Allied Capital ( ALD) reported a smaller-than-expected increase in its fourth-quarter net income as it recorded a net loss on its investment portfolio.

The business development company, which has investments in about 130 mostly private companies, on Wednesday reported net income of $42.9 million, or 43 cents a share, for the quarter ending Dec. 31. That was up from $42.3 million, or 52 cents a share, in the year-earlier quarter.

Analysts, who expected a profit of 45 cents a share, said they were somewhat surprised to see the company post a net loss of $10.5 million on its investments. The company reported a net gain of $7.6 million the fourth quarter of 2000. Both figures include realized and unrealized gains and losses, the company said.

Officials at Allied Capital said the company's net income varies substantially from quarter to quarter due to the timing of events that result in investment gains and losses. The company, whose investments focus on nondurable consumer products, business services and real estate mortgages, said its operating income before net realized and unrealized gains for the quarter was $53 million, or 53 cents a share, compared with $34.7 million, or 42 cents a share, in the year-earlier fourth quarter.

Still, analysts said they were not expecting the company to report a net loss on investments. "People were expecting them to break even or even have gains," said Charles F. Gunther, a senior equities analyst with Wells Fargo.

The company said it realized losses on its investment StarTech, which has filed for bankruptcy. Allied has $11.9 million on unsecured debt in StarTech and about $20 million in exposure to two other troubled companies.

Allied's exposure to Kmart ( KM), the retailing giant that filed for bankruptcy protection last month, is about 1.5% of its total collateral balance, though any losses won't be known until Kmart announced which stores it is closing, the company said.

In a conference call with analysts, Allied CEO William Walton and other executives said they expect a 37% increase in interest and related portfolio income in 2002. Walton said he also expects to continue to increase the company's dividend.

"Our primary focus will be to grow our taxable income," Walton said, adding that he's looking for 10% to 12% earnings growth in 2002, a good portion of which is expected to come from business transaction and other fees.