Allied Capital ( ALD) reported a smaller-than-expected increase in itsfourth-quarter net income as it recorded a net loss on its investmentportfolio. The business development company, which has investments in about 130 mostlyprivate companies, on Wednesday reported net income of $42.9 million, or 43cents a share, for the quarter ending Dec. 31. That was up from $42.3million, or 52 cents a share, in the year-earlier quarter. Analysts, who expected a profit of 45 cents a share, said they weresomewhat surprised to see the company post a net loss of $10.5 million onits investments. The company reported a netgain of $7.6 million the fourth quarter of 2000. Both figures includerealized and unrealized gains and losses, the company said. Officials at Allied Capital said the company's net income variessubstantially from quarter to quarter due to the timing of eventsthat result in investment gains and losses. The company, whose investmentsfocus on nondurable consumer products, business services and real estatemortgages, said its operating income before net realized and unrealized gains for thequarter 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 netloss 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 hasfiled for bankruptcy. Allied has $11.9 million on unsecured debt in StarTech andabout $20 million in exposure to two other troubled companies. Allied's exposure to Kmart ( KM), the retailing giant that filed for bankruptcyprotection last month, is about 1.5% of its total collateral balance, though any losseswon't be known until Kmart announced which stores it is closing, thecompany said. In a conference call with analysts, Allied CEO William Walton and otherexecutives said they expect a 37% increase in interest and relatedportfolio income in 2002. Walton said he also expects to continue toincrease 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 goodportion of which is expected to come from business transaction and otherfees.