stock (28,672 shares)		424		367
		Common Stock (6,208 shares)		76		18

Staffing Partners Holding		Debt Securities		4,992		4,992
	Company, Inc.	Preferred Stock (414,600 shares)		2,073		2,073
		Common Stock (50,200 shares)		50		50
		Warrants		10		10

Startec Global Communications		Loan		22,815		22,815
	Corporation(1)	Debt Securities		21,286		10,301
		Common Stock (258,064 shares)		3,000		—
		Warrants		—		—


(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.



			March 31, 2002

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

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

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

Sure-Tel, Inc.		Loan		1,207		1,207
		Preferred Stock (1,116,902 shares)		4,642		4,642
		Warrants		662		662
		Options		—		—

Sydran Food Services II, L.P.		Debt Securities		12,973		12,973
		Equity Interest		3,909		3,909

Total Foam, Inc.		Debt Securities		262		127
		Common Stock (910 shares)		10		—

Tubbs Snowshoe		Debt Securities		3,917		3,917
	Company, LLC	Equity Interests		500		500
		Warrants		54		54

United Pet Group, Inc.		Debt Securities		9,017		9,017
		Warrants		15		15

Updata Venture Partners, II, L.P.		Limited Partnership Interest		2		1,492

Velocita, Inc.(1)		Debt Securities		11,718		4,318
		Warrants		3,540		—

Venturehouse Group, LLC		Equity Interest		667		398

Walker Investment Fund II, LLLP		Limited Partnership Interest		1,200		943

Warn Industries, Inc.		Debt Securities		18,646		18,646
		Warrants		1,429		3,129

Williams Brothers Lumber		Warrants		24		322
	Company

Wilmar Industries, Inc.		Debt Securities		33,132		33,132
		Preferred Stock (199,313 shares)		1,849		1,849
		Common Stock (15,615 shares)		139		139
		Warrants		1,181		1,181

Wilshire Restaurant Group, Inc.		Debt Securities		15,368		15,368
		Warrants		735		735

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

Woodstream Corporation		Loan		572		572
		Debt Securities		7,641		7,641
		Equity Interests		1,700		4,547
		Warrants		450		1,203

WyoTech Acquisition		Debt Securities		12,597		12,597
	Corporation	Preferred Stock (100 shares)		3,700		3,700
		Common Stock (99 shares)		100		54,100

Total private finance (133 investments)			$	1,568,704	$	1,604,891


(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.



								March 31, 2002


			Stated					(unaudited)
(in thousands, except number of loans)			Interest			Face		Cost		Value

Commercial Real Estate Finance




CMBS
CMBS Bonds
	Mortgage Capital Funding, Series 1998-MC3			5.5	%	$	54,491	$	27,051	$	27,051
	Morgan Stanley Capital I, Series 1999-RM1			6.4	%		51,046		21,536		21,536
	COMM 1999-1			5.6	%		74,879		36,016		36,016
	Morgan Stanley Capital I, Series 1999-FNV1			6.1	%		37,762		16,780		16,780
	DLJ Commercial Mortgage Trust 1999-CG2			6.1	%		83,718		36,672		36,672
	Commercial Mortgage Acceptance Corp., Series 1999-C1			6.8	%		34,856		16,324		16,324
	LB Commercial Mortgage Trust, Series 1999-C2			6.7	%		29,005		11,463		11,463
	Chase Commercial Mortgage Securities Corp., Series 1999-2			6.5	%		37,430		16,566		16,566
	FUNB CMT, Series 1999-C4			6.5	%		43,372		18,243		18,243
	Heller Financial, HFCMC Series 2000 PH-1			6.8	%		45,456		18,544		18,544
	SBMS VII, Inc., Series 2000-NL1			7.2	%		20,804		10,747		10,747
	DLJ Commercial Mortgage Trust, Series 2000-CF1			7.0	%		38,685		18,274		18,274
	Deutsche Bank Alex. Brown, Series Comm 2000-C1			6.9	%		39,379		17,485		17,485
	LB-UBS Commercial Mortgage Trust, Series 2000-C4			6.9	%		34,967		12,651		12,651
	Credit Suisse First Boston Mortgage Securities Corp., Series 2001-CK1			5.9	%		43,288		18,041		18,041
	JP Morgan-CIBC-Deutsche 2001			5.8	%		46,326		19,705		19,705
	Lehman Brothers-UBS Warburg 2001-C4			6.4	%		49,582		21,891		21,891
	SBMS VII, Inc., Series 2001-C1			6.1	%		41,109		15,974		15,974
	GE Capital Commercial Mortgage Securities Corp., Series 2001-2			6.1	%		45,218		19,835		19,835
	Credit Suisse First Boston Mortgage Securities Corp., Series 2001-CKN5			5.2	%		59,602		28,062		28,062
	JP Morgan Chase Commercial Mortgage Securities Corp., Series 2001-C1			5.6	%		42,747		16,100		16,100
	SBMS VII, Inc., Series 2001-C2			6.2	%		47,353		21,960		21,960
	FUNB CMT, Series 2002-C1			6.0	%		38,238		16,491		16,491
Collateralized Debt Obligations
	Crest 2001-1, Ltd.						24,153		24,153		24,153
	Crest 2002-1, Ltd.						23,104		23,104		23,104

		Total CMBS				$	1,086,570	$	503,668	$	503,668


		Interest		Number of
		Rate Ranges		Loans		Cost		Value

Commercial Mortgage Loans
			Up to 6.99%		10	$	8,096	$	9,518
			7.00%- 8.99%		24		27,096		28,903
			9.00%-10.99%		13		12,072		12,071
			11.00%-12.99%		13		10,054		10,053
			13.00%-14.99%		7		12,500		12,293
			15.00% and above		1		55		55

	Total commercial mortgage loans				68	$	69,873	$	72,893

Residual Interest						$	69,680	$	69,380




Real Estate Owned							5,719		3,228

	Total commercial real estate finance					$	648,940	$	649,169

Total portfolio						$	2,217,644	$	2,254,060

(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, 2001
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Ability One Corporation		Loans	$	10,657	$	10,657

ACE Products, Inc.		Loans		16,875		16,875

Acme Paging, L.P.		Debt Securities		6,992		6,992
		Limited Partnership Interest		3,640		2,184

Advantage Mayer, Inc.		Debt Securities		10,945		10,945
		Warrants		—		—

Allied Office Products, Inc.		Debt Securities		7,491		7,491
		Warrants		629		629

American Barbecue & Grill, Inc.		Warrants		125		—

American Home Care Supply, LLC		Debt Securities		6,906		6,906
		Warrants		579		1,579

American Physicians Services, Inc.		Debt Securities		40,194		40,194
	(formerly Physicians Speciality	Common Stock (79,567,042 shares)		1,000		100
	Corporation)	Guaranty ($195)		—		—

Aspen Pet Products, Inc.		Loans		14,576		14,576
		Preferred Stock (1,860 shares)		1,981		1,981
		Common Stock (1,400 shares)		140		140

ASW Holding Corporation		Warrants		25		25

Aurora Communications, LLC		Loans		15,809		15,809
		Equity Interest		2,461		6,050

Autania AG(1)		Debt Securities		4,762		4,762
		Common Stock (250,000 shares)		2,261		2,261

Avborne, Inc.		Debt Securities		12,750		6,375
		Warrants		1,180		—

Bakery Chef, Inc.		Loans		17,018		17,018

Blue Rhino Corporation(1)		Debt Securities		13,816		13,816
		Warrants		1,200		2,000

Border Foods, Inc.		Debt Securities		9,313		9,313
		Preferred Stock (50,919 shares)		2,000		2,000
		Warrants		665		665

Business Loan Express, Inc.		Loan		6,000		6,000
		Debt Securities		76,242		76,242
		Preferred Stock (25,111 shares)		25,111		25,111
		Common Stock (25,503,043 shares)		104,596		120,096
		Guaranty ($51,350 — See Note 3)		—		—

Camden Partners Strategic Fund II, L.P.		Limited Partnership Interest		1,295		1,295

CampGroup, LLC		Debt Securities		2,702		2,702
		Warrants		220		220


(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, 2001
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

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

Celebrities, Inc.		Loan		244		244
		Warrants		12		550

Classic Vacation Group, Inc.(1)		Loan		6,399		6,399

Colibri Holding Corporation		Loans		3,464		3,464
		Preferred Stock (237 shares)		237		237
		Common Stock (3,362 shares)		1,250		1,250
		Warrants		290		290

The Color Factory Inc.		Loan		5,346		5,346
		Preferred Stock (600 shares)		788		788
		Common Stock (980 shares)		6,535		8,035
		Guaranty ($476)		—		—

Component Hardware Group, Inc.		Debt Securities		10,774		10,774
		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		1,750		1,750
		Preferred Stock (6,316 shares)		1,427		1,427
		Warrants		832		832

CorrFlex Graphics, LLC		Debt Securities		2,312		2,312
		Warrants		—		6,674
		Options		—		576

Coverall North America, Inc.		Loan		10,309		10,309
		Debt Securities		5,324		5,324
		Warrants		—		—

CPM Acquisition Corporation		Loan		9,604		9,604

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

CTT Holdings		Loan		1,388		1,388

CyberRep		Loan		1,109		1,109
		Debt Securities		14,209		14,209
		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		Series A Common Stock (34 shares)		—		—
		Series B Common Stock (6 shares)		8		—
		Series C Common Stock (10 shares)		22		—

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

eCentury Capital Partners, L.P.		Limited Partnership Interest		1,875		1,800


(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, 2001
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

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

Elmhurst Consulting, LLC		Loan		7,762		7,762
		Common Stock (74 shares)		5,157		5,157
		Guaranty ($2,800)		—		—

Eparfin S.A.		Loan		29		29

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

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

Executive Greetings, Inc.		Debt Securities		15,938		15,938
		Warrants		360		360

Fairchild Industrial Products		Debt Securities		5,872		5,872
	Company	Warrants		280		2,378

Foresite Towers, LLC		Equity Interest		15,500		15,500

FTI Consulting, Inc.(1)		Warrants		—		510

Galaxy American		Debt Securities		48,869		39,217
	Communications, LLC	Options		—		—
		Guaranty ($750)		—		—

Garden Ridge Corporation		Debt Securities		26,948		26,948
		Preferred Stock (1,130 shares)		1,130		1,130
		Common Stock (471 shares)		613		613

Gibson Guitar Corporation		Debt Securities		17,175		17,175
		Warrants		525		2,325

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

Global Communications, LLC		Loan		1,990		1,990
		Debt Securities		14,884		14,884
		Equity Interest		11,067		11,067
		Options		1,639		1,639

Grant Broadcasting Systems II		Warrants		87		5,976

Grant Television II LLC		Options		492		492

Grotech Partners, VI, L.P.		Limited Partnership Interest		1,463		1,060

The Hartz Mountain Corporation		Debt Securities		27,408		27,408
		Common Stock (200,000 shares)		2,000		2,000
		Warrants		2,613		2,613


(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, 2001
Portfolio Company
(in thousands, except number of shares)	Investment(2)	Cost		Value

HealthASPex, Inc.	Preferred Stock (1,036,700 shares)	$	4,752	$	3,890
	Preferred Stock (414,680 shares)		760		622
	Common Stock (1,451,380 shares)		4		—

HMT, Inc.	Debt Securities		8,995		8,995
	Common Stock (300,000 shares)		3,000		3,000
	Warrants		1,155		1,155

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

Icon International, Inc.	Common Stock (37,821 shares)		1,219		1,519

Impact Innovations Group, LLC	Debt Securities		6,598		6,598
	Warrants		1,674		1,674

Intellirisk Management Corporation	Loans		22,334		22,334

International Fiber Corporation	Debt Securities		22,257		22,257
	Common Stock (1,029,068 shares)		5,483		6,982
	Warrants		550		700

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

Jakel, Inc.	Loan		22,291		22,291

JRI Industries, Inc.	Debt Securities		1,972		1,972
	Warrants		74		74

Julius Koch USA, Inc.	Debt Securities		1,066		1,066
	Warrants		259		7,000

Kirker Enterprises, Inc.	Warrants		348		3,501
	Equity Interest		4		4

Kirkland’s, Inc.	Debt Securities		7,676		7,676
	Preferred Stock (917 shares)		412		412
	Warrants		96		96

Kyrus Corporation	Debt Securities		7,810		7,810
	Warrants		348		348

Liberty-Pittsburgh Systems, Inc.	Debt Securities		3,487		3,487
	Common Stock (64,535 shares)		142		142

The Loewen Group, Inc.(1)	High-Yield Senior Secured Debt		15,150		12,440

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

Matrics, Inc.	Preferred Stock (511,876 shares)		500		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, 2001
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

MedAssets.com, Inc.		Debt Securities	$	14,949	$	14,949
		Preferred Stock (260,417 shares)		2,049		2,049
		Warrants		136		136

Mid-Atlantic Venture Fund IV, L.P.		Limited Partnership Interest		2,475		1,586

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)		3,860		3,860

Morton Grove		Loan		16,150		16,150
	Pharmaceuticals, Inc.	Preferred Stock (106,947 shares)		5,000		9,000

Most Confiserie GmbH & Co KG		Loan		933		933

MVL Group, Inc.		Loan		1,856		1,856
		Debt Securities		14,806		14,806
		Warrants		643		643
		Guaranty ($1,357)		—		—

NetCare, AG		Loan		811		811

NETtel Communications, Inc.		Debt Securities		11,334		4,334

Nobel Learning Communities,		Debt Securities		9,656		9,656
	Inc.(1)	Preferred Stock (265,957 shares)		2,000		2,000
		Warrants		575		575

North American Archery, LLC		Loans		1,390		840
		Convertible Debentures		2,248		2,008
		Guaranty ($270)		—		—

Northeast Broadcasting Group, L.P.		Debt Securities		310		310

Novak Biddle Venture Partners III, L.P.		Limited Partnership Interest		330		330

Nursefinders, Inc.		Debt Securities		11,341		11,341
		Warrants		900		1,500

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

Opinion Research Corporation(1)		Debt Securities		14,186		14,186
		Warrants		996		996

Oriental Trading Company, Inc.		Loan		128		128
		Debt Securities		12,719		12,719
		Preferred Equity Interest		1,500		1,793
		Common Equity Interest		—		—
		Warrants		13		295

Outsource Partners, Inc.		Debt Securities		23,994		23,994
		Warrants		826		826


(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, 2001
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

Packaging Advantage		Debt Securities	$	11,586	$	11,586
	Corporation	Common Stock (200,000 shares)		2,000		2,000
		Warrants		963		963

Pico Products, Inc.		Loan		1,406		1,406

Polaris Pool Systems, Inc.		Debt Securities		6,581		6,581
		Warrants		1,050		1,050

Powell Plant Farms, Inc.		Loan		16,993		16,993

Proeducation GmbH		Loan		206		206

Professional Paint, Inc.		Debt Securities		21,409		21,409
		Preferred Stock (15,000 shares)		17,215		17,215
		Common Stock (110,000 shares)		69		3,069

Progressive International		Debt Securities		3,958		3,958
	Corporation	Preferred Stock (500 shares)		500		500
		Common Stock (197 shares)		13		13
		Warrants		—		—

Prosperco Finanz Holding AG		Debt Securities		4,899		4,899
		Common Stock (1,528 shares)		956		956
		Warrants		—		—

Raytheon Aerospace, LLC		Debt Securities		5,051		5,051
		Equity Interest		—		—

Redox Brands, Inc.		Debt Securities		9,462		9,462
		Warrants		584		584

Schwinn Holdings Corporation		Debt Securities		10,195		1,835

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

Simula, Inc.(1)		Loan		19,914		19,914

Soff-Cut Holdings, Inc.		Debt Securities		8,569		8,569
		Preferred Stock (300 shares)		300		300
		Common Stock (2,000 shares)		200		200
		Warrants		446		446

Southwest PCS, LLC		Loan		8,243		8,243

Spa Lending Corporation		Preferred Stock (28,625 shares)		485		375
		Common Stock (6,208 shares)		25		18

Staffing Partners Holding		Debt Securities		4,992		4,992
	Company, Inc.	Preferred Stock (414,600 shares)		2,073		2,073
		Common Stock (50,200 shares)		50		50
		Warrants		10		10

Startec Global Communications		Loan		22,815		22,815
	Corporation(1)	Debt Securities		21,286		10,301
		Common Stock (258,064 shares)		3,000		—
		Warrants		—		—

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


(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, 2001
Portfolio Company
(in thousands, except number of shares)		Investment(2)	Cost		Value

SunSource Inc. (The Hillman		Debt Securities	$	40,071	$	40,071
	Companies, Inc.)	Common Stock (6,890,937 shares)		57,156		57,156

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

Sure-Tel, Inc.		Loan		1,207		1,207
		Preferred Stock (1,116,902 shares)		4,642		4,642
		Warrants		662		662
		Options		—		—

Sydran Food Services II, L.P.		Debt Securities		12,973		12,973
		Equity Interest		3,909		3,909

Total Foam, Inc.		Debt Securities		263		127
		Common Stock (910 shares)		10		—

Tubbs Snowshoe		Debt Securities		3,913		3,913
	Company, LLC	Equity Interests		500		500
		Warrants		54		54

United Pet Group, Inc.		Debt Securities		4,965		4,965
		Warrants		15		15

Updata Venture Partners, II, L.P.		Limited Partnership Interest		2,300		3,865

Velocita, Inc.(1)		Debt Securities		11,677		11,677
		Warrants		3,540		3,540

Venturehouse Group, LLC		Equity Interest		667		398

Walker Investment Fund II, LLLP		Limited Partnership Interest		1,000		743

Warn Industries, Inc.		Debt Securities		18,624		18,624
		Warrants		1,429		3,129

Williams Brothers Lumber		Warrants		24		322
	Company

Wilmar Industries, Inc.		Debt Securities		32,839		32,839
		Warrants		3,169		3,169

Wilshire Restaurant Group, Inc.		Debt Securities		15,106		15,106
		Warrants		735		735

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

Woodstream Corporation		Loan		572		572
		Debt Securities		7,631		7,631
		Equity Interests		1,700		4,547
		Warrants		450		1,203

WyoTech Acquisition		Debt Securities		12,588		12,588
	Corporation	Preferred Stock (100 shares)		3,700		3,700
		Common Stock (99 shares)		100		44,100

Total private finance (135 investments)			$	1,553,966	$	1,595,072


(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, 2001
			Stated
(in thousands, except number of loans)			Interest			Face		Cost		Value

Commercial Real Estate Finance

CMBS
	Mortgage Capital Funding, Series 1998-MC3			5.5	%	$	54,491	$	26,888	$	26,888
	Morgan Stanley Capital I, Series 1999-RM1			6.4	%		51,046		21,462		21,462
	COMM 1999-1			5.6	%		74,879		35,636		35,636
	Morgan Stanley Capital I, Series 1999-FNV1			6.1	%		45,527		22,272		22,272
	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		16,304		16,304
	LB Commercial Mortgage Trust, Series 1999-C2			6.7	%		29,005		11,326		11,326
	Chase Commercial Mortgage Securities Corp., Series 1999-2			6.5	%		43,046		20,535		20,535
	FUNB CMT, Series 1999-C4			6.5	%		49,287		22,253		22,253
	Heller Financial, HFCMC Series 2000 PH-1			6.8	%		45,456		18,657		18,657
	SBMS VII, Inc., Series 2000-NL1			7.2	%		24,230		13,309		13,309
	DLJ Commercial Mortgage Trust, Series 2000-CF1			7.0	%		40,502		19,481		19,481
	Deutsche Bank Alex. Brown, Series Comm 2000-C1			6.9	%		41,084		19,418		19,418
	LB-UBS Commercial Mortgage Trust, Series 2000-C4			6.9	%		31,471		11,455		11,455
	Credit Suisse First Boston Mortgage Securities Corp., Series 2001-CK1			5.9	%		58,786		29,050		29,050
	JP Morgan-CIBC-Deutsche 2001			5.8	%		60,889		29,584		29,584
	Lehman Brothers-UBS Warburg 2001-C4			6.4	%		65,130		32,326		32,326
	SBMS VII, Inc., Series 2001-C1			6.1	%		54,780		25,267		25,267
	GE Capital Commercial Mortgage Securities Corp., Series 2001-2			6.1	%		57,039		28,103		28,103
	Credit Suisse First Boston Mortgage Securities Corp., Series 2001-CKN5			5.2	%		84,482		46,176		46,176
	JP Morgan Chase Commercial Mortgage Securities Corp., Series 2001-C1			5.6	%		55,432		24,075		24,075
	SBMS VII, Inc., Series 2001-C2			6.2	%		72,422		40,037		40,037
	Crest 2001-1, Ltd. (collateralized debt obligation)						24,207		24,207		24,207

		Total CMBS				$	1,194,479	$	582,553	$	582,553


		Interest		Number of
		Rate Ranges		Loans		Cost		Value

Commercial Mortgage Loans
			Up to 6.99%		7	$	3,404	$	5,100
			7.00%- 8.99%		30		34,583		36,589
			9.00%-10.99%		16		13,617		13,618
			11.00%-12.99%		14		11,977		11,979
			13.00%-14.99%		7		12,455		12,251
			15.00% and above		2		84		60

	Total commercial mortgage loans				76	$	76,120	$	79,597

Residual Interest						$	70,179	$	69,879
Real Estate Owned							3,784		2,489

	Total commercial real estate finance					$	732,636	$	734,518

Total portfolio						$	2,286,602	$	2,329,590

(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 at and for the three months ended March 31, 2002 and 2001 is unaudited)

Note 1. Organization

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

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

In accordance with specific rules prescribed for investment companies, subsidiaries hold investments on behalf of the Company or provide substantial services to the Company. Portfolio investments are held for purposes of deriving investment income and future capital gains. The Company consolidates the results of its subsidiaries for financial reporting purposes. The financial results of the Company’s portfolio investments are not consolidated in the Company’s financial statements.

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 and commercial mortgage-backed securities (“CMBS”) in a variety of 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 subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 2001 balances to conform with the 2002 financial statement presentation.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, the unaudited consolidated financial results of the Company included herein contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of March 31, 2002 and the results of operations, changes in net assets, and cash flows for the three months ended March 31, 2002 and 2001. The results of operations for the three months ended March 31, 2002 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 2. Summary of Significant Accounting Policies, continued

Valuation of Portfolio Investments

The Company, as a BDC, invests primarily in illiquid securities including the debt and equity of private companies and non-investment grade CMBS. The Company’s investments are generally subject to restrictions on resale and generally have no established trading market. The Company values its securities at fair value as determined in good faith by the Company’s Board of Directors in accordance with the Company’s valuation policy. The Company determines fair value to be the amount for which an investment could be exchanged in an orderly disposition over a reasonable period of time between willing parties other than in a forced or liquidation sale. The Company’s valuation policy considers the fact that privately negotiated securities increase in value over a long period of time, that the Company does not intend to trade the securities, and that no ready market exists. The Company’s valuation policy is intended to provide a consistent basis for establishing the fair value of the portfolio. The Company will record unrealized depreciation on investments when it believes that an asset has been impaired and full collection for the loan or realization of an equity security is doubtful. Conversely, the Company will record unrealized appreciation if it has a clear indication that the underlying portfolio company has appreciated in value and, therefore, the Company’s security has also appreciated in value. Under its valuation policy, the Company does not consider temporary changes in the capital markets, such as interest rate movements or changes in the public equity markets, in order to determine whether an investment in a private company has been impaired or whether a private investment has increased in value. The value of investments in public securities are determined using quoted market prices discounted for illiquidity and restrictions on resale.

Loans and Debt Securities

For loans and debt securities, value normally corresponds to cost unless the borrower’s condition or external factors lead to a determination of value at a lower amount.

When the Company receives nominal cost warrants or free equity securities (“nominal cost equity”), the Company allocates its cost basis in its investment between its debt securities and its nominal cost equity at the time of origination. At that time, the original issue discount basis of the nominal cost equity is recorded by increasing the cost basis in the equity and decreasing the cost basis in the related debt securities.

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected. Loan origination fees, original issue discount and market discount are capitalized and then amortized into interest income using the effective interest method. The weighted average yield on loans and debt securities is computed as the (a) annual stated interest rate earned plus the annual amortization of loan origination fees, original issue discount and market discount earned on accruing loans and debt securities, divided by (b) total loans and debt securities at value. The weighted average yield is computed as of the balance sheet date. Prepayment premiums are recorded on loans when received.

Equity Securities

Equity interests in portfolio companies for which there is no liquid public market are valued based on various factors, including cash flow from operations and other pertinent factors such as

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued

recent offers to purchase a portfolio company’s securities or other liquidation events. The determined values are generally discounted to account for liquidity issues and minority control positions.

The value of the Company’s equity interests in public companies for which market prices are readily available is based upon the average of the closing public market price for the last three trading days up to and including the balance sheet date. Securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security. Dividend income is recorded on cumulative preferred equity securities on an accrual basis to the extent that such amounts are expected to be collected and on common equity securities on the record date for private companies or on the ex-dividend date for publicly traded companies.

Commercial Mortgage-Backed Securities (“CMBS”)

CMBS are carried at fair value. Fair value is based upon a discounted cash flow model which utilizes prepayment and loss assumptions based upon historical experience, economic factors and the characteristics of the underlying cash flow. The Company’s assumption with regard to discount rate is based upon the yield of comparable securities. The Company recognizes income from the amortization of original issue discount using the effective interest method, using the anticipated yield over the projected life of the investment. Yields are revised when there are changes in estimates of future credit losses, actual losses incurred, and actual and estimated prepayment speeds. Changes in estimated yield are recognized as an adjustment to the estimated yield over the remaining life of the CMBS from the date the estimated yield is changed. The Company recognizes unrealized depreciation on its CMBS whenever it determines that the value of its CMBS is less than the cost basis. The Company generally invests in CMBS bonds with the intention of holding the bonds to their maturity.

Residual Interest

The Company values its residual interest from a previous securitization and recognizes income using the same accounting policies used for the CMBS. The residual interest spread is carried at fair value based on discounted estimated future cash flows. The Company recognizes income from the residual interest spread using the effective interest method. At each reporting date, the effective yield is recalculated and used to recognize income until the next reporting date.

Net Realized and Unrealized Gains

Realized gains or losses are measured by the difference between the net proceeds from the sale and the cost basis of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during the year, net of recoveries. Unrealized gains or losses reflect the change in portfolio investment values during the reporting period.

Fee Income

Fee income includes fees for diligence, structuring, transaction services, management services and investment advisory services rendered by the Company to portfolio companies and other third parties. Diligence, structuring and transaction services fees are generally recognized as income when services are rendered or when the related transactions are completed. Management and investment advisory services fees are generally recognized as income as the services are rendered.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 2. Summary of Significant Accounting Policies, continued

Deferred Financing Costs

Financing costs are based on actual costs incurred in obtaining financing and are deferred and amortized as part of interest expense over the term of the related debt instrument.

Derivative Financial Instruments

The Company may or may not use derivative financial instruments to reduce interest rate risk. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not hold or issue derivative financial instruments for trading purposes. All derivative financial instruments are recorded at fair value with changes in value reflected in net unrealized gains or losses during the reporting period.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and all highly liquid investments with original maturities of three months or less.

Dividends to Shareholders

Dividends to shareholders are recorded on the record date.

Federal and State Income Taxes

The Company intends to comply with the requirements of the Internal Revenue Code (“Code”) that are applicable to regulated investment companies (“RIC”) and real estate investment trusts (“REIT”). The Company and its subsidiaries that qualify as a RIC or a REIT intend to annually distribute or retain through a deemed distribution all of their taxable income to shareholders; therefore, the Company has made no provision for income taxes for these entities. AC Corp is a corporation subject to federal and state income taxes and records a provision for income taxes as appropriate.

Per Share Information

Basic earnings per share is calculated using the weighted average number of shares outstanding for the period presented. Diluted earnings per share reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. Earnings per share is computed after subtracting dividends on preferred shares.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio

Private Finance

At March 31, 2002 and December 31, 2001, the private finance portfolio consisted of the following:



		2002							2001

		Cost		Value		Yield			Cost		Value		Yield
($ in thousands)
Loans and debt securities		$	1,174,491	$	1,105,798		14.3	%	$	1,169,673	$	1,107,890		14.8	%




Equity interests			394,213		499,093					384,293		487,182

	Total	$	1,568,704	$	1,604,891				$	1,553,966	$	1,595,072

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 pre-determined strike price, which is generally a nominal price for warrants or options in a private company.

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 in anticipation for investment appreciation and ultimate gain on sale.

At March 31, 2002 and December 31, 2001, the Company had an investment totaling $229,688,000 and $227,449,000, respectively, in Business Loan Express, Inc. (“BLX”), a small business lender that participates in the SBA Section 7(a) Guaranteed Loan Program. The Company owns 94.9% of BLX’s common stock. 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) on BLX’s 3-year unsecured revolving credit facility for $124,000,000. The amount guaranteed by the Company at March 31, 2002 was $51,460,000. 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 March 31, 2002. In consideration for providing this guaranty, BLX will pay the Company an annual guaranty fee of $3,100,000 in 2002. BLX is headquartered in New York, NY.

At March 31, 2002, the Company had an investment in The Hillman Companies, Inc. (formerly SunSource, Inc.) totaling $97,702,000. The Company owns 93.2% of Hillman’s common stock. Hillman is a leading manufacturer of key making equipment and distributor of key blanks, fasteners, signage and other small hardware components to hardware retailers, and its primary operations are located in Cincinnati, Ohio.

At March 31, 2002 and December 31, 2001, approximately 98% of the Company’s private finance loan portfolio was composed of fixed interest rate loans. At March 31, 2002 and December 31, 2001, loans and debt securities with a value of $111,291,000 and $93,744,000, 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 March 31, 2002 and December 31, 2001 were as follows:


		2002			2001

Geographic Region




Mid-Atlantic			41	%		43	%




West			20			19




Midwest			18			17




Southeast			14			14




Northeast			6			5




International			1			2

	Total		100	%		100	%

Industry




Consumer products			28	%		28	%




Business services			23			22




Financial services			15			15




Industrial products			11			10




Retail			5			5




Education			5			5




Telecommunications			4			4




Broadcasting & cable			3			4




Other			6			7

	Total		100	%		100	%

Commercial Real Estate Finance

At March 31, 2002 and December 31, 2001, the commercial real estate finance portfolio consisted of the following:



		2002							2001

		Cost		Value		Yield			Cost		Value		Yield
($ in thousands)
CMBS		$	503,668	$	503,668		15.9	%	$	582,553	$	582,553		14.8	%




Loans			69,873		72,893		8.3	%		76,120		79,597		7.7	%




Residual interest			69,680		69,380		9.4	%		70,179		69,879		9.4	%




Real estate owned			5,719		3,228					3,784		2,489

	Total	$	648,940	$	649,169				$	732,636	$	734,518

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

CMBS

At March 31, 2002 and December 31, 2001, the CMBS portfolio consisted of the following:



		2002				2001

		Cost		Value		Cost		Value
(in thousands)
CMBS bonds		$	456,411	$	456,411	$	558,346	$	558,346




Collateralized debt obligations			47,257		47,257		24,207		24,207

	Total	$	503,668	$	503,668	$	582,553	$	582,553

CMBS Bonds. At March 31, 2002 and December 31, 2001, the CMBS bonds, which were purchased from the original issuer, consisted of the following:


	2002			2001
($ in thousands)
Face	$	1,039,313		$	1,170,272




Original issue discount		(582,902	)		(611,926	)

Cost	$	456,411		$	558,346

Value	$	456,411		$	558,346

Yield		15.7%			14.7%

The non-investment grade and unrated tranches of the CMBS bonds in which the Company invests are junior in priority for payment of principal to the more senior tranches of the related CMBS bond issuance. 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 Company’s most subordinate tranch will bear this loss first. At March 31, 2002, the Company’s CMBS bonds were subordinate to 93% to 97% of the tranches of various CMBS bond issuances. At March 31, 2002, 0.56% of the underlying collateral loans were over 30 days delinquent.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

The underlying rating classes of the CMBS at March 31, 2002 and December 31, 2001 were as follows:



		2002					2001

				Percentage					Percentage
		Value		of Total			Value		of Total
($ In Thousands)
BB+		$	4,493		1.0	%	$	24,785		4.4	%




BB			16,373		3.6			69,404		12.4




BB-			21,372		4.7			67,460		12.1




B+			108,699		23.8			103,560		18.6




B			137,574		30.1			131,362		23.5




B-			76,161		16.7			73,572		13.2




CCC			9,073		2.0			8,893		1.6




Unrated			82,666		18.1			79,310		14.2

	Total	$	456,411		100.0	%	$	558,346		100.0	%

At March 31, 2002 and December 31, 2001, the CMBS bonds were secured by approximately 4,000 and 3,800 commercial mortgage loans with a total outstanding principal balance of $21.2 billion and $20.5 billion, respectively. The geographic composition and the property types of the underlying mortgage loans securing the CMBS calculated using the outstanding principal balance at March 31, 2002 and December 31, 2001 were as follows:


		2002			2001

Geographic Region




West			32	%		32	%




Mid-Atlantic			24			24




Midwest			21			21




Southeast			17			17




Northeast			6			6

	Total		100	%		100	%






Property Type




Retail		31	%	31	%




Housing		27		27




Office		21		22




Hospitality		7		7




Other		14		13

	Total	100	%	100	%

The Company’s yield on its CMBS bonds 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 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. The initial yield on each CMBS bond has been computed assuming an approximate 1% loss rate on its entire underlying collateral mortgage pool,

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued

with the estimated losses being assumed to occur in three equal installments in years three, six and nine. As each CMBS bond ages, the amount of losses and the expected timing of recognition of such losses will be updated, and the respective yield will be adjusted as necessary. 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.

Collateralized Debt Obligations. At March 31, 2002, the Company owned preferred shares in two collateralized debt obligations (“CDOs”) secured by investment grade unsecured debt issued by various real estate investment trusts (“REITs”) and non-investment grade CMBS bonds. The investment grade REIT debt collateral consists of $631,855,000 issued by 36 REITs. The non-investment grade CMBS collateral consists of BB+, BB and BB- CMBS bonds with a face amount of $368,145,000 that were issued in 28 separate CMBS transactions (“CMBS Collateral”). Included in the CMBS Collateral for the CDO, $323,183,000 of these CMBS bonds are senior in priority of repayment to certain lower rated CMBS bonds held by the Company, which were issued in 22 separate CMBS transactions. The preferred shares are junior in priority for payment of principal to the more senior tranches of debt issued by the CDOs. To the extent there are defaults and unrecoverable losses on the underlying collateral resulting in reduced cash flows, the preferred shares will bear this loss first. At March 31, 2002, the Company’s preferred shares in the CDOs were subordinate to approximately 92% of the more senior tranches of debt issued by the CDOs. The yield on the CDOs at March 31, 2002 was 17.3%.

The Company acts as the disposition consultant with respect to the CDOs, which allows the Company to approve disposition plans for individual collateral securities. For these services, the Company collects annual fees based on the outstanding collateral pool balance, and for the quarter ended March 31, 2002, this fee totaled $37,000.

Loans

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

At March 31, 2002 and December 31, 2001, approximately 75% and 25% and 76% and 24% of the Company’s commercial mortgage loan portfolio was composed of fixed and adjustable interest rate loans, respectively. As of March 31, 2002 and December 31, 2001, loans with a value of $10,556,000 and $15,241,000, respectively, were not accruing interest. Loans greater than 120 days delinquent generally do not accrue interest.

The geographic composition and the property types securing the commercial mortgage loan portfolio at value at March 31, 2002 and December 31, 2001 were as follows:


		2002			2001

Geographic Region




Southeast			36	%		36	%




Mid-Atlantic			24			23




West			19			20




Midwest			16			16




Northeast			5			5

	Total		100	%		100	%

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3. Portfolio, continued






Property Type




Office		37	%	34	%




Hospitality		25		25




Retail		20		21




Recreation		4		4




Other		14		16

	Total	100	%	100	%

Residual Interest

At March 31, 2002 and December 31, 2001, the residual interest consisted of the following:



		2002				2001

		Cost		Value		Cost		Value
(in thousands)
Residual interest		$	68,853	$	68,853	$	68,853	$	68,853




Residual interest spread			827		527		1,326		1,026

	Total	$	69,680	$	69,380	$	70,179	$	69,879

The residual interest primarily consists of a retained interest totaling $68,853,000 from a 1998 asset securitization whereby bonds were sold in three classes rated AAA, AA and A. The residual interest represents a right to cash flows from the underlying collateral pool of loans after these senior bond obligations are satisfied.

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 interest as well as the residual interest spread (“Residual”) from the interest earned on the loans sold less the interest paid on the bonds over the life of the bonds. As of March 31, 2002 and December 31, 2001, 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 6.7% and 6.6% as of March 31, 2002 and December 31, 2001, respectively.

The Company uses a discounted cash flow methodology for determining the value of its retained 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% or approximately $1.1 million of the total principal balance of the underlying collateral throughout the life of the collateral. These assumptions result in an expected weighted average life of the bonds of 0.5 years. 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 4. Debt

The Company records debt at cost. At March 31, 2002 and December 31, 2001, the Company had the following debt:



			2002				2001

			Facility		Amount		Facility		Amount
			Amount		Drawn		Amount		Drawn
(in thousands)
Notes payable and debentures:




	Unsecured long-term notes payable		$	694,000	$	694,000	$	694,000	$	694,000




	SBA debentures			101,800		94,500		101,800		94,500




	Auction rate reset note			81,856		81,856		81,856		81,856




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

		Total notes payable and debentures		883,356		876,056		883,356		876,056

Revolving line of credit				527,500		57,000		497,500		144,750

	Total		$	1,410,856	$	933,056	$	1,380,856	$	1,020,806

Notes Payable and Debentures

Unsecured Long-Term Notes Payable. The Company issued unsecured long-term notes to private institutional investors. The notes require semi-annual interest payments until maturity and have original terms of five or seven years. At March 31, 2002, the notes had remaining maturities of one to four years. The weighted average fixed interest rate on the notes was 7.6% at March 31, 2002 and December 31, 2001. The notes may be prepaid in whole or in part, together with an interest premium, as stipulated in the note agreement.

SBA Debentures. At March 31, 2002 and December 31, 2001, 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% and 2.4% to 8.2%, respectively. At March 31, 2002, the debentures had remaining maturities of three to ten years. The weighted average interest rate was 7.0% and 6.7% at March 31, 2002 and December 31, 2001, 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 Auction Rate Reset Senior Note Series A that matures on December 2, 2002, and bears interest at the three-month London Interbank Offered 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 debt, equity or other securities in one or more public or private transactions in an amount at least equal to the outstanding principal balance, or prepay the 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.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 4. Debt, continued

Scheduled future maturities of notes payable and debentures at March 31, 2002, are as follows:


		Amount Maturing
Year		(in thousands)

2002		$	81,856




2003			140,000




2004			221,000




2005			179,000




2006			180,700




Thereafter			73,500

	Total	$	876,056

Revolving Line of Credit

The Company has an unsecured revolving line of credit for $527,500,000. The facility may be expanded up to $600,000,000 at the Company’s option. The 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 rate was 3.2% at March 31, 2002 and December 31, 2001, 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 line of credit was $62,292,000 and $106,338,000 for the three months ended March 31, 2002 and for the year ended December 31, 2001, respectively. The maximum amount borrowed under this facility and the weighted average interest rate for the three months ended March 31, 2002 and for the year ended December 31, 2001, were $145,250,000 and $213,500,000, and 3.2% and 5.4%, respectively.

The Company has various financial and operating covenants required by the revolving line of credit and the notes payable and debentures. These covenants require the Company to maintain certain financial ratios, including debt to equity and interest coverage, and a minimum net worth. As of March 31, 2002, the Company was in compliance with these covenants.

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.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 6. Shareholders’ Equity

Sales of common stock for the three months ended March 31, 2002, and the year ended December 31, 2001 were as follows:


		2002			2001
($ in thousands)
Number of common shares			785			13,286




Gross proceeds		$	20,600		$	301,539




Less costs including underwriting fees			(650	)		(14,651	)

	Net proceeds	$	19,950		$	286,888

In addition, the Company issued 204,855 shares of common stock with a value of $5,157,000 to acquire one portfolio investment in a stock-for-stock exchange during 2001.

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.

Dividend reinvestment plan activity for the three months ended March 31, 2002 and for the year ended December 31, 2001 was as follows:


	2002		2001
(in thousands, except per share amounts)
Shares issued		57		271




Average price per share	$	27.64	$	23.32

Note 7. Earnings Per Common Share

Earnings per common share for the three months ended March 31, 2002 and 2001 were as follows:



	For the Three Months
	Ended March 31,

	2002			2001
(in thousands, except per share amounts)
Net increase in net assets resulting from operations	$	55,961		$	52,028




Less preferred stock dividends		(55	)		(55	)

Income available to common shareholders	$	55,906		$	51,973

Basic shares outstanding		99,977			85,504




Dilutive options outstanding to officers		2,387			1,555

Diluted shares outstanding		102,364			87,059

Basic earnings per common share	$	0.56		$	0.61

Diluted earnings per common share	$	0.55		$	0.60

Note 8. Dividends and Distributions

The Company’s Board of Directors declared and the Company paid a $0.53 per common share dividend, or $53,259,000, for the three months ended March 31, 2002.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9. Financial Highlights


		At and for the			At and for the
		Three Months Ended			Year Ended
		March 31,			December 31,
		2002			2001

Per Common Share Data




Net asset value, beginning of period		$	13.57		$	12.11

	Net investment income before net realized and unrealized gains*		0.53			1.92




	Net realized and unrealized gains*		0.02			0.23




	Income tax benefit*		0.00			0.01

Net increase in net assets resulting from operations			0.55			2.16

Net decrease in net assets from shareholder distributions			(0.53	)		(2.01	)




Net increase in net assets from capital share transactions			0.12			1.31

Net asset value, end of period		$	13.71		$	13.57

Market value, end of period		$	27.50		$	26.00




Total return			7.85	%		35.43	%


*	Based on diluted weighted average number of shares outstanding for the period.


	At and for the			At and for the
	Three Months Ended			Year Ended
	March 31,			December 31,
	2002			2001

Ratios and Supplemental Data




Ending net assets	$	1,381,341		$	1,352,123




Common shares outstanding at end of period		100,765			99,607




Diluted weighted average shares outstanding		102,364			93,003




Employee and administrative expenses/ average net assets		0.81	%		3.80	%




Total expenses/average net assets		2.09	%		9.31	%




Net investment income/ average net assets		3.94	%		15.15	%




Portfolio turnover rate		3.49	%		10.04	%




Average debt outstanding	$	938,347		$	847,121




Average debt per share	$	9.17		$	9.11

Note 10. Supplemental Disclosure of Cash Flow Information

For the three months ended March 31, 2002 and for the year ended December 31, 2001 the Company paid $5,860,000 and $63,237,000, respectively, for interest. For the three months ended March 31, 2002 and for the year ended December 31, 2001, the Company’s non-cash financing activities totaled $3,029,000 and $17,523,000, respectively, and includes the issuance of common stock related to the acquisition of portfolio investments, stock option exercises and dividend reinvestment. The non-cash financing activities for the year ended December 31, 2001 includes the issuance of $5,157,000 of the Company’s common stock to acquire portfolio investments.

ALLIED CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 11. Hedging Activities

The Company invests in BB+, BB and BB- CMBS bonds, which are purchased at prices that are based on the 10-year Treasury rate. The Company has entered into transactions with a financial institution to hedge against movement in Treasury rates on certain of these CMBS bonds. These transactions involved the Company receiving the proceeds from the sale of borrowed Treasury securities, with the obligation to replenish the borrowed Treasury securities at a later date based on the then current market price. The Company recorded the proceeds of the sale of the borrowed Treasury securities of $39,010,000 as an other asset, and the related obligation to replenish the borrowed Treasury securities of $38,012,000, which represents the fair value of the obligation, as an other liability at March 31, 2002. The difference between the sales proceeds and the related obligation of $998,000 was recorded as an unrealized gain in the first quarter of 2002.

Note 12. Subsequent Events

As of June 10, 2002, we are aware of five purported class action lawsuits that have been filed in the United States District Court for the Southern District of New York against us, certain of our directors and officers and our former independent auditors, Arthur Andersen LLP, with respect to alleged violations of the securities laws. We have not yet been formally served with the complaints in connection with these lawsuits. All of the actions essentially duplicate one another, pleading essentially the same allegations. The complaints filed in the lawsuits allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, specifically alleging, among other things, that we misstated the value of certain portfolio investments in our financial statements, which allegedly resulted in the purchase of our common stock by purported class members at artificially inflated prices. Several of the complaints also allege state law claims for common law fraud. The lawsuits seek compensatory and other damages, and costs and expenses associated with the litigation. We believe that each of the lawsuits is without merit, and we intend to defend each of these lawsuits vigorously. While we do not expect these matters to materially affect our financial condition or results of operations, there can be no assurance of any particular outcome.

Independent Accountants’ Review Report

The Board of Directors and Shareholders
Allied Capital Corporation and Subsidiaries:

We have reviewed the accompanying consolidated balance sheet of Allied Capital Corporation and subsidiaries, including the consolidated statement of investments, as of March 31, 2002, and the related consolidated statements of operations, changes in net assets and cash flows for the three-month period ended March 31, 2002, and financial highlights (included in Note 9) for the three months ended March 31, 2002. These consolidated financial statements and financial highlights are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements and financial highlights referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

The consolidated balance sheet of Allied Capital Corporation and subsidiaries, including the statement of investments, as of December 31, 2001, and financial highlights (included in note 9) for the year then ended, were audited by other auditors whose report dated February 20, 2002 expressed an unqualified opinion on those statements.


	/s/ KPMG LLP

Washington, D.C.
April 22, 2002, except as to note 12 which is
as of June 10, 2002

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company also is party to certain other 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 6. Exhibits and Reports on Form 8-K

(a) List of Exhibits


Exhibit
Number		Description

	15	Letter from KPMG LLP dated June 10, 2002

(b) Reports on Form 8-K.

On April 3, 2002, Allied Capital filed a Form 8-K reporting that it had selected KPMG LLP to serve as its independent public accountants for the fiscal year December 31, 2002 and dismissed Arthur Andersen LLP as its public accountants effective upon completion of the December 31, 2001 audit.

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


Dated: June 12, 2002		By: /s/ PENNI F. ROLL Penni F. Roll Chief Financial Officer