AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997
SECURITIES ACT FILE NO. 333-29943
INVESTMENT COMPANY ACT FILE NO. 811-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | |
(CHECK APPROPRIATE BOX OR BOXES)
---------------------
AMERICAN CAPITAL STRATEGIES, LTD.
-------------------------------------------------
(Exact name of Registrant as specified in charter)
3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
---------------------------------------
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (301) 951-6122
---------------------
Malon Wilkus
3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
---------------------------------------
(Name and address of agent for service)
---------------------
COPIES TO:
Samuel A. Flax Howard B. Adler
Arnold & Porter Gibson, Dunn & Crutcher LLP
555 Twelfth Street, N.W. 1050 Connecticut Avenue, N.W.
Washington, DC 20004-1206 Washington, DC 20036-5306
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
Registration Statement becomes effective.
-----------
If any securities being registered on this form will be
offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a
devidend reinvestment plan, check the following box. /x/
It is proposed that this filing will become effective (check
appropriate box)
[ X ] when declared effective pursuant to Section 8(c)
<PAGE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered Per Unit Offering Price Fee
- --------------------------------------------------------------------------------
Common Stock, $0.01
per value per share.. 9,660,000(1) $15.00 $144,900,000 $7,318
722,437(2) 13.95 10,077,996 24
442,751(3) 15.00 6,641,265 294
------------ ------ ------------ ------
Total................ 10,825,188 $161,619,261 $7,636(4)
- --------------------------------------------------------------------------------
(1) Common Stock to be offered by the Underwriters pursuant to the attached
Prospectus, including Common Stock to be offered under the Underwriters'
Over-Allotment Option described therein.
(2) Common Stock to be offered in the Direct Offering described in the attached
Prospectus.
(3) Common Stock to be issued pursuant to exercise of Underwriters' Warrants
described in the attached Prospectus.
(4) The total filing fee for this Registration Statement filing is $48,977. The
amount of $41,166 was deposited with the initial filing and $175 was filed
with Pre-Effective Amendment No.1. The amount of $7,636 represents the
increase in the filing fee attributable to an increase in the number of
shares being registered.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
AMERICAN CAPITAL STRATEGIES, LTD.
Cross Reference Sheet Showing Location in Prospectus of Information
Required by Parts A and B of Form N-2 Registration Statement
Item Number Registration Statement Item and Heading Caption or Location in Prospectus
----------- --------------------------------------- ----------------------------------
<S> <C> <C>
1 Outside Front Cover............................... Outside Front Cover Page
2 Inside Front and Outside Back Cover Page.......... Inside Front and Outside Back Cover Page
3 Fee Table and Synopsis............................ Fees and Expenses
4 Financial Highlights.............................. Selected Consolidated Financial and Other Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations
5 Plan of Distribution.............................. Outside Front Cover; Underwriting; Direct Offering
6 Selling Shareholders.............................. Not Applicable
7 Use of Proceeds................................... Use of Proceeds; Certain Transactions
8 General Description of Registrant................. Outside Front Cover;
Prospectus Summary; Risk Factors;
Business; Investment Policies; Portfolio Companies
9 Management........................................ Management; Custodian, Transfer and Dividend
Paying Agent and Registrar; Principal Stockholders
10 Capital Stock, Long-Term Debt and Other
Securities........................................ Description of Capital Stock;
Reinvestment Plan; Investment
Policies; Tax Status; Regulation; Principal Stockholders
11 Defaults and Arrears on Senior Securities......... Not Applicable
12 Legal Proceedings................................. Not Applicable
13 Table of Contents of the Statement of
Additional Information............................ Inside Front Cover Page; Outside Back Cover Page
<CAPTION>
<S> <C> <C>
14 Cover Page........................................ Not Applicable
15 Table of Contents................................. Not Applicable
16 General Information and History................... The Company; Business
17 Investment Objectives and Policies................ Investment Policies
18 Management........................................ Management
19 Control Persons and Principal Holders of
Securities........................................ Principal Stockholders
20 Investment Advisory and Other Services............ Custodian, Transfer and Dividend Paying Agent and Registrar
21 Brokerage Allocation and Other Practices.......... Not Applicable
22 Tax Status........................................ Tax Status
23 Financial Statements.............................. Consolidated Financial Statements
</TABLE>
* Pursuant to General Instruction on Form N-2, all information required to be
set forth in Part B: Statement of Additional Information has been included in
Part A: The Prospectus. All items required to be set forth in Part C are set
forth in Part C.
<PAGE>
[LOGO]
8,400,000 SHARES COMMON STOCK
------------------------
All of the shares of common stock (the 'Common Stock') being offered hereby
(the 'Offering') are being issued and sold by American Capital Strategies, Ltd.
('American Capital' or the 'Company'). It is currently estimated that the
initial public offering price per share will be $15.00. See 'Underwriting' for
the factors to be considered in determining the initial public offering price.
Prior to the Offering, there has been no public market for the Common Stock. The
Common Stock has been approved for listing on the Nasdaq National Market under
the symbol ACAS.
American Capital is a specialty finance company that, following the
Offering, will primarily be engaged in making loans to and investing in small
and medium sized businesses. The Company's investment objectives are to achieve
a high level of current income from the collection of interest and advisory
fees, as well as long-term growth in its stockholders' equity through the
appreciation in value of the Company's equity interests in the companies in
which it invests. The Company intends to make loans at favorable interest rates
to small and medium sized businesses that are underserved by traditional
lenders. See 'Business.' In seeking to achieve these objectives, the Company
will make senior and subordinated loans to small and medium sized businesses in
need of capital for growth, restructuring or a change of control, and the
Company will generally invest in, or obtain warrants to acquire a minority
equity interest in, such businesses. No assurance can be given that the Company
will achieve its objectives. Following the Offering, the Company will be a
non-diversified, closed-end investment company that has elected to be treated as
a business development company under the Investment Company Act of 1940, as
amended (the '1940 Act').
In addition to the 8,400,000 shares offered by the Underwriters, the Company
is offering by means of this Prospectus up to 722,437 shares of Common Stock
directly to directors, officers and employees of the Company and certain
associated persons and entities at the Price to Public net of Underwriting
Discounts and Commissions (the 'Direct Offering'). See 'Direct Offering.'
SHARES OF CLOSED-END INVESTMENT COMPANIES HAVE IN THE PAST FREQUENTLY TRADED
AT DISCOUNTS FROM THEIR NET ASSET VALUES AND INITIAL OFFERING PRICES. THE RISK
OF LOSS ASSOCIATED WITH THIS CHARACTERISTIC OF CLOSED-END INVESTMENT COMPANIES
MAY BE GREATER FOR INVESTORS EXPECTING TO SELL SHARES OF COMMON STOCK PURCHASED
IN THIS OFFERING SOON AFTER THE COMPLETION OF THIS OFFERING.
This Prospectus sets forth concisely the information about American Capital
that a prospective investor ought to know before investing. It should be
retained for future reference. Additional information about the Company has been
filed with the Securities and Exchange Commission (the 'Commission') and is
available upon written or oral request without charge. See 'Additional
Information.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION, INCLUDING
RISKS RELATING TO LEVERAGE, THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY. THERE ARE CERTAIN SPECIAL RISKS ASSOCIATED
WITH INVESTING IN A BUSINESS DEVELOPMENT COMPANY INCLUDING RISKS RESULTING FROM
A PORTFOLIO HEAVILY INVESTED IN SECURITIES OF SMALL AND DEVELOPING BUSINESSES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share......................................... $15.00 $1.05 $13.95
Total(3).......................................... $126,000,000 $8,820,000 $117,180,000(4)
</TABLE>
(1) Does not include warrants to purchase up to 392,351 shares of Common Stock
(442,751 shares of Common Stock if the Over-Allotment Option, as described
below, is exercised in full) issued to the representative of the
Underwriters in connection with the Offering (the 'Underwriters' Warrants')
and an accountable expense allowance of up to $200,000 payable to the
Underwriters. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the 'Securities Act'). See 'Underwriting.'
(2) Before deduction of expenses of the Offering payable by the Company
estimated at $750,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date of this Prospectus, to purchase up to an aggregate of
1,260,000 additional shares of Common Stock on the same terms as set forth
above, solely to cover over-allotments, if any (the 'Over-Allotment
Option'). If this option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to the Company would be
$144,900,000, $10,143,000 and $134,757,000, respectively. See
'Underwriting.'
(4) Excludes $10,078,000 expected to be received by the Company from the Direct
Offering if the Direct Offering is sold in full.
------------------------
The shares of Common Stock offered by this Prospectus, other than through
the Direct Offering, are being offered by the Underwriters, subject to prior
sale, when, as and if accepted by the Underwriters and subject to the
Underwriters' right to reject orders, in whole or in part, and to certain other
conditions. It is expected that delivery of the shares to the Underwriters will
be made at the office of the Underwriters on or about September 4, 1997 against
payment therefor in immediately available funds.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
AUGUST 29, 1997
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
N-2 (the 'Registration Statement') under the Securities Act, with respect to the
shares of Common Stock offered by this Prospectus. The Prospectus, which is a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement, including the exhibits and schedules
thereto.
The Company will also file reports, proxy statements and other information
with the Commission under the Securities Exchange Act of 1934, as amended. Such
reports, proxy statements and other information, as well as the Registration
Statement and the exhibits and schedules thereto, can be inspected at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices,
located at Seven World Trade Center, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a
web site that contains reports, proxy statements and other information regarding
registrants, including the Company, that file such information electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company will also furnish to its stockholders annual and quarterly
reports, which will include annual financial information that has been examined
and reported on, with an opinion expressed, by independent public accountants,
and quarterly unaudited financial information. See 'Experts.'
The Company's principal office is located at 3 Bethesda Metro Center,
Bethesda, Maryland 20814 and its telephone number is (301) 951-6122.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. Except as otherwise indicated, the
information contained in this Prospectus assumes that neither the Over-Allotment
Option nor the Underwriters' Warrants are exercised and reflects a stock
dividend, effective immediately prior to the effective date of the Registration
Statement of which this Prospectus is a part (the 'Registration Statement'),
pursuant to which each outstanding share of Common Stock will be effectively
converted into 29.859 shares of Common Stock. As used herein, the 'Offering
Price' equals $15.00, which represents the price per share for the Common Stock
set forth on the front cover page of this Prospectus.
Information contained or incorporated by reference in this Prospectus may
contain 'forward-looking statements' within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as 'may,' 'will,' 'expect,' 'intend,' 'plans,'
'anticipate,' 'estimate' or 'continue' or the negative thereof or other
variations thereon or comparable terminology. The matters described in 'Risk
Factors' and certain other factors noted throughout this Prospectus and in any
exhibits to the Registration Statement of which this Prospectus is a part,
constitute cautionary statements identifying important factors with respect to
any such forward-looking statements, including certain risks and uncertainties,
that could cause actual results to differ materially from those in such
forward-looking statements.
THE COMPANY
OVERVIEW
American Capital is a specialty finance company that has been principally
engaged in arranging commercial loans for small and medium sized businesses
throughout the United States and has made equity investments in certain of these
businesses. While the Company has historically not made loans because it lacked
the financial resources to do so, after the Offering, the Company plans to make
senior and subordinated commercial loans to small and medium sized businesses at
relatively high interest rates, accompanied by warrants or stock ownership. The
Company's investment objectives are to achieve a high level of current income
from the collection of interest and advisory fees, as well as long-term growth
in its stockholders' equity through the appreciation in the value of the
Company's equity interests in the companies in which it invests. The Company
intends to make loans at favorable interest rates to small and medium sized
businesses that are underserved by traditional lenders. The Company plans to use
its established network of loan referral sources, the relationships of its
Chairman David Gladstone, referral arrangements with Riggs Bank, N.A. ('Riggs
Bank') and NCB Development Corporation ('NCBDC'), an affiliate of the National
Cooperative Bank, that will be entered into prior to the closing of the
Offering, and other similar sources to generate financing opportunities. The
Company's business strategy contemplates that (i) the net capital gains from the
sale of the warrants or stock it receives in connection with its lending
activities will exceed any losses it may experience from loan defaults, (ii) the
fee income it derives from its lending will provide the Company with a source of
revenue in excess of its general and administrative expenses (excluding interest
expense) and (iii) the Company will derive additional income from its financial
advisory services. No assurance can be given that the Company will achieve its
investment objectives or that its business strategy will be successful.
The Company has significant expertise in arranging financing from banks and
finance companies for small and medium sized businesses. Since its formation in
1986, the Company has arranged 29 financings aggregating over $400 million. In
addition, David Gladstone, the Company's Chairman, has over 22 years experience
in making loans and investing at Allied Capital, an affiliated group of public
and private companies which had under management in excess of $750 million in
assets at December 31, 1996, and invests in small and medium sized businesses
('Allied Capital'). While either Chairman or President of Allied Capital, Mr.
Gladstone oversaw, during the years 1992 through 1997 in excess of $850 million
of financing for many small and medium sized businesses and raised, during the
years 1985 throught 1997, seven funds totaling over $430 million of equity.
The Company currently has twelve professionals who are involved in
structuring and arranging financing for small and medium sized businesses, and
upon completion of the Offering, the Company plans to hire an additional four
professionals with business lending experience. The Company believes that this
expertise will help it to be successful in lending to small and medium sized
businesses.
3
<PAGE>
STRATEGY
The Company will target small and medium sized businesses that meet certain
criteria, including the potential for growth, adequate assets for loan
collateral, an experienced management team with a significant ownership interest
in the business, profitable or near profitable operations and potential
opportunities for the Company to realize appreciation and gain liquidity in its
equity position. The Company's loans to these businesses typically will range
from $1 million to $10 million, mature in five to seven years, and require
monthly interest payments at an annualized rate that exceeds the prime rate.
Amortization of principal may generally be deferred for several years. Liquidity
can be achieved through a sale of the business, a public offering by the
business, a private sale of the Company's loan or equity interests or exercising
the Company's rights to require the business to buy back the Company's warrants
or stock.
To develop new financing opportunities, the Company plans to use its
established network of referral sources, the relationships of its Chairman David
Gladstone and referral arrangements with Riggs Bank and NCBDC whereby they
would, in certain instances, refer certain small and medium sized business
financing opportunities to the Company. The Company intends to enter into
similar referral arrangements with other financial institutions, but no
assurance can be given that it will be able to do so.
The Company believes that many opportunities exist to provide lending to
small and medium sized businesses. According to the Small Business
Administration, small businesses employed 53% of the private work force,
contributed 47% of all sales in the United States, and were responsible for 50%
of the private gross domestic product in 1995. Small businesses produced an
estimated 75% of the 2.5 million new jobs created during 1995 and had income of
$449.2 billion in 1995. The number of small businesses has increased 49% from
1982 to 1995. As of 1994, there were approximately 22.1 million non-farm
businesses in the United States, of which 99% were small businesses.
The Company believes that the market for commercial loans to these small
and medium sized businesses is underserved for a number of reasons. First,
traditional lenders, such as commercial banks and savings and loans, generally
are burdened with an overhead and administrative structure and operate in a
regulatory environment that hinders them from lending effectively to these
businesses. Second, consolidation in the banking industry during the past decade
decreased the number of banks willing to lend to small and medium sized
businesses, as the larger acquiring banks sought to limit both the credit
exposure and monitoring costs associated with loans to these businesses. Third,
the banking industry has experienced structural and regulatory changes that have
greatly affected the ability of traditional financial institutions to make funds
available for loans to small and medium sized businesses.
The Company believes that it is well positioned to provide financing to
small and medium sized businesses. The Company is not burdened with the capital
and other regulatory requirements of the banking and savings and loan industries
and has relatively low overhead and administrative expenses. Moreover, the
Company's strategy of making equity investments in its borrowers is intended to
closely align the interests of the Company and its borrowers, thereby reducing
transaction costs, conveying the Company's commitment to its borrowers and
enhancing the Company's attractiveness as a financing source. The Company
believes that it has the experience and expertise to serve as a financing source
for small and medium sized businesses. In particular, the Company intends to
utilize its expertise in corporate spinoffs and employee stock ownership plan
('ESOP') transactions as well as Mr. Gladstone's twenty-two years of experience
in financing small to medium sized businesses to realize a competitive
advantage.
BACKGROUND
The Company has established itself as a leading firm in structuring and
obtaining funding for management and employee buyouts of subsidiaries, divisions
and product lines being divested by larger corporations through the use of an
ESOP. The selling entities have included Sunbeam Corporation, the U.S. Office of
Personnel Management, American Premier Underwriters, Inc. (formerly Penn Central
Corporation), Campbell Soup Company, Union Carbide Corporation, National Forge
Company, Inc., Air Products & Chemicals, Inc., General Cable Corporation, PPG
Industries, Inc., GenCorp, Inc., American Maize-Products Company,
Ampco-Pittsburgh Corporation, and British Petroleum Company. In most of the ESOP
transactions structured by the Company, the employees agree to restructure their
wages and benefits so that overall cash compensation is reduced in favor of the
contribution of stock to an ESOP. The Company structures the resulting company
so that the fair market value of stock contributed to the employees' ESOP can be
deducted from corporate income before paying taxes. Restructuring employee
compensation together with the ESOP tax advantages has the effect of improving
the
4
<PAGE>
cash flow of the ESOP company. Principals of the Company have served on the
boards of directors of eighteen ESOP companies.
The Company has also provided financial advisory services to the following
entities or parties involved in transactions with such entities: AMR Corporation
(parent of American Airlines, Inc.), Massachusetts Financial Services Company,
Wings Holdings, Inc. (then parent of Northwest Airlines, Inc.), Northwestern
Steel and Wire Company, Goldendale Aluminum Company, Inc., Columbia Aluminum
Corporation, Flair Corporation, Bidermann Industries Corporation, Simmons
Company, John Morrell & Company, Inc., The Circle K Corporation, and H.P. Hood,
Inc.
The Company believes that, through its current business, it has established
an extensive referral network comprised of venture capitalists, investment
bankers, attorneys, commercial bankers and business and financial brokers. While
the Company plans to continue its present business of structuring ESOP
transactions, it also intends to utilize its existing referral network to expand
the Company's operations by making loans to ESOP companies and by financing
small and medium sized businesses without ESOPs.
From 1990 through June 30, 1997, the Company made equity investments in
eight of the businesses that it assisted. The Company's Board of Directors has
determined the value of its six current equity investments based on valuations
by independent firms that were conducted as of dates between December 31, 1996
and June 30, 1997. Based on those six valuations and the net realized gains from
the Company's other two investments, the return on the Company's equity
investments from August 20, 1990 to June 30, 1997 was 47.0% per annum. As of
June 30, 1997, the Company retained six of its equity investments with an
aggregate value of $9.7 million. See 'Portfolio Companies.'
The Company is headquartered in Bethesda, Maryland, a suburb of Washington,
D.C., and has professionals based in or near New York, Pittsburgh, San
Francisco, Savannah and Boston. The Company believes that it offers investors an
opportunity to invest in a portfolio of loans to, and equity interests in, small
and medium sized businesses that may not be otherwise available to the general
public. Following the Offering, the Company will be a non-diversified,
closed-end investment company that will operate as a business development
company under the 1940 Act. To facilitate compliance with certain regulatory
requirements relating to investment companies, the Company plans to contribute
its assets and operations relating to its existing business to a wholly owned
subsidiary. Proceeds from the Offering will remain with the Company.
TAXATION AS A REGULATED INVESTMENT COMPANY
Since its formation in 1986, the Company has been subject to tax as an
ordinary corporation under Subchapter C of the Internal Revenue Code of 1986, as
amended (the 'Code'). After the Offering, the Company intends to qualify for and
elect to be treated as a regulated investment company ('RIC') under Subchapter M
of the Code. If the Company qualifies as a RIC, it will be able to take a
deduction against its otherwise taxable income for certain dividends it pays,
allowing it to substantially reduce or eliminate its corporate-level tax
liability.
The tax consequences of converting an existing corporation from taxation
under Subchapter C of the Code to taxation as a RIC under Subchapter M of the
Code are uncertain. The Company has requested a ruling from the Internal Revenue
Service ('IRS') that would clarify the consequences of the conversion. Although
the Company expects a favorable ruling, there can be no assurance that the IRS
will issue a favorable ruling or that such a ruling would be issued on a timely
basis.
If the Company does not receive a favorable ruling on a timely basis it
will treat the conversion as triggering a deemed sale of all the Company's
assets. The deemed sale would cause the Company to pay approximately $3.1
million of additional tax (based on the Company's June 30, 1997 financial
results), which potential liability is included on the Company's financial
statements as a deferred tax liability. The Company would also pay a taxable
dividend to holders of Common Stock before the end of its first tax year during
which it wishes to be treated as a RIC equal to the gain recognized on the
deemed sale, reduced by the tax payment referred to above. The dividend would be
approximately $5.9 million or $0.60 per share (based on the Company's June 30,
1997 financial results and assuming the Direct Offering is sold in full, but
that the Underwriter's Warrants, Over-Allotment Option or other options are not
exercised). See 'Tax Status--Conversion to RIC Status.'
CERTAIN INVESTMENT CONSIDERATIONS
Investment in the Common Stock carries certain risks. There can be no
assurance that the market price for the Common Stock will not decrease below the
offering price or that the Company will pay regular dividends. Only investors
who can bear the risk of such decreases in the stock price and who do not depend
on the payment of regular dividends should consider purchasing the Common Stock.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 8,400,000 shares
Common Stock to be outstanding after
the Offering..................................... 9,808,767 shares(1)
Nasdaq National Market Symbol...................... ACAS
Use of proceeds.................................... Origination of loans and investments and repayment of
indebtedness. See 'Use of Proceeds.'
Distributions...................................... The Company intends to distribute quarterly 90% or more of
its net investment income and net realized short-term
capital gains, if any. The first distribution is expected to
be declared approximately 60 days after the date of this
Prospectus. See 'Distributions.'
Risk Factors....................................... Investment in shares of Common Stock involves certain risks
relating to the structure and investment objectives of the
Company that should be considered by purchasers of Common
Stock. See 'Risk Factors.'
Reinvestment Plan.................................. All cash distributions to stockholders will be reinvested
automatically under the Company's Reinvestment Plan in
additional whole and fractional shares of Common Stock
unless a stockholder or its representative elects to receive
cash. See 'Reinvestment Plan' and 'Tax Status.'
</TABLE>
- ------------------
(1) Assumes that all of the 722,437 shares offered through the Direct Offering
are sold in full, but does not include Common Stock reserved for issuance
upon exercise of the Underwriters' Warrants, the Over-Allotment Option or
options to be issued under the Company's 1997 Stock Option Plan. See
'Management--Stock Option Plan,' 'Shares Eligible for Future Sale' and
'Underwriting.'
6
<PAGE>
FEES AND EXPENSES
The purpose of the following table is to assist a prospective investor in
understanding the various costs and expenses that an investor in the Company
will bear directly or indirectly.
<TABLE>
<S> <C> <C>
STOCKHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price).......................................... 7.00%(1)
Dividend Reinvestment Plan Fees......................................................... None(2)
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management Fees......................................................................... None
Interest Payments on Borrowed Funds..................................................... 0.03%(3)
Other Expenses.......................................................................... 2.49%(3)
-----
Total Annual Expenses (estimated)............................................. 2.52%
-----
-----
</TABLE>
- ------------------
(1) The underwriting discounts and commissions with respect to the Common Stock
sold by the Company in the Offering, which are onetime fees paid by the
Company to the Underwriters in connection with the Offering, are the only
sales load paid in connection with the Offering.
(2) The expenses of the Reinvestment Plan are included in stock record expenses,
a component of Total Operating Expenses. The Company has no cash purchase
plan.
(3) Estimates of Interest Payments on Borrowed Funds and Total Operating
Expenses have been based on the Company's existing Operating Expenses
(including interests costs) and including expenses associated with its
financial advisory services divided by the Company's assets subsequent to
the Offering. The percentage in the table assumes that the Company has not
issued any securities that are senior to its equity securities. In fact, the
Company does not expect the Offering proceeds to be fully invested for the
first year and possibly one and a half years. See 'Use of Proceeds.' Once
the Offering proceeds are substantially fully invested, the Company intends
to issue senior debt securities ('Senior Debt Securities') up to an amount
so that the asset coverage, as defined in the 1940 Act, is at least 200%
immediately after each issuance of Senior Debt Securities. See
'Business--Leverage.'
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Company. These amounts are based upon payment
by an investor of a 7% sales load (the underwriting discounts and commissions
paid by the Company with respect to the Common Stock sold by the Company in this
Offering) and payment by the Company of operating expenses at the levels set
forth in the table above which, as indicated above, does not include leverage or
related expenses.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return............................................................ $ 95 $ 149 $ 209 $386
</TABLE>
This example should not be considered a representation of the future
expenses of the Company, and actual expenses may be greater or less than those
shown. Moreover, while the example assumes (as required by the Commission) a 5%
annual return, the Company's performance will vary and may result in a return
greater or less than 5%. In addition, while the example assumes reinvestment of
all dividends and distributions at net asset value, participants in the
Reinvestment Plan may receive shares purchased by the Plan Administrator at the
market price in effect at the time, which may be at, above or below net asset
value. See 'Reinvestment Plan.'
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- ----------
1993(1) 1994 1995 1996
---------- ---------- ---------- ---------- 1996
----------
1992(1)(2) (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
REVENUE
Financial advisory fees...................... $ 891,340 $1,195,821 $1,433,891 $1,148,752 $1,738,295 $ 838,625
Financial performance fees................... -- 210,000 708,377 1,288,797 649,030 240,980
Other........................................ 156,380 476,337 355,963 268,083 359,097 212,435
----------- ---------- ---------- ---------- ---------- ----------
Total revenue................................ 1,047,720 1,882,158 2,498,231 2,705,632 2,746,422 1,292,040
OPERATING EXPENSES
Salaries and benefits........................ 462,910 751,755 1,350,909 1,484,833 1,067,315 514,807
General and administrative................... 252,634 386,816 523,233 573,102 926,502 374,500
Other operating expenses..................... 159,870 292,842 345,056 278,212 355,693 184,464
Provision for doubtful accounts.............. -- -- -- 302,283 224,329 100,250
Interest..................................... 15,948 38,960 36,001 37,037 32,959 11,223
Depreciation and amortization................ 9,516 22,526 33,198 35,415 39,016 18,350
ESOP contribution............................ 100,917 166,273 317,361 216,827 215,883 103,328
----------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..................... 1,001,795 1,659,172 2,605,758 2,927,709 2,861,697 1,306,922
----------- ---------- ---------- ---------- ---------- ----------
Net operating income (loss) before investment
activity................................... 45,925 222,986 (107,527) (222,077) (115,275) (14,882)
Unrealized appreciation (depreciation) of
investments................................ 619,760 (61,660) 956,294 370,696 483,665 398,498
Realized gain (loss) on investments.......... -- -- (22,784) 66,148 -- --
----------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item......................... 665,685 161,326 825,983 214,767 368,390 383,616
Provision for (benefit from) income taxes.... 212,346 (2,458) 421,664 57,381 159,251 149,454
----------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary item............. 453,339 163,784 404,319 157,386 209,139 234,162
Extraordinary item........................... 60,228 -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ----------
Net income................................... $ 513,567 $ 163,784 $ 404,319 $ 157,386 $ 209,139 $ 234,162
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL PER SHARE DATA:(3)
Net operating income (loss) before investment
activity................................... $ (0.17)
Income before extraordinary item............. 0.30
Net income................................... 0.30
Weighted average shares outstanding.......... 686,330
BALANCE SHEET DATA AT PERIOD END:
Investments.................................. $2,173,202 $2,111,542 $3,045,052 $3,422,422 $3,980,421 $3,820,920
Cash and cash equivalents.................... 206,204 229,674 203,234 359,029 322,664 312,001
Total assets................................. 2,713,821 2,821,611 3,930,365 4,382,994 5,432,265 4,890,574
Total liabilities............................ 1,244,751 971,102 1,358,919 1,437,335 2,060,614 1,606,455
Total stockholders' equity................... 1,469,070 1,850,509 2,571,446 2,945,659 3,371,651 3,284,119
OPERATING STATISTICS (DOLLARS IN THOUSANDS):
(UNAUDITED)
Number of financings arranged during the
period..................................... 1 6 2 4 4 2
Amount of financings arranged................ $ 35,153 $ 42,862 $ 16,470 $ 131,039 $ 49,931 $ 8,080
Number of portfolio companies as of end of
period..................................... 2 4 5 5 5 5
<CAPTION>
1997
----------
<S> <C>
STATEMENT OF INCOME DATA:
REVENUE
Financial advisory fees...................... $ 860,431
Financial performance fees................... 743,600
Other........................................ 337,658
----------
Total revenue................................ 1,941,689
OPERATING EXPENSES
Salaries and benefits........................ 619,851
General and administrative................... 700,006
Other operating expenses..................... 425,316
Provision for doubtful accounts.............. (177,198)
Interest..................................... 41,709
Depreciation and amortization................ 21,832
ESOP contribution............................ 7,296
----------
Total operating expenses..................... 1,638,812
----------
Net operating income (loss) before investment
activity................................... 302,877
Unrealized appreciation (depreciation) of
investments................................ 5,332,369
Realized gain (loss) on investments.......... --
----------
Income before income taxes and
extraordinary item......................... 5,635,246
Provision for (benefit from) income taxes.... 2,150,893
----------
Income before extraordinary item............. 3,484,353
Extraordinary item........................... --
----------
Net income................................... $3,484,353
----------
----------
SUPPLEMENTAL PER SHARE DATA:(3)
Net operating income (loss) before investment
activity................................... $ 0.44
Income before extraordinary item............. 5.08
Net income................................... 5.08
Weighted average shares outstanding.......... 686,330
BALANCE SHEET DATA AT PERIOD END:
Investments.................................. $9,685,679
Cash and cash equivalents.................... 726,086
Total assets................................. 11,369,683
Total liabilities............................ 4,506,383
Total stockholders' equity................... 6,893,300
OPERATING STATISTICS (DOLLARS IN THOUSANDS):
(UNAUDITED)
Number of financings arranged during the
period..................................... 2
Amount of financings arranged................ $ 39,539
Number of portfolio companies as of end of
period..................................... 6
</TABLE>
- ------------------
(1) Beginning January 1, 1994, the Company prospectively adopted the provisions
of AICPA Statement of Position 93-6, 'Employers' Accounting for Employee
Stock Ownership Plans' (SOP 93-6). Through December 31, 1993, the Company
accounted for ESOP shares in accordance with AICPA Statement of Position
76-3.
(2) Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
FASB Statement No. 109, 'Accounting for Income Taxes.' As permitted under
the new rules, financial statements as of and for the year ended December
31, 1992 have not been restated for the effect of this change. The
cumulative effect of adopting Statement 109 as of January 1, 1993 was
immaterial for financial statement presentation.
(3) Per share data for periods not shown is not meaningful, in part, because of
the July 28, 1997 conversion of the Company ESOP's Preferred Stock into
Common Stock. See 'Capitalization.'
8
<PAGE>
RISK FACTORS
The purchase of the shares offered by this Prospectus involves a number of
significant risk and other factors relating to the structure and investment
objectives of the Company. As a result, there can be no assurance that the
Company will achieve its investment objectives. In addition to the other
information contained in this Prospectus, prospective investors should consider
carefully the following information before making an investment in the Common
Stock.
RISKS ASSOCIATED WITH LOANS TO AND INVESTMENTS IN SMALL AND MEDIUM SIZED
PRIVATELY-OWNED BUSINESSES
The Company's portfolio primarily will consist of loans to and securities
issued by small and medium sized, privately-owned businesses. There is generally
no publicly available information about such companies and the Company must rely
on the diligence of its employees and agents to obtain information in connection
with the Company's investment decisions. Typically, small and medium sized
businesses depend for their success on the management talents and efforts of one
or two persons or a small group of persons, and the death, disability or
resignation of one or more of these persons could have a material adverse impact
on the related company. In addition, small and medium sized businesses
frequently have smaller product lines and market shares than their competition.
Small and medium sized companies may be more vulnerable to economic downturns
and often need substantial additional capital to expand or compete. Such
businesses may also experience substantial variations in operating results.
Accordingly, investment in small and medium sized businesses should be
considered speculative. The Company's operating history is relatively limited,
and it has not previously operated as a lender to small and medium sized
businesses. The Company will seek to make senior secured loans and subordinated
loans, the latter of which have a higher degree of collection risk. The Company
will also make unsecured loans and will invest in equity, both of which
activities may involve a higher degree of risk.
RISK OF PAYMENT DEFAULT
The Company after this Offering intends generally to make five to seven
year term loans, deferring amortization of principal for several years. The
loans will have relatively high interest rates floating with the prime lending
rate or a comparable index. These loans will be made to small and medium sized
companies that may have limited financial resources and may be unable to obtain
financing from traditional sources. These loans generally will be secured by the
assets of the borrower. A borrower's ability to repay its loan may be adversely
affected by numerous factors, including the failure to meet its business plan, a
downturn in its industry or negative economic conditions. A deterioration in a
borrower's financial condition and prospects usually will be accompanied by a
deterioration in the value of any collateral for the loan and a reduction in the
likelihood of realizing on any guarantees obtained from the borrower's
management. Although the Company often will seek to be the senior, secured
lender to a borrower, the Company will not always be the senior lender, and the
Company's interest in any collateral for a loan may be subordinate to another
lender's security interest.
LONG-TERM CHARACTER OF INVESTMENTS
The Company expects that it will take at least one and possibly
one-and-a-half years for the net proceeds from the Offering to be substantially
fully invested or loaned. See 'Use of Proceeds.' Since the Company generally
intends to make five to seven year term loans and to hold its loans and related
equity investments until the loans mature, an investor in the Company should not
expect realization events, if any, to occur for a long time. In addition, the
Company expects that its equity investments may require several years to
appreciate in value and no assurance can be given that such appreciation will
occur.
ILLIQUIDITY
Liquidity relates to the ability of the Company to sell either a debt or
equity security in a timely manner at a price that reflects the value of that
security. Most of the investments of the Company will consist of securities
acquired directly from their issuers in private transactions. The securities
will usually be subject to restrictions on resale or otherwise illiquid because
there will usually be no established trading market for such securities. The
illiquidity of most of the Company's portfolio securities will adversely affect
the ability of the Company to dispose of such securities in a timely manner and
at a fair price at times when it might be necessary or advantageous for the
Company to liquidate portfolio securities. To the extent that there exists any
market, the market for illiquid securities tends to be more volatile than the
market for more liquid securities and market
9
<PAGE>
values of relatively illiquid securities may be more susceptible to change as a
result of adverse publicity and investor perceptions than are the market values
of relatively liquid securities. In the absence of readily ascertainable market
value, the valuation of securities in the Company's portfolio is determined in
good faith by the Company's Board of Directors. The estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
LEVERAGE RISKS
The Company expects that it will take at least one and possibly
one-and-a-half years for the net proceeds from the Offering to be substantially
fully invested or loaned. At such time as the Company believes that the
remaining proceeds will be insufficient to fund new loans or investments
anticipated to be made within the next twelve month period (other than temporary
investments), it intends to leverage its assets by borrowing or issuing Senior
Debt Securities up to the maximum amount permitted under the 1940 Act, which is
currently an amount such that the asset coverage, as defined in the 1940 Act, is
at least 200% immediately after each issuance of Senior Debt Securities. The use
of leverage magnifies the potential for gain or loss on monies invested and,
therefore, increases the risks associated with an investment in the Company's
securities. See 'Business-- Leverage,' 'Regulation,' and 'Tax Status.'
POSSIBLE FAILURE TO OBTAIN PASS-THROUGH TAX TREATMENT; TAXATION OF BUILT-IN GAIN
The Company was formed in 1986, and since that time has been subject to tax
as an ordinary corporation under Subchapter C of the Code. After the Offering,
the Company intends to qualify for and elect to be treated as a RIC under
Subchapter M of the Code. If the Company qualifies as a RIC, it will be able to
take a deduction against its otherwise taxable income for certain dividends it
pays, allowing it to substantially reduce or eliminate its corporate-level tax
liability. Failure to qualify for RIC status will result in the imposition of
corporate-level taxes that will substantially reduce the returns available to
purchasers of Common Stock. Such a failure would have a material adverse effect
on the Company and its shares.
The tax consequences of converting an existing corporation from taxation
under Subchapter C of the Code to taxation as a RIC under Subchapter M of the
Code are uncertain. The Company has requested a ruling from the IRS that would
clarify the consequences of the conversion. Although the Company expects a
favorable ruling, there can be no assurance that the IRS will issue a favorable
ruling or that such a ruling would be issued on a timely basis.
If the Company does not receive a favorable ruling on a timely basis it
will treat the conversion as triggering a deemed sale of all the Company's
assets. The deemed sale would cause the Company to pay approximately $3.1
million of additional tax (based on the Company's June 30, 1997 financial
results), which potential liability is included on the Company's financial
statements as a deferred tax liability. The Company would also pay a taxable
dividend to holders of Common Stock before the end of its first tax year during
which it wishes to be treated as a RIC equal to the gain recognized on the
deemed sale, reduced by the tax payment referred to above. The dividend would be
approximately $5.9 million (based on the Company's June 30, 1997 financial
results).
If the Company receives a timely favorable ruling, it will not pay
additional tax or a special dividend in connection with its conversion to RIC
status. The Company's basis in the assets it owned before the Offering will be
less than their fair market value by approximately $9.0 million ('built-in
gain'). If the Company disposes of any asset held on the date of the Offering
within ten years of the Offering, and it recognizes any built-in gain from the
disposition of the asset, it generally will be liable for corporate-level tax on
the gain. If all of the built-in gain assets were sold, the built-in gain tax
would be approximately $3.1 million at current corporate tax rates. Such taxes
will reduce the funds otherwise available for the Company's operations or for
distribution to stockholders. See 'Tax Status--Conversion to RIC Status.'
POTENTIAL PURCHASERS OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES OF THE COMPANY'S CONVERSION TO RIC STATUS,
AND THE TAX TREATMENT OF THE COMPANY'S BUILT-IN GAIN.
RISK OF LOSS OF PASS-THROUGH TAX TREATMENT
To maintain its qualification as a RIC, the Company must meet income source
and distribution rules and asset diversification requirements. If the Company
qualifies as a RIC, the Company will not be subject to federal income tax in any
given tax year to the extent it distributes its income to its stockholders. The
income distribution
10
<PAGE>
requirement is satisfied if the Company distributes at least 90% of its net
investment income to stockholders. Because the Company intends to use leverage,
it is subject to certain asset coverage ratio requirements under the 1940 Act
and could, under certain circumstances, be restricted from making distributions
necessary to qualify as a RIC. The asset diversification requirements must be
met at the end of each calendar quarter. Failure to meet these tests may result
in the Company having to quickly dispose of certain investments in order to
prevent the loss of pass-through treatment. Since most of the Company's
investments will be illiquid, such dispositions, if possible, may not be made at
prices advantageous to the Company and, in fact, may result in substantial
losses. If the Company fails to qualify for pass-through tax treatment for any
reason and becomes fully subject to corporate income tax, the resulting
corporate taxes could substantially reduce the Company's net assets, the amount
of income available for distribution, and the actual amount distributed. Such a
failure would have a material adverse effect on the Company and its shares. See
'Business--Leverage,' 'Tax Status,' and 'Regulation.'
ABSENCE OF A PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; MARKET PRICE
DISPARITIES
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations between the Company and the representative of the
Underwriters. See 'Underwriting' for a discussion of factors to be considered in
determining the initial public offering price. There can be no assurance that a
regular trading market for the Common Stock will develop after this Offering or,
if developed, that a public trading market can be sustained. The initial public
offering price will not necessarily reflect, and may be higher than, the market
price of the Common Stock after the Offering.
Shares of closed-end investment companies frequently trade at a discount
from net asset value, but shares of some have historically traded at a premium
to net asset value. This characteristic of shares of closed-end investment
companies is separate and distinct from the risk that a company's net asset
value per share will decline. It is not possible to predict whether the shares
offered hereby will trade at, above, or below net asset value.
INTEREST RATE RISK AND HEDGING
The Company's income will, in part, depend upon the 'spread' between the
rate at which it borrows funds and the rate at which it loans these funds. The
Company anticipates eventually using a combination of long-term and short-term
borrowings to finance its lending activities and engaging in interest rate risk
management techniques, including various interest rate hedging activities such
as interest rate swaps and purchased interest rate caps and floors. There can be
no assurance, however, that a significant change in market interest rates will
not have a material adverse effect on the Company's profitability. Additionally,
interest rate hedging activities are a type of off-balance sheet financial
derivative and, as such, involve, to varying degrees, interest rate and credit
risk in excess of the amount recognized in the Company's balance sheet. Interest
rate swaps are agreements to exchange fixed and floating interest rate payments
calculated on a notional principal amount. The floating rate is based on a money
market index, primarily short-term LIBOR indices. Purchased interest rate caps
and floors, respectively, are agreements where, for a fee, the counterparty
agrees to pay the amount, if any, by which a specified market interest rate
exceeds or is less than a defined rate applied to a notional amount. For
interest rate swaps, caps and floors, only periodic cash payments and, with
respect to caps and floors, premiums are exchanged. Therefore, cash requirements
and exposure to credit risk are significantly less than the notional value,
although greater than the amount recognized in the Company's balance sheet.
RISK OF UNAVAILABILITY OF FUNDS
Once the Offering proceeds are substantially invested, the Company will
have a continuing need for capital to finance its loans and investments. In
order to maintain RIC status, the Company will distribute to its stockholders
90% of its investment company taxable income. Accordingly, such earnings will
not be available to fund the Company's loans and investments. The unavailability
of funds from commercial banks or other sources on terms favorable to the
Company could have a material adverse effect on the Company. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition, Liquidity and Capital Resources' and
'Distributions.'
COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES
A large number of entities and individuals compete to make the types of
investments made by the Company, many of whom have greater financial resources
than the Company. As a result of this competition, the Company may from time to
time be precluded from entering into attractive transactions. There can be no
assurance that the
11
<PAGE>
Company will be able to identify and make investments which satisfy the
Company's investment objectives or that it will be able to invest fully its
available capital.
DEPENDENCE ON MANAGEMENT
The Company will be dependent for the final selection, structuring, closing
and monitoring of its investments on the diligence and skill of David Gladstone,
Malon Wilkus, Adam Blumenthal and other management members. Although each of the
aforementioned individuals has an employment contract with the Company, the loss
of the services of any of such individuals could have a material adverse effect
on the Company. The Company does not plan to maintain key man life insurance
with respect to any of its executives. See 'Management.'
LACK OF PREVIOUS LENDING OPERATIONS
Although the Company has significant expertise in arranging financing for,
and investing in, small and medium sized businesses and has assisted in
arranging financings aggregating over $400 million, the Company has not
previously made any commercial loans. Consequently, the Company has no prior
experience in loan administration. The Company has, however, entered into an
agreement with Riggs Bank pursuant to which the bank will provide certain loan
accounting administrative services for the Company's loans. Because the Company
has not previously made loans, it has no experience in workouts of troubled
loans as a lender. However, the Company has extensive experience as a financial
adviser to troubled companies. In addition, Mr. Gladstone has more than 22 years
of experience in making and working out loans to, and investing in, small and
medium sized businesses, and, after the Offering, the Company plans to hire an
additional four professionals with substantial lending experience. The success
of the Company will be dependent upon its ability to attract and retain
financial professionals.
The Company intends to obtain licenses in certain states in order to make
commercial loans. The time required to obtain these licenses may delay the
Company's ability to make loans to businesses in those states.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Second Amended and Restated Certificate of Incorporation and
Second Amended and Restated By-laws contain certain provisions that may have the
effect of discouraging a third party from making an acquisition proposal for the
Company and thereby inhibit a change in control of the Company in circumstances
that could give the holders of Common Stock the opportunity to realize a premium
over the then prevailing market price for the Common Stock. See 'Description of
Capital Stock--Certain Provisions of the Second Amended and Restated Certificate
of Incorporation and the Second Amended and Restated By-Laws.'
SHARES ELIGIBLE FOR RESALE
Upon consummation of the Offering and the entire amount of the Direct
Offering, the Company will have 9,808,767 shares of Common Stock outstanding.
Following the Offering, sales of substantial amounts of the Common Stock in the
public market pursuant to Rule 144 or otherwise, or the availability of such
shares for sale, could adversely affect the prevailing market prices for the
Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities should it desire to do so. See 'Shares
Eligible for Future Sale.'
USE OF PROCEEDS
The net proceeds of the Offering and the Direct Offering, assuming that the
Direct Offering is sold in full, are estimated to be approximately $126,508,000
($144,085,000 if the Over-Allotment Option is exercised in full) after deducting
the underwriting discounts and commissions and estimated Offering expenses
payable by the Company. The Company will use approximately $636,000 of the net
proceeds of the Offering to repay the outstanding debt on its term loan and its
acquisition credit facility with NCBDC, which bear interest at rates ranging
from 1.5% to 3% per annum over such lender's base rate and which mature or
terminate on November 30, 2001 and May 7, 2004, respectively. The remainder of
the net proceeds will be invested in accordance with the Company's investment
objectives and policies. See 'Business--Strategy--Selection of Loan
Opportunities' and 'Investment Objectives and Policies.' The Company estimates
that it will take at least one and possibly up to one and one half years for the
net proceeds of the Offering to be substantially fully loaned or invested,
depending on the availability of appropriate opportunities and other market
conditions. Pending such investment, the proceeds will be invested primarily in
certain temporary investments. See 'Business--Temporary Investments.'
12
<PAGE>
DISTRIBUTIONS
The Company intends to distribute quarterly 90% or more of its net
investment income and net realized short-term capital gains, if any. The first
distribution is expected to be declared approximately 60 days after the date of
this Prospectus. Net realized long-term capital gains, if any, may be
distributed annually, as a special distribution, or retained. There can be no
assurance that the Company will achieve results that will permit the payment of
any cash distributions. For a discussion of the consequences for stockholders of
net realized long-term capital gains that are retained by the Company, see 'Tax
Status.' All cash distributions will be reinvested automatically under the
Company's Reinvestment Plan in additional whole and fractional shares unless a
stockholder elects to receive cash. A stockholder whose shares are held in the
name of a broker or other nominee should contact the broker or nominee regarding
participation in the Reinvestment Plan on the stockholder's behalf. See 'Risk
factors--Risk of Loss of Pass-Through Tax Treatment' and 'Reinvestment Plan.'
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1997, which reflects a stock dividend pursuant to which each
outstanding share of Common Stock will effectively convert into 29.859 shares,
to become effective immediately prior to the Effective Date of the Registration
Statement, and (ii) the capitalization of the Company as of June 30, 1997, as
adjusted to reflect the effects of (A) the sale of the Common Stock offered
hereby by the Company including the assumed sale of 722,437 shares in the Direct
Offering, (B) the repayment in full of a loan by the Company to the Company ESOP
which occurred as of July 28, 1997 and, pursuant to the Company's Second Amended
and Restated Certificate of Incorporation, the simultaneous conversion of
Preferred Stock held by the Company ESOP into Common Stock on a one share to one
share basis, (C) the effectiveness of the Company's Second Amended and Restated
Certificate of Incorporation increasing the amount of authorized Preferred Stock
and Common Stock, (D) a contribution of 529 shares of Common Stock made to the
Company ESOP as of July 28, 1997, and (E) the application of the net proceeds as
set forth under 'Use of Proceeds.' This table does not reflect any exercise of
the Over-Allotment Option, the Underwriters' Warrants or any options to be
issued under the Company's 1997 Stock Option Plan.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
AS
ACTUAL ADJUSTED(1)
---------- ------------
<S> <C> <C>
Due to related parties...................................................... $ 39,612 $ --
Notes payable............................................................... 1,019,309 --
---------- ------------
1,058,921 --
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized (5,000,000
shares as adjusted) and 6,857 issued and outstanding (0 issued and
outstanding as adjusted)............................................... 1,419,399 --
Unearned ESOP shares...................................................... (27,956) --
Common stock, $.01 par value, 100,000 shares authorized (20,000,000 shares
as adjusted) and 481,058(2) issued and outstanding (9,808,767 issued
and outstanding as adjusted)........................................... 4,811 98,088
Capital in excess of par value............................................ 10,407 127,852,459
Retained earnings......................................................... 5,456,639 5,420,748
---------- ------------
Total stockholders' equity.................................................. 6,863,300 133,371,294
---------- ------------
Total capitalization........................................................ $7,922,221 $133,371,294
---------- ------------
---------- ------------
</TABLE>
- ------------------
(1) Assumes an Offering Price of $15.00 for the Offering, an offering price of
$13.95 for the Direct Offering and estimated expenses of $750,000.
(2) Actual outstanding shares on June 30, 1997 were 16,111.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial data and
other operating information of the Company. The selected consolidated statement
of income and consolidated balance sheet data as of and for the four years ended
December 31, 1996 are derived from the Company's audited consolidated financial
statements. The selected consolidated statement of income and consolidated
balance sheet data as of and for the year ended December 31, 1992 and as of and
for the six months ended June 30, 1997 and 1996 are derived from unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
which the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1997. The data
should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ----------------------
1992(1)(2) 1993(1) 1994 1995 1996 1996 1997
----------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
REVENUE
Financial advisory fees.......... $ 891,340 $1,195,821 $1,433,891 $1,148,752 $1,738,295 $ 838,625 $ 860,431
Financial performance fees....... -- 210,000 708,377 1,288,797 649,030 240,980 743,600
Other............................ 156,380 476,337 355,963 268,083 359,097 212,435 337,658
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue.................... 1,047,720 1,882,158 2,498,231 2,705,632 2,746,422 1,292,040 1,941,689
OPERATING EXPENSES
Salaries and benefits............ 462,910 751,755 1,350,909 1,484,833 1,067,315 514,807 619,851
General and administrative....... 252,634 386,816 523,233 573,102 926,502 374,500 700,006
Other operating expenses......... 159,870 292,842 345,056 278,212 355,693 184,464 425,316
Provision for doubtful accounts.. -- -- -- 302,283 224,329 100,250 (177,198)
Interest......................... 15,948 38,960 36,001 37,037 32,959 11,223 41,709
Depreciation and amortization.... 9,516 22,526 33,198 35,415 39,016 18,350 21,832
ESOP contribution................ 100,917 166,273 317,361 216,827 215,883 103,328 7,296
----------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses......... 1,001,795 1,659,172 2,605,758 2,927,709 2,861,697 1,306,922 1,638,812
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net operating income (loss)
before investment activity..... 45,925 222,986 (107,527) (222,077) (115,275) (14,882) 302,877
Unrealized appreciation
(depreciation) of investments.. 619,760 (61,660) 956,294 370,696 483,665 398,498 5,332,369
Realized gain (loss) on
investments.................... -- -- (22,784) 66,148 -- -- --
----------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item............. 665,685 161,326 825,983 214,767 368,390 383,616 5,635,246
Provision for (benefit from)
income taxes................... 212,346 (2,458) 421,664 57,381 159,251 149,454 2,150,893
----------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
item........................... 453,339 163,784 404,319 157,386 209,139 234,162 3,484,353
Extraordinary item............... 60,228 -- -- -- -- -- --
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net income....................... $ 513,567 $ 163,784 $ 404,319 $ 157,386 $ 209,139 $ 234,162 $3,484,353
----------- ---------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ---------- ----------
SUPPLEMENTAL PER SHARE DATA:(3)
Net operating income (loss)
before investment activity..... $ (0.17) $ 0.44
Income before extraordinary
item........................... 0.30 5.08
Net income....................... 0.30 5.08
Weighted average shares
outstanding.................... 686,330 686,330
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------------- ----------------------
1992(1)(2) 1993(1) 1994 1995 1996 1996 1997
----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA AT PERIOD END:
Investments...................... $ 2,173,202 $2,111,542 $3,045,052 $3,422,422 $3,980,421 $3,820,920 $9,685,679
Cash and cash equivalents........ 206,204 229,674 203,234 359,029 322,664 312,001 726,086
Total assets..................... 2,713,821 2,821,611 3,930,365 4,382,994 5,432,265 4,890,574 11,369,683
Total liabilities................ 1,244,751 971,102 1,358,919 1,437,335 2,060,614 1,606,455 4,506,383
Total stockholders' equity....... 1,469,070 1,850,509 2,571,446 2,945,659 3,371,651 3,284,119 6,863,300
OPERATING STATISTICS
(DOLLARS IN THOUSANDS):
(UNAUDITED)
Number of financings arranged
during the period.............. 1 6 2 4 4 2 2
Amount of financings arranged.... $ 35,153 $ 42,862 $ 16,470 $ 131,039 $ 49,931 $ 8,080 $ 39,539
Number of portfolio companies as
of end of period............... 2 4 5 5 5 5 6
</TABLE>
- ------------------
(1) Beginning January 1, 1994, the Company prospectively adopted the provisions
of AICPA Statement of Position 93-6, 'Employers' Accounting for Employee
Stock Ownership Plans' (SOP 93-6). Through December 31, 1993, the Company
accounted for ESOP shares in accordance with AICPA Statement of Position
76-3.
(2) Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by
FASB Statement No. 109, 'Accounting for Income Taxes.' As permitted under
the new rules, financial statements as of and for the year ended December
31, 1992 have not been restated for the effect of this change. The
cumulative effect of adopting Statement 109 as of January 1, 1993 was
immaterial for financial statement presentation.
(3) Per share data for periods not shown is not meaningful, in part, because of
the July 28, 1997 conversion of the Company ESOP's Preferred Stock into
Common Stock. See 'Capitalization.'
15
<PAGE>
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 Selected Consolidated
Financial and Other Data, the Company's consolidated financial statements and
the notes thereto and the other financial data included elsewhere in this
Prospectus.
GENERAL
The Offering will significantly increase the Company's capital resources.
Prior to the Offering, the Company operated as a specialty finance company
principally engaged in arranging commercial loans for small and medium sized
businesses and making equity investments in certain of these businesses. The
Company has not historically made loans itself because it has lacked the
financial resources to do so. The amount of capital available for direct
investments by the Company has been small. Subsequent to the Offering, the
Company will operate as a finance company and as a closed-end investment company
that has elected to be treated as a business development company, the primary
business of which will be lending to and investing funds in small and medium
sized businesses. As a result of this change, the Company's operating results
subsequent to the Offering are anticipated to be significantly different from
its operating results prior to the Offering. In addition, the Company plans to
contribute the assets and operations relating to its existing business to a
wholly-owned subsidiary. Thereafter, the financial results of the Company's
subsidiaries will be reported by the Company using the equity method of
accounting.
The Company's financial results as reported under GAAP reflect significant
adjustments from actual cash income. In particular, the Company has historically
reported significant ESOP contributions, which reduce GAAP income and taxes
without an outflow of cash.
The Company's financial performance as reflected in its Consolidated
Statements of Income is composed of four primary elements. The first element is
'Net Operating Income (Loss) Before Investment Activity,' which is the
difference between the Company's income earned from arranging commercial loans
for small and medium sized businesses and other financial advisory work and its
total operating expenses including ESOP contributions, depreciation and interest
expense. ESOP contributions, which reflect non-cash contributions to the
Company's ESOP, historically have represented a significant component of total
operating expenses. All required contributions to the Company's ESOP have been
made by the Company, and further contributions will be made at the discretion of
the Company's Board of Directors. The second element is 'Unrealized Appreciation
(Depreciation) of Investments,' which is the net change in the fair value of the
Company's portfolio assets at the end of the period compared with their fair
values at the beginning of the period or their stated costs, as appropriate. In
the six months ended June 30, 1997 and in each of the years ended December 31,
1996, 1995 and 1994, 'Unrealized Appreciation (Depreciation) of Investments'
exceeded Net Operating Income (Loss) Before Investment Activity. The third
element is 'Realized Gain (Loss) on Investments,' which reflects the difference
between the proceeds from a portfolio investment at the time the gain or loss is
realized, and the value at which the investment was carried on the Company's
balance sheet. The fourth element is Provision for (Benefit from) Income Taxes,
which reflects a statutory tax rate applied to the Company's GAAP pretax income.
Actual taxes paid have historically been lower than the Provision for (Benefit
from) Income Taxes, which has resulted in a Deferred Tax Liability on the
Company's balance sheet.
FISCAL YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Total Revenue...................................................... $2,498,231 $2,705,632 $2,746,422
Operating Expense Excluding ESOP Contribution...................... 2,288,397 2,710,882 2,645,814
ESOP Contribution.................................................. 317,361 216,827 215,883
---------- ---------- ----------
Net Operating Income (Loss) Before Investment Activity............. (107,527) (222,077) (115,275)
Unrealized Appreciation of Investments............................. 956,294 370,696 483,665
Realized Gain (Loss) on Investments................................ (22,784) 66,148 --
Provision for Income Taxes......................................... 421,664 57,381 159,251
---------- ---------- ----------
Net Income......................................................... $ 404,319 $ 157,386 $ 209,139
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
16
<PAGE>
Net Operating Income (Loss)
Net Operating Income (Loss) is the difference between the Company's Total
Revenue earned from arranging commercial loans for small and medium sized
businesses and other financial advisory work and its Total Operating Expenses
including ESOP contributions, depreciation and interest expense.
Total Revenue
Total Revenue consists predominantly of Financial Advisory Fees, which are
hourly or periodic fees earned by the Company for providing advice and analysis
to small and medium sized businesses, and Financial Performance Fees, which are
fees earned on a contingent basis for structuring, financing, or executing
transactions. During 1996, Financial Advisory Fees and Financial Performance
Fees constituted 86.9% of Total Revenue; during 1995, Financial Advisory Fees
and Financial Performance Fees constituted 90.1% of Total Revenue; and during
1994, Financial Advisory Fees and Financial Performance Fees constituted 85.8%
of Total Revenue. During each of the fiscal years ended December 31, 1996 and
1995, the Company earned Total Revenue of $2.7 million. Total Revenue for 1995
reflected an 8.3% increase over 1994 Total Revenue of $2.5 million. Other
components of Total Revenue consisted primarily of expense reimbursements.
Operating Expenses
Total Operating Expenses at the Company were $2.9 million in 1996, a 2.3%
decrease from 1995. Total Operating Expenses for 1995 reflected a 12.4% increase
over 1994's level of $2.6 million. This increase in Total Operating Expenses
from 1994 primarily reflected an increase in Provision for Doubtful Accounts
from $0 in 1994 to $302,000 in 1995 and to $224,000 in 1996. This Provision for
Doubtful Accounts reflected an allowance for uncollectible fees related to two
companies. One of these companies is expected to be liquidated, and no fees are
expected to be recovered. The second company has, in the second quarter of 1997,
begun making payments to reduce the amount owed to the Company. Salaries and
benefits were $1.4 million in 1994 and $1.5 million in 1995, a 9.9% increase.
Salaries and Benefits declined 28.1% to $1.1 million in 1996. This reduction in
Salaries and Benefits is the result of an increased use of outside consultants
in the Company's financial advisory work and the nonpayment of bonuses in 1996.
General and Administrative expenses increased 9.5% from $523,000 in 1994 to
$573,000 in 1995, and 61.7% to $927,000 in 1996. The increased use of
consultants was the primary reason for the increase in General and
Administrative expenses from 1995 to 1996.
Interest Expense
The Company's Interest Expense was $33,000 in 1996, $37,000 in 1995, and
$36,000 in 1994. Interest Expense is primarily associated with credit facilities
used by the Company to support its working capital requirements and, beginning
in 1996, to finance a portion of its investments in small and medium sized
businesses. The Company's total borrowings under these facilities were
approximately $430,000 at December 31, 1996, $161,000 at December 31, 1995, and
$238,000 at December 31, 1994. In addition, the Company had a note payable to
its President in the amount of $74,000 at December 31, 1996, $66,000 at December
31, 1995, and $58,000 at December 31, 1994. During the past three years, the
Company has paid interest on its debt obligations to unrelated parties at rates
ranging from 1.5% above the lender's base rate of interest to 3% above such
rate. The rate of interest on the Company's note payable to its President is 4%
above the prime rate of interest. The Company intends to repay and cancel all of
this indebtedness out of the proceeds of the Offering. See 'Use of Proceeds.'
ESOP Contribution
The Company made ESOP contributions of $216,000 in 1996, $217,000 in 1995,
and $317,000 in 1994. These contributions represent an allocation of the
preferred stock held by the ESOP to the Company's employees which preferred
stock was converted into common stock on a one for one basis on July 28, 1997.
See 'Capitalization.' As a result, these contributions did not result in a cash
outflow from the Company. These contributions were deductible for tax purposes
and served to reduce the Company's tax obligations. At December 31, 1996,
unearned ESOP shares totaled $117,000, and the Company's obligation to make
further contributions to the ESOP was limited to that amount. All of the ESOP
shares have now been earned and allocated to participants and, therefore, the
Company has no further obligation to make contributions to the ESOP. Management
believes that a more complete understanding of the Company's results can be
gained by viewing them on a pro forma, 'fully distributed' basis. This approach
considers all ESOP shares which were allocated to employees to have been
immediately outstanding and thus fully distributed. Consistent with this method,
the ESOP compensation expense is excluded from fully distributed net operating
income, and no portion
17
<PAGE>
of ESOP convertible preferred stock dividends are included in compensation
expense. A comparison of results reported on a fully distributed basis to
results reported under GAAP is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1995 1996
------------------------- ------------------------- -------------------------
EXCL. ESOP EXCL. ESOP EXCL. ESOP
GAAP CONTRIBUTION GAAP CONTRIBUTION GAAP CONTRIBUTION
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Operating Expenses........... $2,605,758 $ 2,288,397 $2,927,709 $ 2,710,882 $2,861,697 $ 2,645,814
Net Operating Income (Loss) Before
Investment Activity.............. (107,527) 209,834 (222,077) (5,250) (115,275) 100,608
</TABLE>
Realized Gain (Loss) on Investments
When an investment is sold, disposed of, or liquidated at a value different
from the cumulative unrealized gain or loss associated with that investment, the
difference between the ultimate value realized on the investment and its
carrying value is shown as a realized gain or loss on the investment. The
Company realized a gain of $66,000 in 1995 on the sale of an investment in a
portfolio company and a loss of $23,000 on its investment in a portfolio company
in 1994 due to the winding up of that company.
Unrealized Appreciation of Investments
For the years ended December 31, 1996, 1995, and 1994, the Company recorded
net increases in unrealized appreciation of investments of $484,000, $371,000,
and $956,000, respectively. Unrealized Appreciation represents the periodic
increases and decreases in the fair market value of the investments in the
Company's portfolio. Fair market value is determined by the Board of Directors
of the Company, taking into account recent independent third party valuations of
these investments. The following chart sets forth the components of Unrealized
Appreciation of Investments for the years ended December 31, 1996, 1995, and
1994:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- --------- --------
<S> <C> <C> <C>
Erie Forge and Steel, Inc.................................................... $708,938 $(208,937) $203,808
Good Stuff Food Company, Inc................................................. 67,750 499,250 (81,000)
Indiana Steel & Wire Corporation............................................. 12,608 (5,719) 9,057
Martino's Bakery, Inc........................................................ 120,750 (18,250) 156,500
Mobile Tool International, Inc............................................... -- 170,500 195,300
The C.M. Kemp Manufacturing Company(1)....................................... 46,248 (66,148) --
-------- --------- --------
Total Unrealized Appreciation of Investments................................. $956,294 $ 370,696 $483,665
-------- --------- --------
-------- --------- --------
</TABLE>
- ------------------
(1) The Company's investment in the C.M. Kemp Manufacturing Company ('Kemp') was
sold in 1995 for a gain over the original cost of the investment. The
Company had recorded Unrealized Appreciation in the amount of this gain
prior to the Sale and, thus, at the time of sale, Kemp was sold for the
value at which it was then reflected on the Company's balance sheet. The
Company then recorded depreciation of $66,000 in 1995 to reverse the
Unrealized Appreciation and recognize the Realized Appreciation associated
with the sale of Kemp.
Provision for Income Taxes
During 1996, 1995, and 1994, the Company was taxed as a C corporation under
the Code. Unrealized appreciation (depreciation) does not affect the actual tax
paid by the Company. However, under GAAP, the Company provides for income taxes
based on its GAAP pretax income, which includes unrealized appreciation
(depreciation). The result of this is that the Company reflects a deferred tax
liability on its balance sheet. The Company recorded provisions for income taxes
of $159,000 in 1996, $57,000 in 1995, and $422,000 in 1994.
18
<PAGE>
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1997
---------- ----------
<S> <C> <C>
Total Revenue...................................................................... $1,292,040 $1,941,689
Operating Expense Excluding ESOP Contribution...................................... 1,203,594 1,631,516
ESOP Contribution.................................................................. 103,328 7,296
---------- ----------
Net Operating Income (Loss) Before Investment Activity............................. (14,882) 302,877
Unrealized Appreciation of Investments............................................. 398,498 5,332,369
Provision for Income Taxes......................................................... 149,454 2,150,893
---------- ----------
Net Income......................................................................... $ 234,162 $3,484,353
---------- ----------
---------- ----------
</TABLE>
Total Revenue
Total Revenue was $1.9 million in the first half of 1997 compared to $1.3
million in the first half of 1996, a 50.3% increase. Financial Advisory Fees
increased to $860,000 in the first half of 1997 from $839,000 in the first half
of 1996, and Financial Performance Fees in the first half of 1997 increased to
$744,000 from $241,000 in the first half of 1996. This increase in financial
performance fees, and resulting increase in Total Revenue, was associated with
the Company's successful completion of an engagement to advise the Allied Pilots
Association on the structuring of an employee option plan at American Airlines.
Operating Expenses
Total operating expenses increased to $1.6 million in the first half of
1997 from $1.3 million in the first half of 1996, a 25.4% increase. Salaries and
benefits increased to $620,000 from $515,000, a 20.4% increase which was
predominantly associated with increased levels of staffing. General and
Administrative expenses increased to $700,000 from $375,000, an 86.9% increase
primarily associated with the increased use of consultants by the Company. Other
operating expenses increased 130.6% to $425,000 from $184,000, reflecting a
variety of expenses associated with potential transactions. Interest expense
increased to $42,000 in the first half of 1997 from $11,000 in the first half of
1996, a 271.6% increase associated primarily with increased levels of working
capital financing on the Company's term loan facility from NCBDC, on which the
Company pays interest at the rate of 1.5% above the finance company's base rate
of interest.
The Company changed its evaluation of collectibility of a receivable from
Martino's Bakery, Inc. due to Martino's improved financial condition,
restructuring of repayment terms, and subsequent payment history. Therefore, the
Company recorded a reversal in its provision for doubtful accounts totaling
$177,000 for the six months ended June 30, 1997.
ESOP Contribution
The Company made contributions to its ESOP of $7,000 in the first half of
1997 and $103,000 in the first half of 1996. As stated above, these
contributions did not result in a cash outflow from the Company. At June 30,
1997, the unearned ESOP shares totaled $28,000, and the Company's obligation to
make further contributions to the ESOP was limited to that amount. Management
anticipates that all of the ESOP shares will be earned and distributed prior to
the Offering. The Company will have no further obligation to make contributions
to the ESOP. As stated above, management believes that a more complete
understanding of the Company's results can be gained by viewing them on a
proforma, 'fully distributed' basis. A comparison of results reported on a fully
distributed basis to results reported under GAAP is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------
1996 1997
--------------------------- ---------------------------
EXCL. ESOP EXCL. ESOP
GAAP CONTRIBUTION GAAP CONTRIBUTION
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Total Operating Expenses........................... $1,306,922 $ 1,203,594 $1,638,812 $ 1,631,516
Net Operating Income (Loss) Before Investment
Activity......................................... (14,882) 88,446 302,887 310,173
</TABLE>
Unrealized Appreciation of Investments
For the six months ended June 30, 1997 and 1996, the Company recorded net
increases in Unrealized Appreciation of Investments of $5,332,000 and $398,000
respectively. Included in Unrealized Appreciation of Investments during the
first six months of 1997 was $4.4 million associated with the acquisition of
Biddeford Textile Company, formerly the blanket operation of the electric
blanket manufacturing division of Sunbeam Products, Inc.
19
<PAGE>
The Company structured a buyout transaction in which the Company, a local
investor group, management, and Biddeford employees each received an ownership
position at Biddeford in the second quarter of 1997. The appreciation of the
Biddeford investment was determined by an independent valuation as of June 30,
1997. The Biddeford investment further diversified the Company's portfolio,
which previously included investments in food products, steel products, and lift
truck manufacturing, into consumer textile products. The following table sets
forth the components of Unrealized Appreciation of Investments for the six
months ended June 30,1997 and 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1996
----------------------------
<S> <C>
Erie Forge and Steel, Inc.................................................. $ 102,053
Good Stuff Food Company, Inc............................................... (27,000)
Indiana Steel & Wire Corporation........................................... 4,528
Martino's Bakery, Inc...................................................... 130,417
Mobile Tool International, Inc............................................. 188,500
Biddeford Textile Corporation.............................................. --
----------------------------
Total Unrealized Appreciation of Investments............................... $ 398,498
----------------------------
----------------------------
<CAPTION>
1997
----------------------------
<S> <C>
Erie Forge and Steel, Inc.................................................. $ --
Good Stuff Food Company, Inc............................................... 355,675
Indiana Steel & Wire Corporation........................................... --
Martino's Bakery, Inc...................................................... 20,000
Mobile Tool International, Inc............................................. 557,089
Biddeford Textile Corporation.............................................. 4,399,605
----------------------------
Total Unrealized Appreciation of Investments............................... $ 5,332,369
----------------------------
----------------------------
</TABLE>
Provision for Income Taxes
The Company recorded provisions for income taxes of $2.2 million for the
six months ended June 30, 1997 and $149,000 for the six months ended June 30,
1996. As stated above, this provision is determined based on GAAP pretax income,
which includes unrealized appreciation (depreciation).
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At June 30, 1997, the Company had $726,000 in cash and cash equivalents.
The Company's sources of funds have historically been operating cash flows and
borrowings from NCBDC, a finance company. At June 30, 1997, the Company had a
term loan commitment from the finance company in the amount of $1.0 million
which is subject to a two-year draw-down period ending in May 1999. During the
draw-down period, individual draws can be made in increments of a minimum of
$100,000 for the purpose of making investments in small and medium sized
businesses. Each draw on the loan is payable over a five year term from the date
of the draw. The interest rate is the finance company's base rate plus 3%. This
arrangement is secured by accounts receivable, furniture, fixtures, equipment,
and the Company's investments in shares of common stock in the Portfolio
Companies. As of June 30, 1997, the outstanding balance on this facility was
$636,000 and the interest rate was 11.50%.
At June 30, 1997, the Company also had a five year credit arrangement with
the same finance company which is a line of credit with a term conversion
provision. During only the first two years of the agreement, which commenced in
December 1996, the Company has the ability to borrow up to $500,000 with
interest payable monthly. The balance outstanding after the initial two-year
period is payable in equal monthly installments of principal plus accrued
interest over the remaining three years. The interest rate is the finance
company's base rate plus 1.5%. This arrangement is secured by accounts
receivable, furniture, fixtures, equipment, and 56,270 shares of common stock in
Erie Forge and Steel, one of the Company's investments, and is subject to
cross-collateralization and cross-default arrangements with the Company's other
credit facility from the finance company. At June 30, 1997, the outstanding
balance on this facility was approximately $383,000 and the interest rate was
10%. The outstanding balance on this facility was fully retired on July 15,
1997. The credit facilities require that the Company receive the finance
company's consent before, among other things, encumbering its assets, merging,
or consolidating with another entity. In addition, the realization of gains on
the Company's investment portfolio may trigger repayment obligations with
respect to the credit facilities. At June 30, 1997, the Company also had a
demand note payable to its President in the amount of approximately $40,000. The
note bears interest at the rate of 4% over the prime rate of interest; the
interest rate on the note was 12.25% at June 30, 1997. This note was paid in
full on August 4, 1997.
The Company intends to repay its remaining credit facility with a portion
of the proceeds of the Offering, and to cancel it at that time. See 'Use of
Proceeds.' The credit facility does not contain a prepayment penalty.
Immediately subsequent to the Offering, the Company expects to have cash
resources in excess of $100 million, and no indebtedness. Because it is a
business development company, the Company is required to distribute quarterly
90% or more of its interest income and net realized short-term capital gains.
While the Company will provide stockholders with the option of reinvesting their
distributions in the Company, the Company anticipates having to borrow to obtain
liquidity after the proceeds of the Offering have been fully invested. See
'Distributions,' 'Business--Leverage,' and 'Reinvestment Plan.'
20
<PAGE>
BUSINESS
American Capital is a specialty finance company that has been principally
engaged in arranging commercial loans for small and medium sized businesses
throughout the United States and has made equity investments in certain of these
businesses. While the Company has historically not made loans because it lacked
the financial resources to do so, after the Offering, the Company plans to make
senior and subordinated commercial loans to small and medium sized businesses at
relatively high interest rates, accompanied by warrants or stock ownership. The
Company was founded in 1986, is headquartered in Bethesda, Maryland, a suburb of
Washington, D.C., and has professionals based in or near New York, Pittsburgh,
San Francisco, Savannah and Boston.
The Company has significant expertise in arranging financing from banks and
financing companies for small and medium sized businesses. Since its formation
in 1986, the Company has arranged 29 financings aggregating over $400 million.
In addition, David Gladstone, the Company's Chairman, has over 22 years
experience in making loans to and investing at Allied Capital. While either
Chairman or President of Allied Capital, Mr. Gladstone oversaw, during the years
1992 through 1997, in excess of $850 million of financing for many small and
medium sized businesses and raised, during the years 1985 through 1997, seven
funds totalling over $430 million in equity. The Company currently has twelve
professionals who are involved in structuring and arranging financing for small
and medium sized businesses, and upon completion of the Offering, the Company
plans to hire an additional four professionals with business lending experience.
The Company believes that this expertise will help it to be successful in
lending to small and medium sized businesses.
The Company has established itself as a leading firm in structuring and
obtaining funding for management and employee buyouts of subsidiaries, divisions
and product lines being divested by larger corporations through the use of an
ESOP. The selling entities have included Sunbeam Corporation, the U.S. Office of
Personnel Management, American Premier Underwriters, Inc. (formerly Penn Central
Corporation), Campbell Soup Company, Inc., Union Carbide Corporation, National
Forge Company, Inc., Air Products & Chemicals, Inc., General Cable Corporation,
PPG Industries, Inc., GenCorp, Inc., American Maize-Products Company, Ampco-
Pittsburgh Corporation, and British Petroleum Company. In most of the ESOP
transactions structured by the Company, the employees agree to restructure their
wages and benefits so that overall cash compensation is reduced in favor of
contribution of stock to an ESOP. The Company structures the resulting company
so that the fair market value of stock contributed to the employees' ESOP can be
deducted from corporate income before paying taxes. Restructuring employee
compensation together with the ESOP tax advantages has the effect of improving
the cash flow of the ESOP company. Principals of the Company have served on the
boards of directors of 18 ESOP companies.
The Company has also provided financial advisory services to the following
entities or to parties involved in transactions with such entities: AMR
Corporation (parent of American Airlines, Inc.), Massachusetts Financial
Services Company, Wings Holdings, Inc. (then parent of Northwest Airlines,
Inc.), Northwestern Steel and Wire Company, Goldendale Aluminum Company, Inc.,
Columbia Aluminum Corporation, Flair Corporation, Bidermann Industries
Corporation, Simmons Company, John Morrell & Company, Inc., The Circle K
Corporation, and H.P. Hood, Inc.
The Company believes that, through its current business, it has established
an extensive referral network comprised of venture capitalists, investment
bankers, attorneys, commercial bankers and business and financial brokers. While
the Company plans to continue structuring ESOP transactions, it also intends to
utilize its referral network to expand the Company's operations by making loans
to ESOP Companies and by financing small and medium sized businesses without
ESOPs. The Company's referral network includes relationships with Riggs Bank and
NCBDC under which they, in certain instances, will refer small and medium sized
business financing opportunities to the Company. The Company intends to enter
into similar referral arrangements with other financial institutions, but no
assurance can be given that it will be able to do so.
Since 1990, the Company made equity investments in eight of the businesses
that it assisted. The Company's Board of Directors has determined the value of
its equity investments based on valuations by independent firms that were
conducted as of dates between December 31, 1996 and June 30, 1997. Based on
those six valuations and the net realized gains from the Company's other two
investments, the return on the Company's equity investment from August 20, 1990
to June 30, 1997 was 47.0% per annum. As of June 30, 1997, the Company retained
six of its equity interests with an aggregate value of $9.7 million.
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STRATEGY
The Company intends to make loans at favorable interest rates to small and
medium sized businesses that are underserved by traditional lenders. The Company
plans to use its established network of loan referral sources to make senior and
subordinated loans to selected businesses that do not have sufficient access to
traditional sources of lending. The Company's business strategy contemplates
that (i) the net capital gains from the sale of the warrants or stock it
receives in connection with its lending activities will exceed any losses it may
experience from loan defaults, (ii) the fee income it derives from its lending
will provide the Company with a source of revenue in excess of its general and
administrative expenses (excluding interest expense), and (iii) the Company will
derive additional income from its financial advisory services. No assurance can
be given that the Company will achieve its investment objectives or that its
business strategy will be successful.
The Company believes that many opportunities exist to provide loans to
small and medium sized businesses and plans to take advantage of these
opportunities. According to the Small Business Administration, small businesses
employed 53% of the private work force, contributed 47% of all sales in the
United States, and were responsible for 50% of the private gross domestic
product in 1995. Small businesses produced an estimated 75% of the 2.5 million
new jobs created during 1995 and had total revenues of $449.2 billion in 1995.
The number of small businesses has increased 49% from 1982 to 1995. As of 1994,
there were approximately 22.1 million non-farm businesses in the United States,
of which 99% are small businesses. The Company believes that the market for
commercial loans to these small and medium sized businesses is underserved for a
number of reasons. First, traditional lenders such as commercial banks and
savings and loans, generally are burdened with an overhead and administrative
structure and operate in a regulatory environment that hinders them from lending
effectively to these businesses. Second, consolidation in the banking industry
during the past decade decreased the number of banks willing to lend to small
and medium sized businesses, as the larger acquiring banks sought to limit both
the credit exposure and monitoring costs associated with loans to these
businesses. Third, the banking and savings and loan industries have experienced
structural and regulatory changes that have greatly affected the ability of
traditional financial institutions to make funds available for loans to small
and medium sized businesses. Additionally, the Company believes that many small
and medium sized businesses prefer to obtain financing from non-bank finance
companies rather than federally insured financial institutions that are
perceived to be subject to regulatory pressure to demand the repayment of loans
when a borrower encounters a period of economic difficulties.
The Company believes that it is well positioned to provide financing to
small and medium sized businesses. The Company is not burdened with the capital
and other regulatory requirements of the banking and savings and loan industries
and has relatively low overhead and administrative expenses. At the same time,
the Company believes that it has the experience and expertise to satisfy the
financing needs of small and medium sized businesses. In particular, the Company
intends to utilize its expertise in corporate spinoffs and ESOP transactions as
well as Mr. Gladstone's twenty-two years of experience in financing small to
medium sized businesses to realize a competitive advantage. The Company plans to
use its established network of loan referral sources, the relationships of its
Chairman David Gladstone and its referral arrangements with Riggs Bank and NCBDC
to generate opportunities to make senior and subordinated loans to selected
businesses that do not have sufficient access to traditional sources of lending.
Moreover, the Company's strategy of making equity investments in its borrowers
is intended to closely align the interests of the Company and its borrowers,
thereby reducing transaction costs, conveying the Company's commitment to its
borrowers and enhancing the Company's attractiveness as a financing source.
The Company will target small and medium sized businesses that meet certain
criteria, including the potential for growth, adequate assets for loan
collateral, experienced management teams with significant ownership interest in
the business, profitable or near profitable operations and potential
opportunities for the Company to realize appreciation and gain liquidity in its
equity position. Liquidity can be achieved through a sale of a business, a
public offering by the business or by the Company exercising its rights to
require the business to buy back the Company's warrants or stock. The Company
expects to serve businesses that need funds to finance growth, restructure their
balance sheet or effect a change of control. In a change of control situation,
the Company will continue to use ESOP buyouts or traditional buyouts. ESOP
buyouts will typically be used instead of traditional buyouts in circumstances
where total labor costs are significant in relationship to operating income.
ESOP buyouts will also be used where sellers qualify for certain ESOP related
tax advantages.
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The Company will continue to make available significant managerial
assistance to its borrowers and other portfolio companies. Such assistance will
typically involve closely monitoring the operations of each company,
participating in its board and management meetings, being available for
consultation with its officers, and providing organizational and financial
guidance.
The Company's loans to these businesses typically will range from $1
million to $10 million, mature in five to seven years, and require monthly
interest payments at an annualized variable rate that exceeds the prime rate.
The Company will also make fixed rate loans. Amortization of principal will
generally be deferred for several years. The Company will focus on making loans
accompanied by warrants or stock ownership. The warrants will typically have a
nominal exercise price while the loans generally will be collateralized by a
security interest in assets of the borrower. The Company expects to make both
senior and subordinated loans. From time to time, a company in which the Company
has invested may request additional financing, providing additional lending or
investing opportunities for the Company. Requests for additional financing will
be considered under the criteria established for acquisition of investments, and
debt and equity securities issued in such follow-on financing are expected to
have characteristics comparable to those issued in the original financing.
Follow-on investments generally will not be made merely to enhance the quality
of the earlier investment or to preserve the Company's proportionate ownership
interest. In some situations, the Company's failure or inability to make a
follow-on investment may be detrimental to the operations or survival of the
portfolio company involved and thus jeopardize the Company's investment in that
company.
The Company's equity interests in privately-owned small and medium sized
businesses will be made with the intention of disposing of such interests within
three to seven years. If a financing is successful, not only will the debt
securities acquired by the Company in such financing have been repaid with
interest, but the Company will be in a position to realize a gain on the
accompanying equity interests. The opportunity to realize such gain may occur if
the business is sold to new owners or the business makes a public offering. In
most cases, the Company will not have the right to require that a business
undergo an initial public offering by registering securities under the
Securities Act, but the Company generally will have the right to sell its equity
interests in any subsequent public offering by the business. Even when public
offerings occur, underwriters frequently insist that large holders of equity
securities retain all or a substantial portion of their position, at least for a
time, even if they have the right to participate in the offering. Moreover, the
Company may decide not to sell an equity position even when it has the right and
the opportunity to do so. Thus, although the Company expects to dispose of an
equity interest after a certain time, situations may arise in which it may hold
equity securities for a longer period. In most cases, the Company will receive
the right to require the business to purchase the warrants or stock held by the
Company ('Put Rights'). When no public offering is available the Company may use
its Put Rights to dispose of its equity interest in a business, although the
Company's ability to exercise Put Rights may be limited or nonexistent if a
business is illiquid. Similarly, it is anticipated that the Company usually will
obtain the right to require that the business purchase the Company's warrants or
stock if there is an offer for the business ('Unlocking Rights'). The Unlocking
Rights may allow the Company to sell its equity interests back to the business
at the price offered by the potential acquiror.
To develop new lending opportunities, the Company plans to use its
established network of loan referral sources, capitalize on its ESOP expertise
with prospective and existing ESOP companies, and add four professionals with
substantial lending experience and six additional support staff to its seventeen
employees. The Company has relationships with Riggs Bank and NCBDC under which
they, in certain instances, will refer certain small and medium sized business
financing opportunities to the Company. The Company intends to enter into
similar arrangements with other financial institutions, but no assurance can be
given that it will be able to do so.
SELECTION OF LOAN AND INVESTMENT OPPORTUNITIES
The Company has identified certain characteristics that it believes are
important to profitable small and medium sized business lending. The criteria
listed below will provide a general guidepost for the Company's lending and
investment decisions, although not all of such criteria may be followed in each
instance:
Growth. In addition to generating sufficient cash flow to service its
debt, a potential borrower generally will be required to establish its ability
to grow its cash flow. Anticipated growth will be a key factor in determining
the value ascribed to the warrants and equity interests acquired by the Company
in connection with its loans.
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Liquidation Value of Assets. Although the Company does not intend to
operate as an asset-based lender, liquidation value of the assets
collateralizing the Company's loans will be an important factor in each credit
decision. Emphasis will be placed both on tangible assets (accounts receivable,
inventory, plant, property and equipment) as well as intangible assets such as
customer lists, networks, databases and recurring revenue streams.
Experienced Management Team. The Company will generally require that each
borrower have or promptly obtain a management team that is experienced and
properly incentivized through a significant ownership interest in the borrower.
The Company generally will require that a borrower have, at a minimum, a strong
chief executive officer and chief financial officer who have demonstrated the
ability to accomplish the borrower's objectives and implement its business plan.
Profitable or Near Profitable Operations. The Company will focus on
borrowers that are profitable or near profitable at the operating level. The
Company does not intend typically to lend to or invest in start-up or other
early stage companies.
Exit Strategy. Prior to making an investment, the Company will analyze the
potential for the borrower to experience a liquidity event that will allow the
Company to realize value for its equity position. Liquidity events include,
among other things, an initial public offering, a private sale of the Company's
financial interest, a sale of the borrower, or a purchase by the borrower or one
of its stockholders of the Company's equity position in the borrower.
OPERATIONS
Origination Process. The Company has twelve professionals responsible for
originating loans and investments and providing financial assistance to small
and medium sized businesses. Upon completion of the Offering, the Company plans
to hire four additional professionals with substantial business lending
experience, who will operate out of the Company's headquarters in Bethesda,
Maryland and with the Company's existing professionals based in or near New
York, Pittsburgh, San Francisco, Savannah and Boston. To originate loans, these
lending officers will use an extensive referral network comprised of venture
capitalists, investment bankers, attorneys, accountants, commercial bankers,
business brokers and prospective or existing ESOP companies. The referral
network includes the Company's relationships with Riggs Bank and NCBDC under
which they, in certain instances, will refer certain small and medium sized
business financing opportunities to the Company. The Company also has an
extensive set of internet sites that it uses to attract financing opportunities.
Approval Process. The Company's financial professionals will review
informational packages in search of potential financing opportunities and will
conduct a due diligence investigation of each applicant that passes an initial
screening process. This due diligence investigation generally will include one
or more on-site visits, a review of the company's historical and prospective
financial information, interviews with management, employees, customers and
vendors of the applicant, and background checks and research on the applicant's
product, service or particular industry. Upon completion of the due diligence
investigation, the financial professional will create a borrower profile
summarizing its historical financial statements, industry and management team
and analyzing its conformity to the Company's general investment criteria. The
financial professional will then present this profile to the Company's Credit
Committee, which will initially be comprised of David Gladstone, Malon Wilkus
and Adam Blumenthal. The Company's Credit Committee and the Company's Board of
Directors must approve each financing.
Support Services. The Company has entered into an agreement with Riggs
Bank pursuant to which the bank will provide certain loan accounting
administrative services for the Company's loans. Riggs Bank also will act as the
custodian of the Company's portfolio assets pursuant to a Custodian Services
Agreement and in accordance with the 1940 Act.
Merger and Acquisition Advisory Services. Prior to the Offering, the
Company has obtained fee income by performing merger and acquisition and other
financial advisory services for small and medium sized companies. These advisory
services operations and the assets related thereto will be moved into a wholly
owned subsidiary of the Company at the successful completion of the Offering.
This subsidiary will continue to focus on providing advisory services to small
and medium sized companies throughout the United States that are similar in size
to the Company's target financing market. The Company's past clients have
included corporate sellers, and the buying groups of subsidiaries, divisions and
product lines of large corporations, as well as privately owned businesses. The
typical engagement includes a monthly retainer and a performance fee contingent
upon closing
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the transaction. Management believes that future growth of this subsidiary is
attainable through adding additional professionals, by gaining additional market
share and by realizing the benefits of what is expected to be an increasing
client base, which should expand as a result of its relationship with the
Company. However, no assurance can be given that such growth can be achieved.
This subsidiary is expected to be a significant source of financing
opportunities for the Company.
COMPETITION
The Company's primary competitors will include financial institutions and
venture capital firms and other nontraditional lenders. Many of these entities
have greater financial and managerial resources than the Company will have.
EMPLOYEES
The Company currently has seventeen employees, twelve of whom are
professionals working on financings for small and medium sized businesses. Upon
completion of the Offering, the Company intends to hire eleven additional
employees, four of whom will be professionals with business lending experience.
The Company believes that its relations with its employees are excellent. The
Company intends to maintain a relatively low overhead by outsourcing most job
functions not directly related to marketing or underwriting its investments and
the executive management of the Company.
TEMPORARY INVESTMENTS
Pending investment in other types of 'Qualifying Assets,' as described
below, the Company will invest its otherwise uninvested cash primarily in cash,
cash items, government securities or high quality debt securities maturing in
one year or less from the time of investment in such high quality debt
investments ('Temporary Investments') so that 70% of its assets are Qualifying
Assets. See 'Regulation.' Typically, the Company will invest in U.S. Treasury
bills or in repurchase obligations of a 'primary dealer' in government
securities (as designated by the Federal Reserve Bank of New York) or of any
other dealer whose credit has been established to the satisfaction of the Board
of Directors. There is no percentage restriction on the proportion of the
Company's assets that may be invested in such repurchase agreements. A
repurchase agreement involves the purchase by an investor, such as the Company,
of a specified security and the simultaneous agreement by the seller to
repurchase it at an agreed upon future date and at a price which is greater than
the purchase price by an amount that reflects an agreed-upon interest rate. Such
interest rate is effective for the period of time during which the investor's
money is invested in the arrangement and is related to current market interest
rates rather than the coupon rate on the purchased security. The Company will
require the continual maintenance by its custodian or the correspondent in its
account with the Federal Reserve/Treasury Book Entry System of underlying
securities in an amount at least equal to the repurchase price. If the seller
were to default on its repurchase obligation, the Company might suffer a loss to
the extent that the proceeds from the sale of the underlying securities were
less than the repurchase price. A seller's bankruptcy could delay or prevent a
sale of the underlying securities. The Company's Board of Directors has
established procedures, which it will review periodically, requiring the Company
to monitor the credit-worthiness of the dealers with which the Company enters
into repurchase agreement transactions.
LEVERAGE
For the purpose of making investments other than Temporary Investments and
to take advantage of favorable interest rates, the Company intends to issue
Senior Debt Securities, up to the maximum amount permitted by the 1940 Act,
which currently permits the Company to issue Senior Debt Securities and
preferred stock (collectively, 'Senior Securities') in amounts such that the
Company's asset coverage, as defined in the 1940 Act, is at least 200% after
each issuance of Senior Securities. Such indebtedness may also be incurred for
the purpose of effecting share repurchases. As a result, the Company would
become exposed to the risks of leverage. See 'Risk Factors--Leverage.' The
Company does not, however, intend to leverage itself so long as it holds cash or
Temporary Investments in an amount sufficient to fund the amount of investments
(other than Temporary Investments) projected to be made in the forthcoming 12
months. Although the Company has no current intention to do so, it has retained
the right to issue preferred stock. See 'Description of Capital Stock--
Preferred Stock' and 'Regulation.' As permitted by the 1940 Act, the Company
may, in addition, borrow amounts up to 5% of its total assets for temporary or
emergency purposes.
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INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to achieve a high level of current
income from the collection of interest and advisory fees, as well as long-term
growth in its stockholders' equity through the appreciation in value of the
Company's equity interests in the companies in which it invests. The following
restrictions, along with these investment objectives, are the Company's only
fundamental policies--that is, policies which may not be changed without the
approval of the holders of the majority, as defined in the 1940 Act, of the
Company's outstanding voting securities. The percentage restrictions set forth
below other than the restriction pertaining to the issuance of Senior
Securities, as well as those contained elsewhere in this Prospectus, apply at
the time a transaction is effected, and a subsequent change in a percentage
resulting from market fluctuations or any cause other than an action by the
Company will not require the Company to dispose of portfolio securities or to
take other action to satisfy the percentage restriction.
The Company will at all times conduct its business so as to retain its
status as a business development company. In order to retain that status, the
Company may not acquire any assets (other than non-investment assets necessary
and appropriate to its operations as a business development company) if after
giving effect to such acquisition the value of its 'Qualifying Assets' amounts
to less than 70% of the value of its total assets. For a summary definition of
'Qualifying Assets,' see 'Regulation.' The Company believes that the securities
it proposes to acquire (provided that the Company controls, or through its
officers or other participants in the financing transaction, makes significant
managerial assistance available to the issuers of these securities), as well as
Temporary Investments, will generally be Qualifying Assets. Securities of public
companies, on the other hand, are generally not Qualifying Assets unless they
were acquired in a distribution, in exchange for or upon the exercise of a right
relating to securities that were Qualifying Assets.
The Company may invest up to 100% of its assets in securities acquired
directly from issuers in privately-negotiated transactions. With respect to such
securities, the Company may, for the purpose of public resale, be deemed an
'underwriter' as that term is defined in the 1933 Act. The Company may invest up
to 50% of its assets to acquire securities of issuers for the purpose of
acquiring control (up to 100% of the voting securities) of such issuers. The
Company will not concentrate its investments in any particular industry or group
of industries. Therefore, the Company will not acquire any securities (except
upon the exercise of a right related to previously acquired securities) if, as a
result, 25% or more of the value of its total assets consists of securities of
companies in the same industry.
The Company may issue Senior Securities to the extent permitted by the 1940
Act for the purpose of making investments, to fund share repurchases, or for
temporary or emergency purposes. A business development company may issue Senior
Securities up to an amount so that the asset coverage, as defined in the 1940
Act, is at least 200% immediately after each issuance of Senior Securities. For
the risks associated with the resulting leverage, see 'Risk Factors--Leverage.'
The Company will not (i) act as an underwriter of securities of other
issuers (except to the extent that it may be deemed an 'underwriter' of
securities purchased by it that must be registered under the 1933 Act before
they may be offered or sold to the public); (ii) purchase or sell real estate or
interests in real estate or real estate investment trusts (except that the
Company may purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments and may own the
securities of companies or participate in a partnership or partnerships that are
in the business of buying, selling or developing real estate); (iii) sell
securities short; (iv) purchase securities on margin (except to the extent that
it may purchase securities with borrowed money); (v) write or buy put or call
options (except to the extent of warrants or conversion privileges in connection
with its acquisition financing or other investments, and rights to require the
issuers of such investments or their affiliates to repurchase them under certain
circumstances); (vi) engage in the purchase or sale of commodities or commodity
contracts, including futures contracts (except where necessary in working out
distressed loan or investment situations); or (vii) acquire more than 3% of the
voting stock of, or invest more than 5% of its total assets in any securities
issued by, any other investment company, except as they may be acquired as part
of a merger, consolidation or acquisition of assets. With regard to that portion
of the Company's investments in securities issued by other investment companies
it should be noted that such investments may subject the Company's stockholders
to additional expenses.
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INVESTMENT ADVISOR
The Company has no investment advisor and is internally managed by its
executive officers under the supervision of the Board of Directors.
PORTFOLIO COMPANIES
The following table sets forth certain information regarding each portfolio
company in which the Company currently has an equity investment. Unless
otherwise noted in the table or the descriptions that follow the table, the only
relationship between each portfolio company and the Company is the Company's
investment. The investments listed below are the Company's only present
investments, but in the aggregate they will represent no more than 8.5% of the
Company's assets and no single investment will represent more than 4.0% upon
completion of the Offering. While the Company may make loans to or additional
investments in these companies, the Company has no present plans to make any
such loans or investments that would raise the Company's investment in any one
such company above 5% of total assets. Any such loans and investments will be
made in accordance with the Company's investment policies and procedures.
<TABLE>
<CAPTION>
TOTAL ANNUAL %
SALES FOR THE OWNED COST OR VALUE OF
NATURE YEAR ENDED ON ON A INITIAL INVESTMENT
NAME AND ADDRESS OF OF THE DATE TYPE OF FULLY DILUTED VALUE OF AS OF
PORTFOLIO COMPANY BUSINESS INDICATED(1) SECURITY BASIS(2) INVESTMENT JUNE 30, 1997(3)
- ------------------------------ ------------------ ------------- -------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Erie Forge and Steel, Inc. Steel Forging $62.3 million Common 16.7% $500,000 $2,736,418
1341 West 16th Street 9/29/96 Stock
Erie, PA 16152
Indiana Steel and Wire Corp. Wire Mfg. $37.8 million Common 1.3% 42,914 58,869
2200 East Jackson Street 12/31/96 Stock
Muncie, IN 47307
Good Stuff Food Company, Inc. Commercial Bakery $32.3 million Common 8.3% 226,125 1,000,050
1771 Blake Ave. 4/26/97 Stock
Los Angeles, CA 90031
Martino's Bakery, Inc. Sweet Goods Bakery $14.6 million Common 12.5% 120,750 279,000
901 W. Alameda 8/31/96 Stock
Burbank, CA 91506
Mobile Tool Lift Truck Mfg. $63.6 million Common 2.7% 246,349 1,069,237
International, Inc. 6/30/96 Stock
56000 West 88th Avenue
Westminster, CO 80030
Biddeford Textile Corporation Blanket Mfg. $37.0 million Common 19.8% 592,500 4,542,105
PO Box 624 12/31/96 Stock
2 Main Street
Biddeford, ME 04005
</TABLE>
- ------------------
(1) Based upon information provided by management of the portfolio companies.
(2) Fully-Diluted basis includes equity securities to be issued (i) upon the
exercise or conversion of any outstanding options, warrants or rights, or
(ii) pursuant to contractual commitments to issue equity securities,
including any such commitments to an ESOP.
(3) These valuations were determined by the Company's Board of Directors based
on valuations by independent firms that were conducted as of dates between
December 31, 1996 and June 30, 1997.
The following is a summary of certain additional information concerning
each portfolio company. The Company's equity interest in each portfolio company
is held through a wholly-owned subsidiary of the Company, other than its
interest in Erie Forge and Steel, Inc. which is held directly by the Company.
For additional information relating to the value of the Company's investments in
its portfolio companies, see the Company's consolidated financial statements as
of June 30, 1997 appearing elsewhere in this Prospectus.
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ERIE FORGE AND STEEL, INC.
In 1990, the Company purchased common stock of Erie Forge and Steel, Inc.
('Erie') which purchased the assets of Erie from National Forge, Inc. Erie is a
leading producer of high alloy ingots and billets and large scale, complex,
open-die steel forging. In the fiscal year ended September 29, 1996, Erie had
revenue of approximately $62 million, of which greater than one-half represented
the sale of ingots and billets and one-third represented steel forging products.
Erie Forge is the leading manufacturer of large ship propeller shafting for the
U.S. Navy and has a significant share of the ingot and billet market. Erie is
fully integrated which enables it to produce steel, heat treat and machine very
large forgings in one facility. Erie is located in Erie, PA where its
predecessor companies have been in business since 1872. The employees of Erie
are part owners of the company through an ESOP that owns approximately 73% of
Erie. Malon Wilkus, the President of the Company, is a member of the Erie Board
of Directors. Following the Offering, the Company intends to contribute the Erie
common stock to a wholly owned subsidiary.
MOBILE TOOL INTERNATIONAL, INC.
In 1995, a subsidiary of the Company purchased the stock of Mobile Tool
International ('Mobile Tool') from Pennsylvania Company, a subsidiary of
American Premier Underwriters (formerly Penn Central Corporation) and merged
with Mobile Tool. Mobile Tool's ownership was then restructured so that a
majority of the stock was reserved for future contribution to an ESOP and sold
to members of management. Mobile Tool is a manufacturer of lift trucks sold to
telephone, cable and electric utilities as well as air dryers and air
purification units used in various applications by utilities. In the fiscal year
ended June 30, 1996, the company had approximately $63.6 million in annual
revenue and large shares of its target markets. It has three principal
manufacturing facilities located in Westminster, CO, Fort Wayne, IN and
Frederick, MD. Mobile Tool's predecessors began business in the early 1950s. The
employees of Mobile Tool are part owners of the company through an ESOP that
will eventually own approximately 76% of the company. Adam Blumenthal, Executive
Vice President of the Company, is a member of the Mobile Tool Board of Directors
and the Company is performing financial advisory services for Mobile Tool.
INDIANA STEEL & WIRE CORPORATION
In 1993, a subsidiary of the Company purchased the stock of Indiana Steel &
Wire Company (which was renamed Indiana Steel & Wire Corporation ('IS&W')) from
a subsidiary of General Cable Corporation and merged with IS&W. IS&W's ownership
was then restructured so that a majority of the stock was sold to an ESOP and to
members of management. With annual sales of approximately $37.8 million in the
fiscal year ended December 31, 1996, IS&W accounts for a significant portion of
the U.S. galvanized steel strand and core wire markets. The company is located
in Muncie, IN. Roland Cline, a Vice President of the Company, is a member of the
Board of Directors of IS&W.
GOOD STUFF FOOD COMPANY, INC.
In 1994, a subsidiary of the Company purchased the assets of Good Stuff
Food Company, Inc. ('GSFC') pursuant to a bankruptcy plan of reorganization.
Subsequently, a majority of the stock of the Company's subsidiary (which was
renamed GSFC) was contributed to an ESOP. GSFC is a leading manufacturer of
bread in the Los Angeles metropolitan area for the institutional market, with
approximately $32.3 million in sales in the fiscal year ended April 26, 1997.
Malon Wilkus, Adam Blumenthal, Roland Cline and Angela Atherton, the President,
Executive Vice President, Vice President, and a principal of the Company,
respectively, are members of the Board of Directors of GSFC and the Company is
performing financial advisory services for GSFC.
MARTINO'S BAKERY, INC.
In 1994, a subsidiary of the Company purchased the assets of Martino's
Bakery, Inc. ('Martino's') from a subsidiary of Campbell Soup Company
('Campbell'). A majority of the stock of the Company's subsidiary (which was
renamed Martino's) has been contributed or reserved for contribution to an ESOP.
Martino's is a sweet goods bakery located in Burbank, California, with
approximately $14.6 million in sales in the fiscal year ended August 31, 1996.
Martino's continues to supply Pepperidge Farm, a subsidiary of Campbell, with
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significant amounts of frozen product, in addition to maintaining a Los Angeles
brand presence. Malon Wilkus, Adam Blumenthal and Roland Cline, the President,
Executive Vice President, and Vice President of the Company, respectively, are
members of the Board of Directors of Martino's and the Company is performing
financial advisory services for Martino's.
BIDDEFORD TEXTILE CORPORATION
In May 1997, a subsidiary of the Company purchased the assets of Biddeford
from Sunbeam Products, Inc. ('Sunbeam'). The ownership of the Company's
subsidiary was then restructured so that a majority of the stock of such
subsidiary (which was renamed Biddeford) was sold to management and other
outside investors and reserved for future contribution to an ESOP. Biddeford's
predecessor business had annual sales of approximately $37 million in the fiscal
year ended December 31, 1996. Biddeford has the exclusive right to manufacture
the blanket portion of Sunbeam's electric blankets under a long term supply
agreement with Sunbeam. The blankets are shipped to Sunbeam's Mississippi
operation where they are wired and packaged and then distributed to customers.
Sunbeam currently supplies 100% of the electric blankets sold in North America.
Malon Wilkus and John Ireland, the President and a principal of the Company,
respectively, are members of the Board of Directors of Biddeford and the Company
is performing financial advisory services for Biddeford.
MANAGEMENT
The business and affairs of the Company are managed under the direction of
its Board of Directors. The Board of Directors has nine members, six of whom are
not 'interested persons' of the Company as defined in Section 2(a)(19) of the
1940 Act (the 'Independent Directors'). The Board of Directors elects the
Company's officers who serve at the pleasure of the Board of Directors.
EXECUTIVE OFFICERS AND DIRECTORS
The persons that are executive officers and directors of the Company and
their positions are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- --------------------------------------------- --- ---------------------------------------------
<S> <C> <C>
David Gladstone.............................. 55 Chairman of the Board of Directors(1)
Malon Wilkus................................. 45 President and Director(1)
Adam Blumenthal.............................. 36 Executive Vice President and Director(1)
Stephen L. Hester............................ 59 Vice President and General Counsel
Roland Cline................................. 49 Vice President
Robert L. Allbritton......................... 28 Director
Landon Butler................................ 55 Director
Neil M. Hahl................................. 48 Director
Philip R. Harper............................. 53 Director
Stan Lundine................................. 58 Director
Stephen P. Walko............................. 45 Director
</TABLE>
- ------------------
(1) Interested person as defined in Section 2(a)(19) of the 1940 Act.
The following is a summary of certain biographical information concerning
the Company's executive officers and directors:
David Gladstone. Mr. Gladstone has served as Chairman of the Board of the
Company since June 1997. From 1974 to February 1997, Mr. Gladstone held various
positions, including Chairman and Chief Executive officer, with Allied Capital
Corporation, Allied Capital Corporation II, Allied Capital Lending Corporation,
Allied Capital Commercial Corporation and Allied Capital Advisors Inc. From 1992
to 1997, Mr. Gladstone served as a Director and President and Chief Executive
Officer of Business Mortgage Investors. Mr. Gladstone served as a Director of
The Riggs National Corporation (the parent of Riggs Bank) from 1993 to May 1997
and of Riggs Bank from 1991 to 1993. He currently serves as a Trustee of The
George Washington University. He is also a member of the Listings and Hearings
Committee of the National Association of Securities Dealers, Inc. and a member
of the Business Development Group of the Women's Growth Capital Fund. Mr.
Gladstone holds
29
<PAGE>
an MBA degree from the Harvard Business School, a MA from American University
and a BA from the University of Virginia. Mr. Gladstone has authored two books
on financing for small and medium sized businesses, Venture Capital Handbook and
Venture Capital Investing (both published by Prentice-Hall).
Malon Wilkus. Mr. Wilkus founded the Company in 1986 and has served as the
Company's President since that time. Mr. Wilkus previously served as Chairman
and is a Director of the National Center for Employee Ownership. Mr. Wilkus is a
member of the Board of Governors of the ESOP Association. Mr. Wilkus is a
Director of Erie Forge & Steel, Inc., Oakmont Steel, Inc., Good Stuff Food
Company, Inc., Biddeford Textile Corporation and Martino's Bakery, Inc.
Adam Blumenthal. Mr. Blumenthal has served as the Company's Executive Vice
President since 1995. From 1990 to 1995, Mr. Blumenthal served as a Vice
President of the Company. Mr. Blumenthal currently serves as a Director of
Mobile Tool International, Martino's Bakery, Inc., the Good Stuff Food Company,
Inc. and the Yale School of Management Alumni Association. Mr. Blumenthal holds
a Masters of Public and Private Management degree from the Yale School of
Management and a AB from Harvard College.
Stephen L. Hester. Mr. Hester currently serves as the Company's Vice
President and General Counsel. Mr. Hester has been employed by the Company since
1994. From 1973 to 1993, Mr. Hester was a Partner in the law firm of Arnold &
Porter. Mr. Hester is currently a Director of Copper Range Company and U.S.
Investigations Services, Inc. and is a Trustee of Northwest Airlines' Employee
Stock Ownership Plan.
Roland Cline. Mr. Cline has been employed by the Company since 1991 and
has served as a Vice President of the Company since 1990. Mr. Cline is a
Director of Indiana Steel and Wire Corporation, Martino's Bakery, Inc. and Good
Stuff Food Company, Inc. Mr. Cline has an MBA degree from the University of
Wisconsin.
Robert L. Allbritton. Mr. Allbritton was elected as a Director in 1997.
Mr. Allbritton has served as the Executive Vice President and Chief Operating
Officer of Allbritton Communications Company since 1994 and as a Director of
that Company since 1992. Mr. Allbritton is currently a Director of Riggs
National Corporation, Perpetual Corporation, Allbritton Jacksonville, Inc., and
University Bankshares, Inc.
Landon Butler. Mr. Butler was elected as a Director in 1997. Mr. Butler is
currently President of Landon Butler & Co., an investment management firm, a
post he has held since 1981. Mr. Butler is currently Vice Chairman of Poland
Partners Management Company and a Member of the Policy Board of Multi-Employer
Property Trust.
Neil M. Hahl. Mr. Hahl was elected as a Director in 1997. Mr. Hahl has
been President of The Weitling Group, a business consulting firm, since 1996.
From 1995 to 1996, Mr. Hahl served as Senior Vice President of the American
Financial Group. From 1982 to 1996, Mr. Hahl served as Senior Vice President and
CFO of Penn Central Corporation. Mr. Hahl is currently a Director of Buckeye
Management Company and American Financial Enterprises.
Philip R. Harper. Mr. Harper was elected as a Director in 1997. Since July
1996, Mr. Harper has served as President, Chief Executive Officer and a Director
of U.S. Investigations Services, Inc. From 1991 to 1995, Mr. Harper served as
President of Wells Fargo Alarm Services. From 1988 to 1991, Mr. Harper served as
President of Wells Fargo's Burns Western Business Unit.
Stan Lundine. Mr. Lundine was elected as a Director in 1997. Mr. Lundine
has served as Of Counsel for the law firm of Sotir and Goldman since 1995. From
1987 to 1994, he was the Lieutenant Governor of the State of New York. Mr.
Lundine is a Director of U.S. Investigations Services, Inc. and National Forge
Holdings. From 1976 to 1986, Mr. Lundine served as a member of the U.S. House of
Representatives.
Stephen P. Walko. Mr. Walko was elected as a Director in 1997. Mr. Walko
is President and a Director of Textileather Corporation, a manufacturer of vinyl
products, posts he has held since 1990. Mr. Walko is a Director of Mobile Tool
International, Inc. and Bliss Salem Steel Corp.
<PAGE>
COMPENSATION
The following table sets forth certain information concerning the
compensation paid to the Company's three highest paid executive officers for the
fiscal year ended December 31, 1996. No director who was not also an officer of
the Company received compensation in excess of $60,000 for the fiscal year 1996.
The Company has no pension plan, other than the Company ESOP. The Company ESOP
will be amended in connection with
30
<PAGE>
completion of the Offering so that it will be a money purchase pension plan
under the Code pursuant to which the Company will make annual contributions in
an amount generally equal to 3.0% of each employee's compensation.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
CAPACITIES IN WHICH AGGREGATE CASH ESOP
NAME OF INDIVIDUAL OR IDENTITY OF GROUP COMPENSATION WAS RECEIVED COMPENSATION(1) CONTRIBUTION(2)
- ------------------------------------------------ ------------------------- --------------- ---------------
<S> <C> <C> <C>
Malon Wilkus.................................... President $ 150,000 $30,000
Adam Blumenthal................................. Executive Vice President, 135,000 30,000
Chief Financial Officer
and Secretary
Roland Cline.................................... Vice President 127,500 30,000
</TABLE>
- ------------------
(1) Comprised solely of salary.
(2) Represents the value of Common Stock allocated to the indicated executive
officer's Company ESOP account in 1996.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain officers
including Messrs. Gladstone, Wilkus, Blumenthal, Cline and Hester (the
'Executive Officers'). The employment agreements of the Executive Officers,
which generally will become effective only upon completion of the Offering, but
in the case of Mr. Gladstone, retroactive to April 1, 1997, each provide for a
five-year term. However, two years before expiration of each agreement, its term
will be automatically renewed for an additional year, unless either party has
given six months advance written notice that the automatic extensions are to
cease.
The base salary under the employment agreements of Messrs. Gladstone,
Wilkus and Hester is $150,000 per year, while under those of Messrs. Blumenthal
and Cline, it is $135,000 and $132,500 per year, respectively, subject to
certain geographic cost of living adjustments. Mr. Hester's base salary is
subject to adjustment for part-time status. The Board of Directors will have the
right to increase the base salary during the term and also, generally, to
decrease it, but not below the original base salary. The employment agreements
provide that the Executive Officers are entitled to participate in a performance
based bonus program under which each will receive up to 200% of his base salary
depending on the Company's performance against certain criteria to be
established annually by the Compensation Committee of the Board of Directors.
Each Executive Officer will be entitled to receive 5% of this bonus regardless
of the Company's performance.
The Executive Officers will also be contractually entitled to participate
in the Company's 1997 Stock Option Plan, described below, effective with the
completion of the Offering. The employment agreements provide that Messrs.
Gladstone, Wilkus, Blumenthal, Cline and Hester will receive options equal to
5.5%, 0.4%, 2.7%, 1.6% and 0.3%, respectively, of the Company's outstanding
Common Stock as of the completion of the Offering and the Direct Offering,
adjusted for any exercise of the Over-Allotment Option. These stock options will
vest over three years from the date of grant, with one-third of the granted
options vesting each year. However, an Executive Officer may accelerate such
vesting by agreeing to exercise options immediately upon vesting and then
agreeing for the period through the date on which the option would have
originally vested not to sell, assign or convey any stock so purchased (other
than by laws of descent or distribution) and to grant to the Company a call
option to repurchase any such stock at the option exercise price if the options
would have been forfeited prior to their original vesting date as a result of
the Executive Officer's subsequent termination of employment under the
circumstances noted below.
If the Company should terminate an Executive Officer's employment by reason
of the Executive Officer's disability, the Executive Officer would be entitled
to receive from the Company for two years the difference between his base salary
plus annual bonus and any long-term disability benefits. Additionally, the
Executive Officer's unvested options which would have vested within one year of
the disability termination would vest. Vested options would expire unless
exercised (and all outstanding loans resulting from the prior exercise of any
options would have to be repaid) within 18 months of the termination date. If
the Company should terminate an Executive Officer's employment for any reason
other than a disability or misconduct, the Executive Officer, would be entitled
to receive his base salary and bonus for two years, although the Executive
Officer could choose
31
<PAGE>
to forgo the payments and thus obtain a release from non-compete provisions
applicable during this period. These payments would also be made if the
Executive Officer resigned with good reason, which generally includes conduct by
the Company materially and adversely changing the executive's responsibilities
and duties, a material breach by the Company of the employment agreement or a
change in control of the Company. Mr. Gladstone's contract also defines good
reason as determination by him of a material difference with the Board of
Directors. Additionally, an Executive Officer's unvested stock options would
generally vest if his employment were terminated for any reason other than a
disability or misconduct or if he resigned with good reason.
If the Executive Officer dies, his estate will be entitled to receive the
annual bonus in the year of death. Additionally, he will be considered to have
vested on the date of death in those options which would vest within one year of
the date of death, and would forfeit any unvested options. All such vested
options would expire unless exercised (and all outstanding loans resulting from
the prior exercise of any options would have to be repaid) within 18 months of
the date of death.
In the event that the Company should terminate an Executive Officer's
employment as a result of the Executive Officer's misconduct or in the event
that the Executive Officer voluntarily terminates his employment for other than
good reason, all unvested stock options would be forfeited (except that in the
case of a voluntary termination by Mr. Gladstone, 30% of such options would be
considered to have vested six months after the date of grant, 30% more would be
considered to have vested one year after the date of grant, and 20% more would
be considered to have vested on the second anniversary of the date of grant) and
the Executive Officer would have no more than 90 days to exercise any
unexercised options (and to repay any outstanding loans resulting from the prior
exercise of any options).
Upon termination of employment, an Executive Officer would be subject to
certain non-compete covenants. These covenants would generally apply for two
years, although should the Executive Officer resign without good reason, the
covenants would apply for only one year following resignation. The covenants
applicable to Mr. Gladstone are generally shorter although in essentially all
cases, Mr. Gladstone would be prohibited from competing with the Company for at
least one year from the completion of the Offering. As noted above, during
periods when Executive Officers are receiving severance payments from the
Company, they may terminate covenants prohibiting competition by foregoing such
payments.
Each of the employment agreements also provides that the Executive Officer
will maintain the confidentiality of the Company's confidential information.
BOARD OF DIRECTORS
Pursuant to the terms of the Company's Second Amended and Restated
Certificate of Incorporation, the directors are divided into three classes. One
class holds office initially for a term expiring at the annual meeting of
stockholders to be held in 1998, a second class holds office initially for a
term expiring at the annual meeting of stockholders to be held in 1999 and a
third class holds office initially for a term expiring at the annual meeting of
stockholders to be held in 2000. Each director holds office for the term to
which he or she is elected and until his or her successor is duly elected and
qualified. Messrs. Gladstone, Allbritton and Butler have terms expiring in 1998,
Messrs. Blumenthal, Hahl and Lundine have terms expiring in 1999, and Messrs.
Wilkus, Harper and Walko have terms expiring in 2000. At each annual meeting of
the stockholders of the Company, the successors to the class of directors whose
terms expire at such meeting will be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election.
COMMITTEES OF THE BOARD OF DIRECTORS
Executive Committee. The Board of Directors has established an executive
committee (the 'Executive Committee'). Membership of the Executive Committee
initially is comprised of Messrs. Gladstone, Wilkus and Blumenthal. The
Executive Committee has the authority to exercise all powers of the Board of
Directors except for actions that must be taken by the full Board of Directors
under the Delaware General Corporation Law.
Audit Committee. The Board of Directors has established an audit committee
(the 'Audit Committee'). Membership of the Audit Committee initially is
comprised of Messrs. Allbritton, Hahl, Walko and Lundine, each of whom is an
Independent Director. The Audit Committee will make recommendations concerning
the engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants,
32
<PAGE>
review the independence of the independent public accountants and review the
adequacy of the Company's internal accounting controls.
Compensation Committee. The Board of Directors has established a
compensation committee (the 'Compensation Committee'). Membership of the
Compensation Committee initially is comprised of Messrs. Butler, Hahl and
Harper, each of whom is an Independent Director. The Compensation Committee will
determine compensation for the Company's executive officers, in addition to
administering initially the Company's Stock Option Plan.
STOCK OPTION PLAN
The Company has established the 1997 Stock Option Plan (the '1997 Plan')
for the purpose of attracting and retaining executive officers, directors and
other key employees.
Initially, a maximum of 1,177,052 shares of Common Stock may be issued in
the aggregate under the 1997 Plan to employees and directors. Such number of
shares will be increased by 12% of the number of shares sold by the Company
under the Over-Allotment Option. Options granted under the 1997 Plan may be
exercised for a period of no more than ten years from the date of grant. Unless
sooner terminated by the Company's Board of Directors, the 1997 Plan will
terminate on August 27, 2007 and no additional awards may be made under the 1997
Plan after that date. The maximum number of shares that may be covered by
Options granted under the Plan for a single participant is 608,782.
Options granted under the 1997 Plan may be either 'incentive stock options'
within the meaning of Section 422 of the Code or nonstatutory stock options, and
entitle the optionee, upon exercise, to purchase shares of Common Stock from the
Company at a specified exercise price per share. Only employees of the Company
and its subsidiaries are eligible to receive incentive stock options under the
1997 Plan. Incentive stock options must have a per share exercise price of no
less than the fair market value or, if the optionee owns or is treated as owning
(under Section 424(d) of the Code) more than 10% of the total combined voting
power of all classes of stock of the Company, 110% of the fair market value of a
share of Common Stock on the date of the grant. Nonstatutory stock options
granted under the 1997 Plan must have a per share exercise price of no less than
the fair market value of a share of Common Stock on the date of the grant.
Options will not be transferable other than by laws of descent and distribution
and will generally be exercisable during an optionee's lifetime only by the
optionee.
The Compensation Committee will administer the 1997 Plan and have the
authority, subject to the provisions of the 1997 Plan, to determine who will
receive awards under the 1997 Plan and the terms of such awards. The
Compensation Committee will have the authority to adjust the number of shares
available for options, the number of shares subject to outstanding options and
the exercise price for options following the occurrence of events such as stock
splits, dividends, distributions and recapitalizations.
The Compensation Committee may provide that the exercise price of an option
may be paid in Common Stock. The Compensation Committee may also permit a
'cashless exercise' arrangement whereby an optionee, without payment of the
exercise price, receives upon exercise, shares having an aggregate fair market
value equal to the product of (i) the excess of the fair market value of a share
on the exercise date over the exercise price and (ii) the number of shares
covered by the option.
The Compensation Committee may also provide with respect to any
nonstatutory stock option (as defined in the 1997 Plan) that if an employee
delivers shares of Common Stock in full or partial payment of the exercise price
of the nonstatutory stock option, the employee will be granted a 'reload stock
option' to purchase that number of shares of Common Stock delivered by the
employee.
CERTAIN TRANSACTIONS
As of December 31, 1996, the Company had a note payable to Malon Wilkus,
the Company's President, with an outstanding principal amount of approximately
$74,000. Since that date, the Company has repaid the loan.
As of June 23, 1997, the Company sold an aggregate of 9.2% of its interest
in Biddeford to Stephen L. Hester, its Vice President and General Counsel, and
John L. Ireland, a principal of the Company, for the aggregate price of $60,000,
in cash, the price paid by the Company for that portion of its interest.
33
<PAGE>
PRINCIPAL STOCKHOLDERS
Of the 20,000,000 shares of Common Stock authorized under the Company's
Second Amended and Restated Certificate of Incorporation, there will be 686,330
shares of Common Stock outstanding and five holders of record prior to
completion of the Offering. The Company will have no other shares of Capital
Stock outstanding. The following table sets forth certain ownership information
with respect to the Common Stock for (i) those persons who directly or
indirectly own, control or hold with the power to vote, 5% or more of the
outstanding Common Stock and (ii) all officers and directors, as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
STOCK OUTSTANDING
-----------------------
TYPE OF SHARES BEFORE AFTER
NAME AND ADDRESS OWNERSHIP OWNED(1) OFFERING OFFERING(2)
- ----------------------------------------------------------------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C>
Malon Wilkus .................................................... Record and 521,417 (3) 76.0% 6.4%(4)
c/o American Capital Strategies, Ltd. Beneficial
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
American Capital Strategies, Ltd. % %
Employee Stock Ownership Plan Trust(5) ........................ Record 205,272 29.9 2.1
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Adam Blumenthal ................................................. Beneficial 36,591 (6) 5.3% 0.4%
c/o American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Roland Cline .................................................... Beneficial 36,442 (6) 5.3% 0.4%
c/o American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Officers and directors as a group (11 persons)...................
607,035 88.4% 8.3%(7)
</TABLE>
- ------------------
(1) Reflects the stock dividend whereby each share of Common Stock has been
effectively converted into 29.859 shares.
(2) Does not reflect Common Stock reserved for issuance upon exercise of the
Underwriters' Warrants, the Over-Allotment Option or stock options to be
issued under the 1997 Plan, but does reflect the sales of all 722,437 shares
to be offered through the Direct Offering.
(3) Includes 43,673 shares allocated to the account of Mr. Wilkus as a
participant in the Company ESOP over which Mr. Wilkus has voting power under
the terms of the Company ESOP.
(4) Includes the purchase of 107,527 shares in the Direct Offering.
(5) The trustees of the Company ESOP are Adam Blumenthal, Roland Cline and Kathy
Stock.
(6) Reflects only shares allocated to the accounts of Messrs. Blumenthal and
Cline, respectively, as participants in the Company ESOP and over which they
have voting power under the terms of the Company ESOP but not other shares
legally owned by the Company ESOP for which Messrs. Blumenthal and Cline are
among the trustees.
(7) Includes the purchase of 204,657 shares in the Direct Offering.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Company's outstanding shares shall be
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus liabilities by the
total number of shares outstanding at the date as of which the determination is
made.
In calculating the value of the Company's total assets, securities that are
traded in the over-the-counter market or on a stock exchange are valued at the
prevailing bid price on the valuation date, unless the investment
34
<PAGE>
is subject to a restriction that requires a discount from such price, which is
determined by the Board of Directors. All other investments are valued at fair
market value as determined in good faith by the Board of Directors. In making
such determination, the Board of Directors will value loans and non-convertible
debt securities for which there exists no public trading market at cost plus
amortized original issue discount, if any, unless adverse factors lead to a
determination of a lesser value. In valuing convertible debt securities, equity
or other types of securities for which there exists no public trading market,
the Board of Directors will determine fair market value on the basis of
collateral, the issuer's ability to make payments, its earnings and other
pertinent factors.
A substantial portion of the Company's assets will consist of securities
carried at fair market values determined by its Board of Directors.
Determination of fair market values involves subjective judgment not susceptible
to substantiation by auditing procedures. Accordingly, under current auditing
standards, the notes to the consolidated financial statements refer to the
uncertainty with respect to the possible effect of such valuations on the
financial statements.
REINVESTMENT PLAN
Pursuant to the Company's Reinvestment Plan (the 'Plan'), a stockholder
whose shares are registered in his own name will have all distributions
reinvested automatically in additional shares by Boston EquiServe, L.P., the
plan administrator (the 'Plan Administrator'). Stockholders whose shares are
held in the name of a broker or other nominee will have distributions reinvested
automatically by the broker or the nominee in additional shares under the Plan,
unless such a service is not provided by the broker or the nominee or the
stockholder elects not to participate in the Plan. Stockholders whose shares are
held in the name of a broker or other nominee should contact the broker or
nominee for details. A stockholder may terminate participation in the Plan at
any time by delivering written notice to the Plan Administrator before the
record date of the next dividend or distribution. All distributions to
stockholders who do not participate in the Plan will be paid by check mailed
directly to the record holder by or under the direction of the Plan
Administrator.
When the Company declares a dividend or distribution, stockholders who are
participants in the Plan will receive the equivalent of the amount of the
dividend or distribution in shares of the Common Stock. The Plan Administrator
will buy shares in the open market, on the Nasdaq National Market or elsewhere.
Alternatively, the Board of Directors may choose to contribute newly issued
shares of Common Stock to the Plan, in lieu of the payment of cash dividends on
shares held in the Plan. The Plan Administrator will apply all cash received on
account of a dividend or distribution as soon as practicable, but in no event
later than 30 days, after the payment date of the dividend or distribution
except to the extent necessary to comply with applicable provisions of the
federal securities laws. The number of shares to be received by the Plan
participants on account of the dividend or distribution will be calculated on
the basis of the average price of all shares purchased for that 30 day period,
including brokerage commissions, and will be credited to their accounts as of
the payment date of the dividend or distribution.
The Plan Administrator will maintain all stockholder accounts in the Plan
and will furnish written confirmations of all transactions in the account,
including information needed by stockholders for personal and tax records.
Shares in the account of each Plan participant will be held by the Plan
Administrator in non-certificated form in the name of the participant, and each
stockholder's proxy will include shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends and capital
gains distributions. The fees of the Plan Administrator for handling the
reinvestment of dividends and capital gains distributions will be included in
the fee to be paid by the Company to its transfer agent. There will be no
brokerage charges with respect to shares issued directly by the Company as a
result of dividends or capital gains distributions payable either in shares or
in cash. However, each participant will bear a pro rata share of brokerage
commissions incurred with respect to the Plan Administrator's open market
purchases in connection with the reinvestment of distributions.
The automatic reinvestment of distributions will not relieve participants
of any income tax which may be payable on distributions. See 'Tax Status.'
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the Plan as
applied to any distribution paid subsequent to written notice of the change sent
to participants in the Plan at least 90 days before the record date for the
distribution. The Plan also may be amended or terminated by the Plan
Administrator with the Company's prior written consent, on at least 90 days'
35
<PAGE>
written notice to participants in the Plan. All correspondence concerning the
Plan should be directed to the Plan Administrator by mail at 150 Royall Street,
mail stop 45-02-62, Canton, MA 02021 or by phone at 1-800-425-5523.
TAX STATUS
The following discussion is a general summary of the principal material
federal income tax considerations applicable to the Company and to an investment
in Common Stock and does not purport to be a complete description of the tax
considerations applicable to such an investment. Prospective stockholders should
consult their own tax advisors with respect to the tax considerations which
pertain to their purchase of the Common Stock. This summary is based on the
Code, Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. This summary does not discuss all
aspects of federal income taxation relevant to holders of the Common Stock in
light of their particular circumstances, or to certain types of holders subject
to special treatment under federal income tax laws, including foreign taxpayers.
This summary does not discuss any aspects of foreign, state, or local tax laws.
CONVERSION TO RIC STATUS
The Company was formed in 1986, and since that time has been subject to tax
as an ordinary corporation under Subchapter C of the Code. After the Offering,
the Company intends to qualify for and elect to be treated as a RIC under
Subchapter M of the Code. If the Company qualifies as a RIC, it will be able to
take a deduction against its otherwise taxable income for certain dividends it
pays, allowing it to substantially reduce or eliminate its corporate-level tax
liability. One requirement to qualify as a RIC is that by the end of its first
taxable year as a RIC the Company must have no earnings and profits accumulated
while the Company was taxable under Subchapter C. Therefore, to qualify for RIC
status, before the close of its first taxable year as a RIC the Company must
eliminate through the payment of dividends any remaining earnings and profits
accumulated while it was taxable under Subchapter C.
As of the date of the Offering, the Company held substantial assets whose
fair market value exceeded their basis ('built-in gain'). In Notice 88-19,
1988-1 C.B. 486 (the 'Notice'), the IRS announced its intention to promulgate
regulations requiring corporations that convert from taxation under Subchapter C
to taxation as a RIC to recognize all their built-in gain before they may
qualify for taxation as a RIC. The Notice states that, in general, the
regulations would treat a corporation electing RIC status as having sold all of
its assets at their fair market value as of the final day of the last year in
which it was taxable under Subchapter C. Such a deemed sale would be subject to
corporate level tax and would create earnings and profits that would be treated
as arising while the corporation was taxable under Subchapter C. To qualify as a
RIC, a corporation would have to eliminate such earnings and profits, typically
through the payment of dividends.
The Notice further provides, however, that the regulations will permit
corporations converting to RIC status to elect to be subject to rules similar to
the rules of section 1374 of the Code, which governs the tax treatment of
built-in gain on assets held by a corporation taxable under Subchapter C that
converts to taxation under Subchapter S. Such a conversion ordinarily eliminates
corporate-level tax. Section 1374 generally imposes corporate-level tax on
built-in gain on assets held when such a corporation converted to Subchapter S
status, if the gain is recognized within ten years of the conversion.
The IRS has not issued any of the regulations described in the Notice. The
Company has requested a private letter ruling from the IRS which, if favorable,
would allow it to be subject to rules similar to those of section 1374 on its
built-in gain. If the Company receives such a favorable ruling, it will not be
deemed to have sold its assets. The Company's basis in its assets will remain
below their fair market value, and if the Company disposes of any of those
assets within 10 years of the Offering it will be liable for corporate level tax
on such built-in gain. There can be no prediction whether the IRS will issue
such a ruling or when such a ruling would be issued.
If the Company does not receive a favorable ruling from the IRS by the due
date (including extensions) of its final return as a Subchapter C corporation,
it will compute its taxable income for that final return as if it had sold all
of its assets at fair market value on the last day of its taxable year. Based on
the Company's June 30, 1997 financial results, such a deemed sale would increase
the Company's tax liability by approximately
36
<PAGE>
$3.1 million. As a result of the deemed sale the Company would have a basis in
its assets equal to their fair market value. The Company would then pay a
taxable dividend to its stockholders equal to the additional earnings and
profits created by the deemed sale of assets. Based on the Company's June 30,
1997 financial results, the dividend should be approximately $5.9 million. Such
a dividend should eliminate the Company's remaining earnings and profits
accumulated while the Company was taxable under Subchapter C. If the Company
does not eliminate all of the earnings and profits accumulated while taxable
under Subchapter C, it will not qualify for tax treatment as a RIC.
TAXATION AS A RIC
If the Company qualifies as a RIC and distributes to stockholders each year
in a timely manner at least 90% of its 'investment company taxable income,' as
defined in the Code (i.e., net investment income and net short-term capital
gains), it will not be subject to federal income tax on the portion of its
taxable income and gains it distributes to stockholders. In addition, if the
Company distributes in a timely manner (or treats as 'deemed distributed' as
described below) 98% of its capital gain net income for each one year period
ending October 31, and distributes 98% of its ordinary income for each calendar
year (as well as any income not distributed in prior years), it will not be
subject to a 4% nondeductible federal excise tax on certain undistributed income
of a RIC.
In order to qualify as a RIC for federal income tax purposes, the Company
must, among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale of stock or securities, or other income derived with respect to its
business of investing in such stock or securities, and (b) diversify its
holdings so that (i) at least 50% of the value of the Company's assets consists
of cash, cash items, government securities and other securities if such other
securities of any one issuer do not represent more than 5% of the Company's
assets and 10% of the outstanding voting securities of the issuer and (ii) no
more than 25% of the value of the Company's assets are invested in the
securities of one issuer (other than U.S. government securities), or of two or
more issuers that are controlled by the Company and are engaged in the same or
similar or related trades or businesses.
TREATMENT OF BUILT-IN GAIN
Stockholders should carefully consider the tax implications of the
carryover tax basis of assets owned by the Company before the Offering that will
exist if the Company obtains a favorable ruling from the IRS. As a result of the
tax-free nature of the Company's conversion to RIC status, the basis of the
Company in its assets will equal the basis of the assets before the Offering.
This basis will be approximately $9.0 million less than the market value of the
assets, based on the Company's June 30, 1997 financial results. This represents
a potential capital gain attributable to appreciation in value prior to the
Offering. If the Company recognizes that built-in gain within ten years of the
Offering, it will be liable for corporate-level tax on that gain. The current
corporate tax rate on capital gain income is 35%. Any capital gain recognized by
the Company when these assets are sold will either be distributed or deemed
distributed to the stockholders (net of corporate-level tax), and in either case
will be taxable to the stockholders. In the case of a deemed distribution, each
stockholder is entitled to the credit for taxes paid by the Company as described
below.
TAXATION OF STOCKHOLDERS
For any period during which the Company qualifies as a RIC for tax
purposes, dividends to stockholders of the Company's ordinary income and any
distributions of net short-term capital gain generally will be taxable as
ordinary income to stockholders to the extent of the Company's current or
accumulated earnings and profits. Distributions of the Company's net long-term
capital gains (designated by the Company as capital gain dividends) will be
taxable to stockholders as long-term capital gain regardless of the
stockholder's holding period in his shares. The Company will report to
stockholders the portion of such gains attributable to the disposition of assets
held by the Company for more than one year but not for more than 18 months and
the portion attributable to the disposition of assets held for more than 18
months.
To the extent that the Company retains any capital gains, it may designate
them as 'deemed distributions' and pay a tax thereon for the benefit of its
stockholders. In that event, the stockholders report their share of retained
realized capital gains on their tax returns as if it had been received, and
report a credit for the tax paid thereon by the Company. The amount of the
deemed distribution net of such tax is then added to the stockholder's cost
basis for his shares. Since the Company expects to pay tax on capital gains at
the regular
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<PAGE>
corporate tax rate of 35% and the maximum rate payable by individuals on such
gains is substantially lower, the amount of credit that individual stockholders
may report will exceed the amount of tax that they would be required to pay on
capital gains. Stockholders who are not subject to federal income tax or tax on
capital gains should be able to file a Form 990T or an income tax return on the
appropriate form that allows them to recover the taxes paid on their behalf.
Any dividend declared by the Company in October, November or December of a
year, payable to stockholders of record on a specified date in such month and
actually paid during January of the following year, will be treated as if it
were received by the stockholders on December 31 of the year it was declared.
Investors should be careful to consider the tax implications of buying
shares just prior to the record date for a distribution. Even if the price of
the shares includes the amount of the forthcoming distribution, the stockholder
will be taxed upon receipt of the distribution and will not be entitled to
offset the distribution against tax basis in the shares.
A stockholder may recognize taxable gain or loss if he sells, exchanges or
redeems his shares. Any gain or loss arising from (or, in the case of
distributions in excess of earnings and profits, treated as arising from) the
sale, exchange or redemption of shares generally will be a capital gain or loss,
except in the case of a stockholder who is a securities dealer. This capital
gain or loss will be treated as long-term capital gain or loss if the
stockholder has held his shares for more than one year. The maximum tax rate on
capital gains received by individuals from the sale or disposition of
investments (other than collectibles) held for more than 18 months is 20
percent. If an individual holds an investment for more than one year, but not
for more than 18 months, the maximum rate is 28 percent. Finally, the top
capital gains tax rate for individuals will drop to 18 percent for assets
purchased after January 1, 2000, and held for more than five years. Pursuant to
a special rule, however, any capital loss arising from the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received with
respect to such shares.
The Company may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable dividends and distributions payable to stockholders who
fail to provide the Company with their correct taxpayer identification number or
to make required certifications, or regarding whom the Company has been notified
by the IRS that they are subject to backup withholding. Backup withholding is
not an additional tax and any amounts withheld may be credited against a
stockholder's U.S. federal income tax liability.
Federal withholding taxes at a 30% rate (or a lesser treaty rate) may apply
to distributions to stockholders that are nonresident aliens or foreign
partnerships, trusts or corporations. Foreign investors should consult their tax
advisers with respect to the possible U.S. federal, state and local and foreign
tax consequences of an investment in the Company.
The Company will mail to each stockholder, as promptly as possible after
the end of each fiscal year, a notice detailing, on a per share and per
distribution basis, the amounts includable in such stockholder's taxable income
for such year as net investment income, as net realized capital gains (if
applicable), as 'deemed' distributions of capital gains and as taxes paid by the
Company with respect thereto. In addition, the federal tax status of each year's
distributions will be reported to the IRS. Distributions may also be subject to
additional state, local and foreign taxes depending on each stockholder's
particular situation. Stockholders are advised to consult their own tax advisers
with respect to particular tax consequences to them of an investment in the
Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, $0.01 par value per share and 5,000,000 shares of preferred
stock, par value $0.01 per share (the 'Preferred Stock,' the Preferred Stock and
the Common Stock are collectively referred to as the 'Capital Stock'). The
following summary of the Company's Capital Stock does not purport to be complete
and is subject to, and qualified in its entirety by, the Company's Second
Amended and Restated Certificate of Incorporation. Reference is made to the
Company's Second Amended and Restated Certificate of Incorporation for a
detailed description of the provisions summarized below.
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<PAGE>
COMMON STOCK
All shares of Common Stock, have equal rights as to earnings, assets,
dividends and voting privileges and, when issued, will be duly authorized,
validly issued, fully paid and nonassessable. Distributions may be paid to the
holders of Common Stock if and when declared by the Board of Directors of the
Company out of funds legally available therefor. Shares of Common Stock have no
preemptive, conversion or redemption rights and are freely transferable. In the
event of liquidation dissolution or winding up of the Company, each share of
Common Stock is entitled to share ratably in all assets of the Company that are
legally available for distribution after payment of all debts and other
liabilities and subject to any prior rights of holders of Preferred Stock, if
any, then outstanding. Each share of Common Stock is entitled to one vote and
does not have cumulative voting rights, which means that holders of a majority
of such shares, if they so choose, could elect all of the directors, and holders
of less than a majority of such shares would, in that case, be unable to elect
any director.
The Common Stock has been approved for listing on the Nasdaq National
Market (symbol ACAS).
PREFERRED STOCK
In addition to shares of Common Stock, the Company's Second Amended and
Restated Certificate of Incorporation authorizes the issuance of shares of
Preferred Stock. The Board of Directors is authorized to provide for the
issuance of Preferred Stock with such preferences, powers, rights and privileges
as the Board deems appropriate; except that, such an issuance must adhere to the
requirements of the 1940 Act. The 1940 Act requires, among other things, that
(i) immediately after issuance and before any distribution is made with respect
to Common Stock, the Preferred Stock, together with all other Senior Securities,
must not exceed an amount equal to 50% of the Company's total assets and (ii)
the holders of shares of Preferred Stock, if any are issued, must be entitled as
a class to elect two directors at all times and to elect a majority of the
directors if dividends on the Preferred Stock are in arrears by two years or
more. The Company has no present plans to issue any shares of Preferred Stock,
but believes the availability of such stock will provide the Company with
increased flexibility in structuring future financings and acquisitions.
WARRANTS
In connection with the Offering, the Company will issue the Underwriters'
Warrants. See 'Underwriting.'
LIMITATION ON LIABILITY OF DIRECTORS
The Company has adopted provisions in its Second Amended and Restated
Certificate of Incorporation limiting the liability of directors and officers of
the Company for monetary damages. The effect of this provision in the Second
Amended and Restated Certificate of Incorporation is to eliminate the rights of
the Company and its stockholders (through stockholders' derivative suits on
behalf of the Company) to recover monetary damages against a director or
officers for breach of the fiduciary duty of care as a director or officer
(including breaches resulting from negligent or grossly negligent behavior)
except in certain limited situations. This provision does not limit or eliminate
the rights of the Company or any stockholder to seek nonmonetary relief such as
an injunction or rescission in the event of a breach of a director's or
officer's duty of care. These provisions will not alter the liability of
directors or officers under federal securities laws.
CERTAIN PROVISIONS OF THE SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND THE SECOND AMENDED AND RESTATED BY-LAWS
The Second Amended and Restated Certificate of Incorporation and the Second
Amended and Restated By-Laws of the Company contain certain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Board of Directors. The Company believes that the benefits of these
provisions outweigh the potential disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals might result in an
improvement of their terms. The description set forth below is intended as a
summary only and is qualified in its entirety by reference to the Second Amended
and Restated Certificate of Incorporation and the Second Amended and Restated
By-Laws.
39
<PAGE>
CLASSIFIED BOARD OF DIRECTORS
The Second Amended and Restated Certificate of Incorporation provides for
the Board of Directors to be divided into three classes of directors serving
staggered three-year terms, with each class to consist as nearly as possible of
one-third of the directors then elected to the Board. A classified board may
render more difficult a change in control of the Company or removal of incumbent
management. The Company believes, however, that the longer time required to
elect a majority of a classified Board of Directors will help to ensure
continuity and stability of the Company's management and policies.
NUMBER OF DIRECTORS; REMOVAL; FILING VACANCIES
The Second Amended and Restated Certificate of Incorporation provides that
the number of directors will be determined pursuant to the By-Laws. In addition,
the Second Amended and Restated By-Laws provide that the number of directors
shall not be increased by 50% or more in any 12-month period without the
approval of at least 66 2/3% of the members of the Board of Directors then in
office. The Second Amended and Restated Certificate of Incorporation provides
that any vacancies will be filled by the vote of a majority of the remaining
directors, even if less than a quorum, and the directors so appointed shall hold
office until the next election of the class for which such directors have been
chosen and until their successors are elected and qualified. Accordingly, the
Board of Directors could temporarily prevent any stockholder from enlarging the
Board of Directors and filling the new directorships with such stockholder's own
nominees.
The Second Amended and Restated Certificate of Incorporation also provides
that, except as may be provided in a resolution or resolution designating any
class or series of Preferred Stock, the directors may only be removed for cause
by the affirmative vote of 75% of the voting power of all of the shares of
capital stock of the Company then entitled to vote generally in the election of
directors, voting together as a single class.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
The Second Amended and Restated Certificate of Incorporation and the Second
Amended and Restated By-Laws provide that stockholder action can be taken only
at an annual or special meeting of Stockholders. They also prohibit stockholder
action by written consent in lieu of a meeting. These provisions may have the
effect of delaying consideration of a stockholder proposal until the next annual
meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS
The Second Amended and Restated By-Laws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of stockholders of
the Company (the 'Stockholder Notice Procedure').
The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting at which directors are to
be elected, will be eligible for election as directors of the Company and (ii)
at an annual meeting only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Board of Directors or by a
stockholder who has given timely written notice to the Secretary of the Company
of such stockholder's intention to bring such business before the meeting.
Except for stockholder proposals submitted in accordance with the Federal proxy
rules as to which the requirements specified therein shall control, notice of
stockholder nominations or business to be conducted at a meeting must be
received by the Company not less than 60 days or more than 90 days prior to the
first anniversary of the previous year's annual meeting if the notice is to be
submitted at an annual stockholders meeting or no later than 10 days following
the day on which notice of the date of a special meeting of stockholders was
given if the notice is to be submitted at a special stockholders meeting.
The purpose of requiring stockholders to give the Company advance notice of
nominations and other business is to afford the Board of Directors a meaningful
opportunity to consider the qualifications of the proposed nominees and the
advisability of the other proposed business and, to the extent deemed necessary
or
40
<PAGE>
desirable by the Board of Directors, to inform stockholders and make
recommendations about such qualifications or business, as well as to provide a
more orderly procedure for conducting meetings of stockholders. Although the
Second Amended and Restated By-Laws do not give the Board of Directors any power
to disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if proper procedures are
not followed and of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of directors or to approve its
own proposal without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to the Company and its stockholders.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Second Amended and Restated Certificate of Incorporation
provides that the provisions therein relating to the classified Board of
Directors, the number of directors, vacancies on the Board of Directors and
removal of directors may be amended, altered, changed or repealed only by the
affirmative vote of the holders of at least 75% of the voting power of all of
the shares of capital stock of the Company then entitled to vote generally in
the election of directors voting together as a single class.
The Company's Second Amended and Restated Certificate of Incorporation also
provides that the other provisions of such Certificate may be amended, altered,
changed or repealed, subject to the resolutions providing for any class or
series of Preferred Stock, only by the affirmative vote of both a majority of
the members of the Board of Directors then in office and a majority of the
voting power of all of the shares of capital stock of the Company entitled to
vote generally in the election of directors, voting together as a single class.
The Company's Second Amended and Restated Certificate of Incorporation also
provides that the Second Amended and Restated By-Laws may be adopted, amended,
altered, changed or repealed by the affirmative vote of the majority of the
Board of Directors then in office. Any action taken by the stockholders with
respect to adopting, amending, altering, changing or repealing the Second
Amended and Restated By-Laws may be taken only by the affirmative vote of the
holders of at least 75% of the voting power of all of the shares of capital
stock of the Company then entitled to vote generally in the election of
directors, voting together as a single class.
These provisions are intended to make it more difficult for stockholders to
circumvent certain other provisions contained in the Company's Second Amended
and Restated Certificate of Incorporation and Second Amended and Restated
By-Laws, such as those that provide for the classification of the Board of
Directors. These provisions, however, also will make it more difficult for
stockholders to amend the Second Amended and Restated Certificate of
Incorporation or Second Amended and Restated By-Laws without the approval of the
Board of Directors, even if a majority of the stockholders deems such amendment
to be in the best interests of all stockholders.
REGULATION
The Company is a closed-end, non-diversified, management investment company
that has elected to be regulated as a business development company under Section
54 of the 1940 Act and, as such, is subject to regulation under that Act. The
1940 Act contains prohibitions and restrictions relating to transactions between
business development companies and their affiliates, principal underwriters and
affiliates of those affiliates or underwriters and requires that a majority of
the directors be persons other than 'interested persons,' as defined in the 1940
Act. In addition, the 1940 Act provides that the Company may not change the
nature of its business so as to cease to be, or to withdraw its election as, a
business development company unless so authorized by the vote of a majority, as
defined in the 1940 Act, of its outstanding voting securities.
The Company is permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock senior to the shares offered
hereby if its asset coverage, as defined in the 1940 Act, is at least 200%
immediately after each such issuance. In addition, while Senior Securities are
outstanding, provision must be made to prohibit any distribution to stockholders
or the repurchase of such securities or shares unless the Company meets the
applicable asset coverage ratios at the time of the distribution or repurchase.
The Company may also borrow amounts up to 5% of the value of its total assets
for temporary or emergency purposes.
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Under the 1940 Act, a business development company may not acquire any
asset other than assets of the type listed in Section 55(a) of the 1940 Act
('Qualifying Assets') unless, at the time the acquisition is made, Qualifying
Assets represent at least 70% of the company's total assets. The principal
categories of Qualifying Assets relevant to the proposed business of the Company
are the following:
(1) Securities purchased in transactions not involving any public
offering from the issuer of such securities, which issuer is an eligible
portfolio company. An eligible portfolio company is defined in the 1940 Act
as any issuer which:
(a) is organized under the laws of, and has its principal place of
business in, the United States;
(b) is not an investment company other than a small business
investment company wholly-owned by the business development company; and
(c) does not have any class of securities with respect to which a
broker or dealer may extend margin credit.
(2) Securities of any eligible portfolio company which is controlled
by the business development company.
(3) Securities received in exchange for or distributed on or with
respect to securities described in (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.
(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.
In addition, a business development company must have been organized (and
have its principal place of business) in the United States and must be operated
for the purpose of making investments in the types of securities described in
(1) or (2) above. However, in order to count portfolio securities as Qualifying
Assets for the purpose of the 70% test, the business development company must
either control the issuer of the securities or must offer to make available to
the issuer of the securities significant managerial assistance; except that,
where the business development company purchases such securities in conjunction
with one or more other persons acting together, one of the other persons in the
group may make available such managerial assistance. Making available
significant managerial assistance means, among other things, any arrangement
whereby the business development company, through its directors, officers or
employees, offers to provide, and, if accepted, does so provide, significant
guidance and counsel concerning the management, operations or business
objectives and policies of a portfolio company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and assuming that shares offered through
the Direct Offering are sold in full, the Company will have outstanding
9,808,767 shares of Common Stock, based on the number of shares outstanding on
September 1, 1997, and assuming (i) no exercise of the Over-Allotment Option,
and (ii) no exercise of the Underwriters' Warrants. Of these shares, the
9,122,437 shares of Common Stock sold in the Offering and the Direct Offering
will be freely tradable without restriction or limitation under the Securities
Act. However, the shares sold in the Direct Offering will be subject to the
agreement with the Representative of the Underwriters described below. Of the
remaining 686,330 shares, the 477,744 shares owned by Malon Wilkus, the Company
President (the 'Restricted Shares') will be subject to a lockup agreement in
favor of the Representative of the Underwriters which generally provides that
none of such shares may, without the prior written consent of the Representative
of the Underwriters, be sold or otherwise disposed of for a period of 180 days
from the date of this Prospectus. The Company ESOP, which owns 205,272 shares,
is legally prohibited from entering into such lockup agreements. Nevertheless,
under the terms of the Company ESOP, only in the event of the death or
disability of a participant, would the Company ESOP make distributions of shares
to ESOP participants during the term of such lockup agreements. Similarly,
Company ESOP participants cannot legally enter into such lockup agreements with
regard to shares allocated to their accounts under the Company ESOP. The
Representative of the Underwriters may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to the
lockup agreements.
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SHARE REPURCHASES
Shares of closed-end investment companies frequently trade at discounts
from net asset value, especially shortly after the completion of the initial
public offering. The Company cannot predict whether its shares will trade above,
at or below net asset value. The market price of the Company's shares will be
determined by, among other things, the supply and demand for the Company's
shares, the Company's investment performance and investor perception of the
Company's overall attractiveness as an investment as compared with alternative
investments. The Board of Directors has authorized officers of the Company in
their discretion, subject to compliance with the 1940 Act and other applicable
law, to purchase on the open market or in privately negotiated transactions,
outstanding shares of the Company in the event that the shares trade at a
discount to net asset value. There is no assurance that any such open market
purchases will be made and such authorization may be terminated at any time. In
addition, if at any time after the second anniversary of this Offering the
Company's shares publicly trade for a substantial period of time at a
substantial discount from the Company's then current net asset value per share,
the Company's Board of Directors will consider authorizing periodic repurchases
of the Company's shares or other actions designed to eliminate the discount. The
Board of Directors would consider all relevant factors in determining whether to
take any such actions, including the effect of such actions on the Company's
status as a RIC under the Code and the availability of cash to finance these
repurchases in view of the restrictions on the Company's ability to borrow. No
assurance can be given that any share repurchases will be made or that if made,
they will reduce or eliminate market discount. Should any such repurchases be
made in the future, it is expected that they would be made at prices at or below
the current net asset value per share. Any such repurchase would cause the
Company's total assets to decrease, which may have the effect of increasing the
Company's expense ratio. The Company may borrow money to finance the repurchase
of shares subject to the limitations described in this Prospectus. Any interest
on such borrowing for this purpose will reduce the Company's net income.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the 'Underwriters') and each of the Underwriters, for whom Friedman,
Billings, Ramsey & Co., Inc., is acting as representative (the
'Representative'), has severally agreed to purchase, the number of shares of
Common Stock offered hereby set forth below opposite its name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ------------------------------------------------------------------------------------------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc...................................................... 6,540,000
Bear, Stearns & Co. Inc.................................................................... 125,000
Keefe, Bruyette & Woods, Inc............................................................... 125,000
Montgomery Securities...................................................................... 125,000
PaineWebber Incorporated................................................................... 125,000
Smith Barney, Inc.......................................................................... 125,000
Advest, Inc................................................................................ 65,000
J.C. Bradford & Co......................................................................... 65,000
Cleary Gull Reiland & McDevitt Inc......................................................... 65,000
Cruttenden Roth Incorporated............................................................... 65,000
Equitable Securities Corporation........................................................... 65,000
Everen Securities, Inc..................................................................... 65,000
Fahnestock & Co. Inc....................................................................... 65,000
Ferris, Baker Watts, Inc................................................................... 65,000
J.J.B. Hillard, W.L. Lyons, Inc............................................................ 65,000
Legg Mason Wood Walker, Incorporated....................................................... 65,000
Morgan Keegan & Company, Inc............................................................... 65,000
The Ohio Company........................................................................... 65,000
Parker/Hunter Incorporated................................................................. 65,000
Scott & Stringfellow, Inc.................................................................. 65,000
The Seidler Companies Incorporated......................................................... 65,000
Stephens Inc............................................................................... 65,000
Stifel, Nicolaus & Company, Incorporated................................................... 65,000
Sutro & Co. Incorporated................................................................... 65,000
Tucker Anthony Incorporated................................................................ 65,000
---------
Total................................................................................. 8,400,000
---------
---------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $0.63 per share of Common Stock. The Underwriters may
allow and such dealers may reallow a concession not to exceed $.10 per share of
Common Stock to certain other dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms may
be changed by the Underwriters.
The Company has granted to the Underwriters the Over-Allotment Option,
which is an option exercisable during a 30-day period after the date hereof to
purchase, at the initial offering price less underwriting discounts and
commissions, up to an additional 1,260,000 shares of Common Stock for the sole
purpose of covering over-allotments, if any. To the extent that the Underwriters
exercise the Over-Allotment Option, each Underwriter will be committed, subject
to certain conditions, to purchase a number of the additional shares of Common
Stock proportionate to such Underwriter's initial commitment.
The Company has agreed, subject to the approval prior to completion of the
Offering, of the stockholders and a majority of the disinterested directors, to
issue on the date of this Prospectus to the Representative and/or its designees
the Underwriters' Warrants, which are warrants to purchase up to 392,351 shares
of Common Stock (442,751 shares if the Over-Allotment Option is exercised),
representing 4% of the shares of Common Stock
44
<PAGE>
outstanding after completion of the Offering and the Direct Offering, at a
purchase price equal to the initial offering price per share. The Underwriters'
Warrants may not be sold, transferred, assigned or hypothecated for one year
following the date of this Prospectus, except to officers, directors, and
shareholders of the Representative. The Underwriters' Warrants are immediately
exercisable and have a term of five years from the date of this Prospectus (the
'Warrant Exercise Term'). The Company has also registered the shares of Common
Stock underlying the Underwriters' Warrants. During the Warrant Exercise Term,
the Representative is given the opportunity to profit from a rise in market
price of the shares of Common Stock. To the extent that the Underwriters'
Warrants are exercised, dilution to the interests of the holders of the Common
Stock will occur. In addition, the terms upon which the Company will be able to
obtain additional equity capital may be adversely affected because the holders
of the Underwriters' Warrants can be expected to exercise them at a time when
the Company likely would be able to obtain any needed capital on terms more
favorable to the Company than those provided in the Underwriters' Warrants.
The Company has agreed to pay to the Underwriters an accountable expense
allowance of up to $200,000.
The Company has agreed to indemnify the several Underwriters against
certain civil liabilities under the Securities Act, or to contribute to payments
the Underwriters may be required to make in respect thereof.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price has been determined by
negotiation between the Company and the Representative of the Underwriters.
Among the factors considered in making such determination were the history of,
and the prospects for, the industry in which the Company will compete, an
assessment of management, the Company's prospects for future earnings, the
general conditions of the economy and the securities market and the prices of
offerings by similar issuers. There can, however, be no assurance that the price
at which the shares of Common Stock will sell in the public market after the
Offering will not be lower than the price at which they are sold by the
Underwriters.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales of the shares offered hereby to any accounts over which
they exercise discretionary authority.
Until the distribution of the Common Stock is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for or purchase the Common Stock. As an exception to these rules,
the Representative is permitted to engage in certain transactions that stabilize
the price of the Common Stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representative may
reduce that short position by purchasing shares of Common Stock in the open
market. The Representative may also elect to reduce any short position by
exercising all or part of the Over-Allotment Option described above.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
Common Stock in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Stock, it may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold that
Common Stock as part of the Offering.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representative will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company, and each person purchasing in the Direct Offering, including
Malon Wilkus, President of the Company, have generally agreed not to offer, sell
or contract to sell or otherwise dispose any of its Common Stock without the
prior consent of the Representative for a period of 180 days from the date of
this Prospectus. The Company ESOP is legally prohibited from entering into such
an agreement.
45
<PAGE>
DIRECT OFFERING
Concurrently with the offering by the Underwriters, the Company is, by
means of this Prospectus, making the Direct Offering of up to 722,437 shares of
Common Stock to directors, officers and employees of the Company and certain
associated persons and entities at a price equal to $15.00 per share less the
sales load payable with respect to the shares offered to the public. The
obligation of the investors to purchase shares in the Direct Offering is
contingent on the purchase of shares by the Underwriters. There is no minimum
number of shares to be purchased in the Direct Offering. Any proceeds from the
sale of shares in the Direct Offering will be held in escrow until the closing
of the underwritten offering and will be refunded to the investors if the
Underwriters do not purchase shares in the underwritten offering. Such investors
have agreed not to resell any shares so purchased by them for at least 180 days
from the date of this Prospectus without the consent of the Underwriters. If the
Company sells shares to the Underwriters and to the investors in the Direct
Offering, the proceeds of such sales will be used only for the purposes
described in this Prospectus.
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR
The Company's securities are held under a custodian agreement by Riggs
Bank. The address of the custodian is 808 17th Street, N.W., Washington, D.C.
20006. The Company's assets are held under bank custodianship in compliance with
the 1940 Act. State Street Bank and Trust Company will act as the Company's
transfer and dividend paying agent and registrar. The principal business address
of State Street Bank and Trust Company is c/o Boston EquiServe, L.P., 150 Royall
Street, mail stop 45-02-62, Canton, MA 02021.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Arnold & Porter, Washington, D.C. Certain legal matters
will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP,
Washington, D.C.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
46
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................................................. F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................. F-3
Consolidated Schedules of Investments as of December 31, 1996 and 1995................................... F-4
Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994.................. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995, and 1994........................................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994.............. F-7
Notes to Consolidated Financial Statements............................................................... F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) as of June 30, 1997 and 1996..................................... F-14
Consolidated Schedules of Investments (Unaudited) as of June 30, 1997 and 1996........................... F-15
Consolidated Statements of Income (Unaudited) for the six months ended June 30, 1997
and 1996.............................................................................................. F-16
Consolidated Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 1997 and
1996.................................................................................................. F-17
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 1997 and 1996........ F-18
Notes to Unaudited Consolidated Financial Statements..................................................... F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Capital Strategies, Ltd.
We have audited the accompanying consolidated balance sheets of American Capital
Strategies, Ltd. (the Company), including the consolidated schedules of
investments, as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
As discussed in Note 1, in 1994 the Company changed its method of accounting for
preferred stock issued to the employee stock ownership plan.
ERNST & YOUNG LLP
Washington, D.C.
June 11, 1997, except as to Note 12, as to which the date is August 29,1997
F-2
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Investments' at fair value (cost or initial value of $831,414, and $905,748,
respectively)....................................................................... $3,422,422 $3,980,421
Cash and cash equivalents............................................................. 359,029 322,664
Accounts receivable (net of allowance for doubtful accounts of $302,283, and $249,609,
respectively)....................................................................... 276,643 917,625
Income taxes receivable............................................................... 153,147 52,225
Property and equipment:
Computer equipment.................................................................. 124,953 154,182
Office furniture and equipment...................................................... 94,304 96,827
Less: accumulated depreciation...................................................... (100,099) (130,495)
---------- ----------
119,158 120,514
Other assets.......................................................................... 52,595 38,816
---------- ----------
Total assets.......................................................................... $4,382,994 $5,432,265
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities.............................................. $ 94,322 $ 322,252
Due to related parties................................................................ 72,222 78,142
Deferred taxes........................................................................ 1,109,958 1,230,536
Notes payable......................................................................... 160,833 429,684
---------- ----------
Total liabilities..................................................................... 1,437,335 2,060,614
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized and 6,857 issued and
outstanding...................................................................... 1,419,399 1,419,399
Unearned ESOP shares................................................................ (332,551) (116,668)
Common stock, $.01 par value, 20,000,000 shares authorized, 480,312 and 481,058
shares issued and outstanding in 1995 and 1996, respectively..................... 4,804 4,811
Capital in excess of par value...................................................... 9,444 10,407
Retained earnings................................................................... 1,844,563 2,053,702
---------- ----------
Total stockholders' equity............................................................ 2,945,659 3,371,651
---------- ----------
Total liabilities and stockholders' equity............................................ $4,382,994 $5,432,265
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED SCHEDULES OF INVESTMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ----------------------------------------------------------------------- ---------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................ 120,773 $ 500,000 $2,736,418
Good Stuff Food Company, Inc......................................... 27,000 67,750 486,000
Indiana Steel & Wire Corporation..................................... 7,547 42,914 58,869
Martino's Bakery, Inc................................................ 50,000 120,750 259,000
Mobile Tool International, Inc....................................... 6,130 174,334 440,134
--------------- ----------
$ 905,748 $3,980,421
--------------- ----------
--------------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ----------------------------------------------------------------------- ---------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................ 120,773 $ 500,000 $2,532,610
Good Stuff Food Company, Inc......................................... 27,000 67,750 567,000
Indiana Steel & Wire Corporation..................................... 7,547 42,914 49,812
Martino's Bakery, Inc................................................ 50,000 120,750 102,500
Mobile Tool International, Inc....................................... 5,000 100,000 170,500
--------------- ----------
$ 831,414 $3,422,422
--------------- ----------
--------------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Financial advisory fees................................................. $1,433,891 $1,148,752 $1,738,295
Financial performance fees.............................................. 708,377 1,288,797 649,030
Other................................................................... 355,963 268,083 359,097
---------- ---------- ----------
Total revenue...................................................... 2,498,231 2,705,632 2,746,422
OPERATING EXPENSES
Salaries and benefits................................................... 1,350,909 1,484,833 1,067,315
General and administrative.............................................. 523,233 573,102 926,502
Other operating......................................................... 345,056 278,212 355,693
Provision for doubtful accounts......................................... -- 302,283 224,329
Interest................................................................ 36,001 37,037 32,959
Depreciation and amortization........................................... 33,198 35,415 39,016
ESOP contribution....................................................... 317,361 216,827 215,883
---------- ---------- ----------
Total operating expenses........................................... 2,605,758 2,927,709 2,861,697
---------- ---------- ----------
Net operating loss before investment activity........................... (107,527) (222,077) (115,275)
Unrealized appreciation of investments.................................. 956,294 370,696 483,665
Realized gain (loss) on investments..................................... (22,784) 66,148 --
---------- ---------- ----------
Income before income taxes.............................................. 825,983 214,767 368,390
Provision for income taxes.............................................. 421,664 57,381 159,251
---------- ---------- ----------
Net income......................................................... $ 404,319 $ 157,386 $ 209,139
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL EARNINGS (LOSS) PER SHARE:
Net operating loss before investment activity......................... $ (0.17)
Net income............................................................ 0.30
Weighted average shares outstanding................................... 686,330
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL
UNEARNED COMMON STOCK IN EXCESS
PREFERRED ESOP ---------------- OF PAR RETAINED
STOCK SHARES SHARES AMOUNT VALUE EARNINGS TOTAL
---------- --------- ------- ------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993........ $1,419,399 $(932,307) 479,864 $4,800 $ 8,692 $1,349,925 $1,850,509
Net income........................ -- -- -- -- -- 404,319 404,319
Dividends......................... -- -- -- -- -- (67,067) (67,067)
Sale of common stock to
employees....................... -- -- 448 4 752 -- 756
ESOP shares earned................ -- 382,929 -- -- -- -- 382,929
---------- --------- ------- ------ --------- ---------- ----------
Balance at December 31, 1994........ 1,419,399 (549,378) 480,312 4,804 9,444 1,687,177 2,571,446
Net income........................ -- -- -- -- -- 157,386 157,386
ESOP shares earned................ -- 216,827 -- -- -- -- 216,827
---------- --------- ------- ------ --------- ---------- ----------
Balance at December 31, 1995........ 1,419,399 (332,551) 480,312 4,804 9,444 1,844,563 2,945,659
Net income........................ -- -- -- -- -- 209,139 209,139
Options exercised................. -- -- 746 7 963 -- 970
ESOP shares earned................ -- 215,883 -- -- -- -- 215,883
---------- --------- ------- ------ --------- ---------- ----------
Balance at December 31, 1996........ $1,419,399 $(116,668) 481,058 $4,811 $10,407 $2,053,702 $3,371,651
---------- --------- ------- ------ --------- ---------- ----------
---------- --------- ------- ------ --------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
AMERICAN CAPITAL STRATEGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................................. $404,319 $157,386 $ 209,139
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 33,198 35,415 39,016
Unrealized appreciation of investments................................ (956,294) (370,696) (483,665)
Realized (gain) loss on investments................................... 22,784 (66,148) --
Amortization of deferred finance costs................................ 3,024 7,332 11,088
Provision for deferred income taxes................................... 495,483 115,485 120,578
Loss on disposal of property and equipment............................ 1,498 91 629
ESOP contribution..................................................... 382,929 216,827 215,883
Provision for doubtful accounts....................................... -- 302,283 224,329
Increase in accounts receivable....................................... (54,867) (182,056) (865,311)
(Increase) decrease in income taxes receivable........................ (100,894) (32,822) 100,922
Decrease (increase) in other assets................................... (11,082) (3,554) 5,665
Increase (decrease) in accounts payable and accrued liabilities....... (35,834) 29,538 227,930
-------- -------- ---------
Net cash provided by (used in) operating activities........................ $184,264 $209,081 $(193,797)
-------- -------- ---------
-------- -------- ---------
INVESTING ACTIVITIES
Proceeds from sale of investments.......................................... -- 66,148 --
Purchase of investments.................................................... -- (6,674) (74,640)
Purchases of property and equipment, net of disposals...................... (72,561) (20,304) (39,669)
-------- -------- ---------
Net cash provided by (used in) investing activities.......................... (72,561) 39,170 (114,309)
FINANCING ACTIVITIES
Proceeds from notes payable................................................ -- -- 429,684
Principal payments of notes payable........................................ (71,667) (77,500) (160,833)
Increase in deferred finance costs......................................... -- (25,849) (4,000)
Increase (decrease) in due to related parties.............................. (165) 10,893 5,920
Sale of common stock....................................................... 756 -- --
Options exercised.......................................................... -- -- 970
Dividends paid............................................................. (67,067) -- --
-------- -------- ---------
Net cash provided by (used in) financing activities.......................... (138,143) (92,456) 271,741
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents......................... (26,440) 155,795 (36,365)
Cash and cash equivalents at beginning of year............................... 229,674 203,234 359,029
-------- -------- ---------
Cash and cash equivalents at end of year..................................... $203,234 $359,029 $ 322,664
-------- -------- ---------
-------- -------- ---------
</TABLE>
See accompanying notes.
F-7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
American Capital Strategies, Ltd. (the Company) is a specialty finance
company that assists small and medium sized businesses in raising financing and
has made equity investments in certain of these businesses. It also provides
other financial services to these companies. It has focused on structuring,
raising financing, and investing in management and employee buyouts of
subsidiaries, divisions, and product lines being divested by larger corporations
utilizing employee stock ownership plans (ESOPs). The Company is headquartered
in Bethesda, Maryland and has offices in New York, Boston, Pittsburgh, San
Francisco, and Savannah.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company's majority owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation. Labor Research, Inc. and ACS
Capital Investment Corporation are the only active Company subsidiaries included
in consolidated balances. The Company's remaining majority owned subsidiaries
are inactive.
Cash and Cash Equivalents
For the purpose of reporting cash flows, the Company has defined cash and
cash equivalents as cash and investments in mutual funds.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments
Investments are comprised of investments in equity securities and are
recorded at estimated market value. Market value is determined by either
independent third party appraisals or by estimates of the Company's management
made in consultation with managements of the companies in which equity
investments have been made. However, because of the inherent uncertainty of
valuation, those estimated values may differ significantly from the values that
would have been used had a ready market for the securities existed, and the
differences could be material.
Property and Equipment
Property and equipment is carried at cost and is depreciated using the
straight-line method over the estimated useful lives of the related assets
ranging from five to seven years.
Revenue Recognition
Financial advisory fees represent amounts received for providing advice and
analysis to small and medium sized businesses and are recognized as earned based
on hours incurred. Financial performance fees represent amounts received that
are earned on a contingent basis for structuring, financing, and executing
transactions and are recognized as earned when the transaction is completed.
F-8
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Employee Stock Ownership Plan (ESOP)
Beginning January 1, 1994, the Company prospectively adopted the provisions
of AICPA Statement of Position 93-6, 'Employers' Accounting for Employee Stock
Ownership Plans,' (SOP 93-6). SOP 93-6 requires that ESOP contribution expense
for ESOP shares acquired after 1992 and not committed to be released before the
beginning of 1994, be measured based on the fair value of those shares when
committed to be released to employees, rather than based on their original cost.
Additionally, under SOP 93-6, dividends on unallocated shares of preferred stock
are recorded as ESOP contribution expense. As a result of this change, net
income in 1994 has been reduced by $110,358. Through December 31, 1993, the
Company accounted for ESOP shares in accordance with AICPA Statement of Position
76-3.
Income Taxes
During the years ended December 31, 1996, 1995, and 1994, the Company
operated under Subchapter C of the Internal Revenue Code. The Company calculates
its tax provision pursuant to Statement of Financial Accounting Standards No.
109. Deferred income taxes are determined based on the differences between
financial reporting and tax basis of assets and liabilities.
New Accounting Pronouncements
In October 1995, Statement of Financial Accounting Standards No. 123,
'Accounting for Stock-Based Compensation' (SFAS 123), was issued. SFAS 123
requires entities that have followed Accounting Principles Board Opinion No. 25,
'Accounting for Stock Issued to Employees' (APB 25) and related Interpretations
to either adopt a fair value method of accounting for stock-based compensation
(as described by SFAS 123) or continue to follow APB 25 and provide additional
pro forma disclosures in the footnotes to the financial statements.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under SFAS 123 requires the use of valuation methods
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options approximates
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, 'Earnings Per Share,' (SFAS 128) which is required to be adopted on
December 31, 1997. At that time, the Company will change the method currently
used to compute earnings per share and to restate all prior years. The impact of
SFAS 128 on the calculation of fully diluted earnings per share for these years
is not expected to be material.
2. NOTES PAYABLE
At December 31, 1995, the Company had two notes payable to a finance
company, which were approximately $146,000 and $15,000. The interest rates were
adjusted monthly at the finance company's base rate plus 2% and the finance
company's base rate plus 2.5%, respectively, and were 10.75% and 11.25%,
respectively, as of December 31, 1995. The notes payable were secured by a
certificate of deposit, inventory, accounts receivable, equipment, and an
investment in shares of common stock of the Company's investments. These notes
were extinguished in December 1996.
As of December 31, 1996, the Company has a five-year credit arrangement
with the finance company which is a line of credit with a term conversion
provision. During only the first two years of the agreement, the Company has the
ability to borrow up to $500,000 with interest payable monthly. The balance
outstanding after the initial two-year period is payable in equal monthly
installments of principal plus accrued interest over the remaining three years.
The interest rate is the finance company's base rate plus 1.5%. This arrangement
is
F-9
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. NOTES PAYABLE--(CONTINUED)
secured by accounts receivable, furniture, fixtures, equipment, and 56,270
shares of common stock in Erie Forge and Steel, one of the Company's
investments. At December 31, 1996, the outstanding balance was approximately
$283,000, and the interest rate was 9.75%. This amount is payable in monthly
installments over a three year period beginning in December 1998.
As of December 31, 1996, the Company had a term loan commitment with the
finance company in the amount $750,000 which was subject to a two-year drawn
down period ending in October 1997. During the draw down period, individual
draws could be made in increments of a minimum of $100,000 and a maximum of
$250,000. Each draw on the loan was payable over a five-year term from the date
of the draw. The interest rate was the finance company's base rate plus 3%. This
arrangement was secured by accounts receivable, furniture, fixtures, equipment,
and the Company's investments in shares of common stock. At December 31, 1996,
the outstanding balance was approximately $146,000, and the interest rate was
11.25%. This amount was due in 2001.
On May 30, 1997, certain terms of the above described loan were amended.
The term loan commitment was increased from $750,000 to $1,000,000. The draw
down period was extended until May 1999. The aforementioned restrictions
regarding the amount of individual draws were removed. Interest only will be
assessed over a four year term from the date of the draw, and thereafter,
monthly payments of principal and interest are payable until all outstanding
amounts become fully due in May 2004.
During the years ended December 31, 1996, 1995, and 1994, the cash paid for
interest was approximately $43,000, $36,000, $33,000, respectively. The weighted
average interest rates, including amortization of deferred finance costs, for
the years ended December 31, 1996, 1995, and 1994 were 17.3%, 13.7%, and 10.5%,
respectively.
3. INCOME TAXES
Significant components of the Company's deferred tax liabilities and assets
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Investments..................................................... $1,120,196 $1,303,911
Depreciation.................................................... 18,392 21,393
---------- ----------
1,138,588 1,325,304
Deferred tax assets:
Net operating loss carryforward................................. 28,630 63,085
Alternative minimum tax......................................... 25,509 25,509
Other........................................................... -- 6,174
---------- ----------
54,139 94,768
Valuation allowance............................................... (25,509) --
---------- ----------
Net deferred tax liabilities.................................... $1,109,958 $1,230,536
---------- ----------
---------- ----------
</TABLE>
The components of the income tax provision were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Current provision (benefit)........................................ $(73,819) $(58,104) $ 38,673
Deferred provision................................................. 495,483 115,485 120,578
-------- -------- --------
$421,664 $ 57,381 $159,251
-------- -------- --------
-------- -------- --------
</TABLE>
F-10
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES--(CONTINUED)
The differences between the Federal statutory tax rate and the effective
tax rate were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory rate..................................................... $280,834 $ 73,021 $125,253
State taxes........................................................ 96,714 8,589 14,747
ESOP dividends..................................................... (31,370) -- --
Change in valuation allowance...................................... 44,639 (19,130) (25,509)
Other.............................................................. 30,847 (5,099) 44,760
-------- -------- --------
Effective rate..................................................... $421,664 $ 57,381 $159,251
-------- -------- --------
-------- -------- --------
</TABLE>
During the years ended December 31, 1996, 1995, and 1994, cash paid for
income taxes was approximately $1,000, $45,000, and $17,000, respectively.
At December 31, 1996, the Company had a net operating loss carryforward of
approximately $166,000 which expires during 2010 and 2011.
The aggregate gross and net unrealized appreciation over the cost for
Federal income tax purposes was $3,399,423 and $2,915,758 as of December 31,
1996 and 1995, respectively. The aggregate cost of securities for Federal income
tax purposes were $580,998 and $506,664 as of December 31, 1996 and 1995,
respectively.
4. LEASE COMMITMENTS
The Company has noncancelable operating leases for office space and office
equipment. The leases expire over the next four years and contain provisions for
certain annual rental escalations.
Rent expense for operating leases for the years ended December 31, 1996,
1995, and 1994 was approximately $101,000, $95,000, and $78,000, respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1996 were as follows:
<TABLE>
<S> <C>
1997.......................................................... $106,133
1998.......................................................... 106,540
1999.......................................................... 10,350
2000.......................................................... 3,150
2001.......................................................... 1,575
--------
$227,748
--------
--------
</TABLE>
5. EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an ESOP, which includes all employees and is fully
funded by the Company. Contributions are made at the Company's discretion up to
$30,000 or 25% of annual compensation expense for each employee. Employees are
not fully vested until completing five years of service.
The Company sponsors an employee stock ownership trust to act as the
depository of employer contributions to the ESOP as well as to administer and
manage the actual trust assets which are deposited into the ESOP.
Unearned ESOP shares are allocated annually at the end of the year to
employees over a five year period, based on compensation levels. As of December
31, 1996, the ESOP held 6,857 shares of preferred stock, of which 6,293 shares
were allocated to employees and 564 shares remain to be allocated.
F-11
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCK OPTION PLAN
On December 31, 1992, the Board of Directors of the Company adopted the
Employee Stock Option Plan (the Stock Option Plan), which provides employees,
including eligible officers of the Company, the opportunity to purchase
restricted common stock. The number of options granted employees under the Stock
Option Plan is based on years of service and compensation level. The options
generally vest immediately and expire after a short-term period. The Company has
not authorized or reserved any shares of its common stock for future grants
under this plan.
As of December 31, 1994, the Company had 35,025 outstanding options with an
exercise price of $1.30, which is the Company's estimate of market value. During
1995, these options expired. During 1996, the Company granted 35,502 options
with an exercise price of $1.28, which is the Company's estimate of market
value. Of these options, 746 were exercised and 34,756 expired during the year.
Pro forma net income information required by SFAS 123 is not provided since
the net impact of the option activity in 1996 and 1995 was not material.
7. PREFERRED STOCK
The Company has two classes of preferred stock, Class A Convertible
Preferred Stock (Class A) and Undesignated Preferred Stock. The Class A shares
have a par value of $50 and pay a cumulative dividend at 12.5% per annum. The
Company's ESOP is the sole owner of the Class A shares. The dividends paid on
the Class A shares may be reduced by the amount of any contributions by the
Company to the ESOP. There are 10,000 shares authorized and 6,857 outstanding as
of December 31, 1996 and 1995. Holders of the Class A shares are entitled to
voting rights and the holders may only as a group convert the Class A shares to
the equivalent number of common stock shares. The Class A holders are entitled
to a liquidation preference equal to $207 per share plus all accrued and unpaid
dividends. Dividends paid on the Class A shares for the year ended December 31,
1994 were $67,067. No dividends were paid on the Class A shares for the years
ended December 31, 1996 and 1995.
There are 90,000 shares of Undesignated Preferred Stock authorized with a
par value of $.01. No shares were issued as of December 31, 1996 or 1995.
8. SUPPLEMENTAL EARNINGS PER SHARE
Supplemental earnings per share for the year ended December 31, 1996 was
calculated on a pro forma basis using weighted average outstanding shares of
common stock of 686,330 as adjusted for the stock split effected in the form of
a stock dividend and the conversion of preferred stock described in Note 12. For
all other periods, earnings per share was not presented since it was not
considered to be meaningful.
9. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CLIENTS
At December 31, 1996, an investment in shares of stock in one company
comprised 69% of the Company's investments.
At December 31, 1996, 74% of the Company's accounts receivable, net of
allowance for doubtful accounts, were from three clients.
During 1996, 46% of the Company's combined financial advisory fee and
financial performance fee revenue was from three clients.
10. RELATED PARTY TRANSACTIONS
As of December 31, 1996 and 1995, the Company had a note payable to its
president for approximately $74,000 and $66,000, respectively. The interest rate
was based on prime plus 4% and was 12.25% and 12.5% as
F-12
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS--(CONTINUED)
of December 31, 1996 and 1995, respectively. The related interest expense for
each of the years ended December 31, 1996, 1995, and 1994, was approximately
$8,000, $8,000, and $6,000, respectively.
During 1996, the Company purchased investments in shares of common stock
from several of its employees. The aggregate amount paid in these transactions
was $9,000.
During 1996, the Company incurred consulting fees from a former employee
that were approximately $195,000. Of this amount, approximately $164,000 was
included in accounts payable and accrued liabilities at December 31, 1996.
In addition, included in due to related parties was approximately $4,000
and $6,000, which was payable to employees at December 31, 1996 and 1995,
respectively.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Investments are carried at their estimated market value determined as
described in Note 1. The carrying values of cash and cash equivalents, accounts
receivable, income taxes receivable, accounts payable and accrued liabilities,
due to related parties, and notes payable approximate fair value.
12. SUBSEQUENT EVENTS
In July 1997, the Company repaid the outstanding balance of the $500,000
line of credit previously secured by accounts receivable, furniture, fixtures,
equipment, and 56,270 shares of common stock in Erie Forge and Steel.
In July 1997, the remaining unearned ESOP shares became earned and
distributed to the employees. Pursuant to the Company's preferred stock
declaration, the preferred stock held by the ESOP was converted into common
stock on a one share to one share basis. The Company also contributed an
additional 529 shares of common stock to the ESOP.
In August 1997, the Company repaid the note payable to its president.
In August 1997, the Company increased its authorized shares of common stock
to 20,000,000.
On August 27, 1997, the Company declared a stock split effective August 29,
1997, effected in the form of a stock dividend pursuant to which each
outstanding share of common stock was effectively converted into 29.859 shares.
Outstanding shares and per share amounts for all periods presented have been
restated to reflect this stock split.
F-13
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
ASSETS
Investments (cost or initial value of $831,414 and $1,728,638, respectively)......... $3,820,920 $ 9,685,679
Cash and cash equivalents............................................................ 312,001 726,086
Accounts receivable (net of allowance for doubtful accounts of $402,533 and $0,
respectively)...................................................................... 444,201 672,213
Income taxes receivable.............................................................. 146,599 --
Property and equipment:
Computer equipment................................................................. 140,173 171,552
Office furniture and equipment..................................................... 95,000 99,825
Less: accumulated depreciation..................................................... (117,783) (151,623)
---------- -----------
117,390 119,754
Other................................................................................ 49,463 165,951
---------- -----------
Total assets......................................................................... $4,890,574 $11,369,683
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities............................................. $ 155,002 $ 120,189
Due to related parties............................................................... 69,960 39,612
Deferred taxes....................................................................... 1,259,410 3,327,273
Notes payable........................................................................ 122,083 1,019,309
---------- -----------
Total liabilities.................................................................... 1,606,455 4,506,383
Stockholders' equity:
Preferred stock, $.01 par value, 100,000 shares authorized and 6,857 issued and
outstanding..................................................................... 1,419,399 1,419,399
Unearned ESOP shares............................................................... (229,223) (27,956)
Common stock, $.01 par value, 20,000,000 shares authorized and 481,058 issued and
outstanding..................................................................... 4,811 4,811
Capital in excess of par value..................................................... 10,407 10,407
Retained earnings.................................................................. 2,078,725 5,456,639
---------- -----------
Total stockholders' equity........................................................... 3,284,119 6,863,300
---------- -----------
Total liabilities and stockholders' equity........................................... $4,890,574 $11,369,683
---------- -----------
---------- -----------
</TABLE>
See accompanying notes.
F-14
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED SCHEDULES OF INVESTMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ------------------------------------------------------------------------ --------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................. 120,773 $ 500,000 $2,736,418
Good Stuff Food Company, Inc.......................................... 33,335 226,125 1,000,050
Indiana Steel & Wire Corporation...................................... 7,547 42,914 58,869
Martino's Bakery, Inc................................................. 50,000 120,750 279,000
Mobile Tool International, Inc........................................ 7,133 246,349 1,069,237
Biddeford Textile Corporation......................................... 118,500 592,500 4,542,105
--------------- ----------
$ 1,728,638 $9,685,679
--------------- ----------
--------------- ----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------
NUMBER OF COST OR INITIAL
COMMON STOCK SHARES VALUE FAIR VALUE
- ------------------------------------------------------------------------ --------- --------------- ----------
<S> <C> <C> <C>
Manufacturing--100%
Erie Forge and Steel, Inc............................................. 120,773 $ 500,000 $2,634,663
Good Stuff Food Company, Inc.......................................... 27,000 67,750 540,000
Indiana Steel & Wire Corporation...................................... 7,547 42,914 54,340
Martino's Bakery, Inc................................................. 50,000 120,750 232,917
Mobile Tool International, Inc........................................ 5,000 100,000 359,000
--------------- ----------
$ 831,414 $3,820,920
--------------- ----------
--------------- ----------
</TABLE>
See accompanying notes.
F-15
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
REVENUE
Financial advisory fees............................................................... $ 838,625 $ 860,431
Financial performance fees............................................................ 240,980 743,600
Other................................................................................. 212,435 337,658
---------- ----------
Total revenue.................................................................... 1,292,040 1,941,689
OPERATING EXPENSES
Salaries and benefits................................................................. 514,807 619,851
General and administrative............................................................ 374,500 700,006
Other operating expenses.............................................................. 184,464 425,316
Provision for doubtful accounts....................................................... 100,250 (177,198)
Interest.............................................................................. 11,223 41,709
Depreciation and amortization......................................................... 18,350 21,832
ESOP contribution..................................................................... 103,328 7,296
---------- ----------
Total operating expenses.............................................................. 1,306,922 1,638,812
---------- ----------
Net operating income (loss) before investment activity................................ (14,882) 302,877
Unrealized appreciation of investments................................................ 398,498 5,332,369
---------- ----------
Income before income taxes............................................................ 383,616 5,635,246
Provision for income taxes............................................................ 149,454 2,150,893
---------- ----------
Net income....................................................................... $ 234,162 $3,484,353
---------- ----------
---------- ----------
SUPPLEMENTAL EARNINGS PER SHARE:
Net operating income before investment activity..................................... $ 0.44
Net income.......................................................................... 5.08
Weighted average shares outstanding................................................. 686,330
</TABLE>
See accompanying notes.
F-16
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL TOTAL
PREFERRED UNEARNED ---------------- IN EXCESS RETAINED STOCKHOLDERS'
STOCK ESOP SHARES SHARES AMOUNT OF PAR VALUE EARNINGS EQUITY
---------- ----------- ------- ------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........... $1,419,399 $(332,551) 480,312 $4,804 $ 9,444 $1,844,563 $ 2,945,659
Net income........................... -- -- -- -- -- 234,162 234,162
Options exercised.................... -- -- 746 7 963 -- 970
ESOP shares earned................... -- 103,328 -- -- -- -- 103,328
---------- ----------- ------- ------ ------------ ---------- -------------
Balance at June 30, 1996............... $1,419,399 $(229,223) 481,058 $4,811 $ 10,407 $2,078,725 $ 3,284,119
---------- ----------- ------- ------ ------------ ---------- -------------
---------- ----------- ------- ------ ------------ ---------- -------------
Balance at December 31, 1996........... $1,419,399 $(116,668) 481,058 $4,811 $ 10,407 $2,053,702 $ 3,371,651
Net income........................... -- -- -- -- -- 3,484,353 3,484,353
ESOP shares earned................... -- 88,712 -- -- -- -- 88,712
Dividends............................ -- -- -- -- -- (81,416) (81,416)
---------- ----------- ------- ------ ------------ ---------- -------------
Balance at June 30, 1997............... $1,419,399 $ (27,956) 481,058 $4,811 $ 10,407 $5,456,639 $ 6,863,300
---------- ----------- ------- ------ ------------ ---------- -------------
---------- ----------- ------- ------ ------------ ---------- -------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
-------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................................. $234,162 $3,484,353
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 18,350 21,832
Unrealized appreciation of investments................................................ (398,498) (5,332,369)
Amortization of deferred finance costs................................................ 4,097 2,525
Provision for deferred income taxes................................................... 149,452 2,096,737
ESOP shares earned.................................................................... 103,328 7,296
Provision for doubtful accounts....................................................... 100,250 (177,198)
Increase (decrease) in accounts receivable............................................ (267,808) 422,610
Decrease in income taxes receivable................................................... 6,548 52,225
Increase in other assets.............................................................. (965) (129,660)
Increase (decrease) in accounts payable and accrued liabilities....................... 60,680 (202,063)
-------- ----------
Net cash provided by operating activities............................................... 9,596 246,288
INVESTING ACTIVITIES
Purchases of investments.............................................................. -- (432,889)
Sale of investment.................................................................... -- 60,000
Purchase of property and equipment, net of disposals.................................. (16,582) (21,072)
-------- ----------
Net cash used in investing activities................................................... (16,582) (393,961)
FINANCING ACTIVITIES
Proceeds from notes payable........................................................... -- 589,625
Principal payments of notes payable................................................... (38,750) --
Decrease in due to related parties.................................................... (2,262) (38,530)
Options exercised..................................................................... 970 --
-------- ----------
Net cash (used in) provided by financing activities..................................... (40,042) 551,095
-------- ----------
Net (decrease) increase in cash and cash equivalents.................................... (47,028) 403,422
Cash and cash equivalents at beginning of period........................................ 359,029 322,664
-------- ----------
Cash and cash equivalents at end of period.............................................. $312,001 $ 726,086
-------- ----------
-------- ----------
SUPPLEMENTAL DISCLOSURE:
Non-cash transaction:
Dividends on preferred stock declared................................................. $ 81,416
</TABLE>
See accompanying notes.
F-18
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
American Capital Strategies, Ltd. (the Company) is a specialty finance
company that assists small and medium-sized businesses in raising financing and
has made equity investments in certain of these businesses. It also provides
other financial services to these companies. It has focused on structuring,
raising financing, and investing in management and employee buyouts of
subsidiaries, divisions, and product lines being divested by larger corporations
utilizing employee stock ownership plans (ESOPs). The Company is headquartered
in Bethesda, Maryland and has offices in New York, Boston, Pittsburgh, San
Francisco, and Savannah.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, 'Earnings Per Share,' (SFAS 128) which is required to be adopted on
December 31, 1997. At that time, the Company will change the method currently
used to compute earnings per share and to restate all prior periods. The impact
of SFAS 128 on the calculation of fully diluted earnings per share for these
periods is not expected to be material.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form N-2 and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included.
The footnotes to the audited consolidated financial statements included in
this registration statement should be read in conjunction with the accompanying
interim financial statements.
3. NOTES PAYABLE
On May 30, 1997, the Company amended one of its notes payable. The term
loan commitment was increased from $750,000 to $1,000,000. The draw down period
was extended until May 1999. Certain restrictions regarding the amount of
individual draws were removed. Interest only will be assessed over a four-year
term from the date of the draw, and thereafter, monthly payments of principal
and interest are payable until all outstanding amounts become fully due in May
2004.
4. SUPPLEMENTAL EARNINGS PER SHARE
Supplemental earnings per share for the six months ended June 30, 1997 was
calculated on a pro forma basis using weighted average outstanding shares of
common stock of 686,330 as adjusted for the stock split effected in the form of
a stock dividend and the conversion of preferred stock described in Note 5. For
all other periods, earnings per share was not presented since it was not
considered to be meaningful.
5. SUBSEQUENT EVENTS
In July 1997, the Company repaid the outstanding balance of the $500,000
line of credit previously secured by accounts receivable, furniture, fixtures,
equipment, and 56,270 shares of common stock in Erie Forge and Steel.
In July 1997, the remaining unearned ESOP shares became earned and
distributed to the employees. Pursuant to the Company's preferred stock
declaration, the preferred stock held by the ESOP was converted into common
stock on a one share to one share basis. The Company also contributed an
additional 529 shares of common stock to the ESOP.
In August 1997, the Company repaid the note payable to its president.
F-19
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SUBSEQUENT EVENTS--(CONTINUED)
In August 1997, the Company increased its authorized shares of common stock
to 20,000,000.
On August 27, 1997, the Company declared a stock split effective August 29,
1997 effected in the form of a stock dividend pursuant to which each outstanding
share of common stock was effectively converted into 29.859 shares. Outstanding
shares and per share amounts for all periods presented have been restated to
reflect this stock split.
F-20
<PAGE>
EXHIBIT 2.N.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption 'Experts' and to the
use of our report dated June 11, 1997, except as to Note 12, as to which the
date is August 29, 1997, in the Registration Statement (Form N-2) and related
Prospectus of American Capital Strategies, Ltd. dated August 29, 1997.
ERNST & YOUNG LLP
Washington, D.C.
August 29, 1997
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information......................... 2
Prospectus Summary............................. 3
Fees and Expenses.............................. 7
Summary Consolidated Financial and Other
Data......................................... 8
Risk Factors................................... 9
Use of Proceeds................................ 12
Distributions.................................. 13
Capitalization................................. 13
Selected Consolidated Financial and Other
Data......................................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 16
Business....................................... 21
Investment Objectives and Policies............. 26
Portfolio Companies............................ 27
Management..................................... 29
Certain Transactions........................... 33
Principal Stockholders......................... 34
Determination of Net Asset Value............... 34
Reinvestment Plan.............................. 35
Tax Status..................................... 36
Description of Capital Stock................... 38
Regulation..................................... 41
Shares Eligible for Future Sale................ 42
Share Repurchases.............................. 43
Underwriting................................... 44
Direct Offering................................ 46
Custodian, Transfer and Dividend Paying Agent
and Registrar................................ 46
Legal Matters.................................. 46
Experts........................................ 46
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
UNTIL SEPTEMBER 23, 1997, (25 DAYS AFTER THE
COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
8,400,000 SHARES
AMERICAN
CAPITAL
STRATEGIES, LTD.
Common Stock
------------------------
PROSPECTUS
------------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997
================================================================================
<PAGE>
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Included in Parts A and B of the Registration Statement:
AMERICAN CAPITAL STRATEGIES, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors..................................... F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995..... F-3
Consolidated Schedules of Investments as of December 31, 1996
and 1995....................................................... F-4
Consolidated Statements of Income for the years ended December
31, 1996, 1995, and 1994....................................... F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995, and 1994........................ F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994.............................. F-7
Notes to Consolidated Financial Statements....................... F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) as of June 30, 1997
and 1996....................................................... F-14
Consolidated Schedules of Investments (Unaudited) as of June
30, 1997 and 1996.............................................. F-15
Consolidated Statements of Income (Unaudited) for the six
months ended June 30, 1997 and 1996........................... F-16
Consolidated Statements of Stockholders' Equity (Unaudited) for
the six months ended June 30, 1997 and 1996................. F-17
Consolidated Statements of Cash Flows (Unaudited) for the six
months ended June 30, 1997 and 1996........................... F-18
Notes to Unaudited Consolidated Financial Statements............. F-19
2. Exhibits:
* a. Second Amended and Restated Certificate of Incorporation
* b. Second Amended and Restated Bylaws
* d.1 Instruments defining the rights of holders of securities: See
Article IV of the Company's Second Amended and Restated
Certificate of Incorporation.
* d.2 Instruments defining the rights of holders of securities: See
Section I of the Company's Second Amended and Restated Bylaws.
e. Dividend Reinvestment Plan
h.1 Form of Underwriting Agreement
h.2 Form of Agreement Among Underwriters
* i.1 Form of American Capital Strategies, Ltd. First Amended and
Restated Employee Stock Ownership Plan
* i.2 Form of American Capital Strategies, Ltd. 1997 Stock Option Plan
* i.3 Form of Employment Agreement between the Company and David Gladstone
* i.4 Form of Employment Agreement between the Company and Malon Wilkus
* i.5 Form of Employment Agreement between the Company and Adam Blumenthal
* i.6 Form of Employment Agreement between the Company and Stephen L. Hester
* i.7 Form of Employment Agreement between the Company and Roland Cline
* j.1 Form of Loan Accounting Agreement between the Company and Riggs Bank,
N.A.
j.2 Form of Custodial Agreement between the Company and Riggs Bank, N.A.
* k.1 Form of Referral Agreement between the Company and Riggs Bank, N.A.
* k.2 Form of Referral Agreement between the Company and NCB Development
Corporation.
l. Opinion of Arnold & Porter
n.1 Consent of Arnold & Porter: See exhibit 2.l
n.2 Consent of Ernst & Young LLP
* r. Financial Data Schedule
- ---------------
* Previously filed.
II-2
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS
The information contained under the heading "Underwriting" on pages
44 through 45 of the Prospectus and under the heading "Shares Eligible for
Future Sale" on pages 42 through 43 of the Prospectus is incorporated herein
by this reference.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee.......................... $ 49,000
NASD Fee...................................... 16,000
Nasdaq additional listing fee................. 35,000
Blue Sky fees and expenses.................... 15,000
Accounting fees and expenses.................. 150,000
Legal fees and expenses....................... 200,000
Printing and engraving........................ 50,000
Registrar and transfer agent's fees........... 10,000
Miscellaneous fees and expenses............... 25,000
Total................................ $550,000
========
Note: All listed amounts are estimates.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
1) ACS Capital Investments Corporation, a Delaware corporation
('ACSCIC'); 100% of stock owned by the Company.
2) American Capital Strategies Labor Research, Inc., a Delaware
corporation; 85% of stock owned by the Company.
Note: Both of the subsidiaries above are included in the Company's
consolidated financial statements.
3) Employee Acquisition Corporation - 17, a
Delaware corporation; 100% of stock owned by ACSCIC.
4) Employee Acquisition Corporation - 19, a
Delaware corporation; 100% of stock owned by ACSCIC.
5) Employee Acquisition Corporation - 20, a
Delaware corporation; 100% of stock owned by ACSCIC.
6) Employee Acquisition Corporation - 21, a
Delaware corporation; 100% of stock owned by ACSCIC.
7) Employee Acquisition Corporation - 22, a
Delaware corporation; 100% of stock owned by ACSCIC.
8) Employee Acquisition Corporation - 23, a
Delaware corporation; 100% of stock owned by ACSCIC.
NOTE: Financial statements for the affiliates listed above as
items (3)-(8) have not been filed or included in
the Company's consolidated financial statements because
such affiliates are not active, do not have any operations
and have no assets other than their respective stated capital.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
Number of Record
Holders as of
TITLE OF CLASS the date hereof
- -------------- ----------------
<S> <C>
Common Stock, par value
$0.01 per share 5
</TABLE>
ITEM 29. INDEMNIFICATION
See Article VII of the Second Amended and Restated Certificate of
Incorporation and Section VI of the Second Amended and Restated Bylaws.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Not applicable.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Company will maintain at its principal office physical possession
of each account, book or other document required to be maintained by Section
31(a) of the 1940 Act.
ITEM 32. MANAGEMENT SERVICES
Not applicable
II-3
<PAGE>
ITEM 33. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To suspend the offering of shares until the Prospectus is
amended if (i) subsequent to the effective date of this Registration
Statement, its net asset value declines more than ten percent from its
net asset value as of the effective date of this Registration Statement
or (ii) the net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus.
(2) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(3) That, for the purpose of determining any liability under
the 1933 Act, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
therein and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(5) That for the purpose of determining any liability under
the Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant under 497(h) under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(6) That for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Washington and District of Columbia, on the 29th day
of August, 1997.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/ Malon Wilkus
-------------------------
Malon Wilkus
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David Gladstone Chairman of the Board of August 29, 1997
- ---------------------- Directors
David Gladstone
/s/ Malon Wilkus President and Director August 29, 1997
- ----------------------
Malon Wilkus
/s/ Adam Blumenthal Executive Vice President, Chief Financial
- ---------------------- Officer, Secretary and Director August 29, 1997
Adam Blumenthal
/s/ Robert L. Allbritton Director August 29, 1997
- ------------------------
Robert L. Allbritton
Director August 29, 1997
- ------------------------
Landon Butler
/s/ Neil M. Hahl Director August 29, 1997
- ------------------------
Neil M. Hahl
/s/ Philip R. Harper Director August 29, 1997
- ------------------------
Philip R. Harper
Director August 29, 1997
- ------------------------
Stan Lundine
Director August 29, 1997
- ------------------------
Stephen P. Walko
</TABLE>
Exhibit 2.e
AMERICAN CAPITAL STRATEGIES, LTD.
DIVIDEND REINVESTMENT PLAN
American Capital Strategies, Ltd.
3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
(301) 951-6122
Plan Administrator:
Boston EquiServe
-----------------
150 Royall Street
Mail Stop 45-02-62
Canton, MA 02021
(800)-425-5523
<PAGE>
The following is the American Capital Strategies, Ltd.
Dividend Reinvestment Plan (the "Plan"). Further
questions and correspondence should be directed to
either of the addresses listed on the front of the Plan:
1. What is the purpose of the Plan?
The purpose of the Plan is to provide stockholders with a
simple and convenient method of investing cash dividends
and distributions in additional shares of common stock,
$0.01 par value per share (the "Common Stock"), of American
Capital Strategies, Ltd. (the "Company" or "American
Capital") at the Common Stock's current market price.
Participants in the Plan ("Participants") may have cash
dividends and distributions automatically reinvested
without charges for recordkeeping, and may take advantage
of the custodial and reporting services provided by Boston
EquiServe (the "Plan Administrator") at no additional Cost.
2. What does the Plan Administrator do?
The Plan Administrator administers the Plan for
Participants, keeps records, sends statement of accounts to
Participants, and performs other duties relating to the
Plan.
3. How does a stockholder enroll?
The Company's Dividend Reinvestment Plan is an "opt-out"
plan. A stockholder whose shares are registered in his own
name will have all distributions reinvested automatically
in additional shares by the Plan Administrator unless the
stockholder elects, in writing, not to participate in the
Plan. The procedure for terminating participation in the
Plan is explained in the answer to Question 16.
4. What if the shares are held by a broker, bank or
nominee?
If your shares are held on the books of the Plan
Administrator in the name of a broker, bank or
other nominee (a "Nominee"), your distributions
will be reinvested automatically by the Nominee
in additional shares under the Plan unless your
Nominee does not provide such a service or you
elect not to participate in the Plan. Many
<PAGE>
Nominees do not provide such a service and routinely
request dividends and distributions to be paid in cash on
all shares registered in their names. If your shares are
held for your account by a Nominee and you would like to
participate in the Plan, you should either make appropriate
arrangements for your Nominee to participate on your
behalf, or you must become stockholder of record by having
a part or all of your shares transferred to your own name.
If your shares are held in the name of a Nominee you should
contact the Nominee for details.
5. What if a stockholder would rather receive cash?
If you would rather receive cash, you must notify the Plan
Administrator in writing that you would like to terminate
your participation in the Plan. You may terminate your
participation in the Plan at any time. The procedure for
terminating participation in the Plan is explained in the
answer to Question 16.
6. What if a stockholder wishes to receive cash on
only some of his or her shares?
If you wish to receive dividends and distributions in cash
on some of your shares, and have the remaining dividends
and distributions reinvested, you must notify the Plan
Administrator, in writing, to that effect. As a partial
participant, you will receive your dividends and
distributions in cash only with respect to the number of
shares that you have specified. With respect to any other
shares registered in your name, and with respect to the
shares credited to your account on the books of the Plan
Administrator, the corresponding dividends and
distributions will be paid in additional shares.
The number of shares on which you receive cash may be
changed at any time simply by writing the Plan
Administrator.
7. May a stockholder elect to re-enroll once he has
terminated participation in the Plan?
Yes. If stockholder has previously elected to
receive dividends and distributions in cash and
thus terminated participation in the Plan, and
- 2 -
<PAGE>
later wishes to participate in the Plan, the stockholder
may re-enroll at any time by completing an Authorization
Form and delivering it to the Plan Administrator. Any
letter requesting enrollment must be received by the Plan
Administrator prior to the dividend declaration date in
order for it to take effect as of the next dividend or
distribution.
A dividend declaration date is a date on which the
Company's Board of Directors (the "Board of Directors")
declares a dividend or distribution to be paid and
specifies the amount of such dividend or distribution.
8. How does the Dividend Reinvestment Plan work and
how are shares allocated under the Plan?
When the Board of Directors declares a dividend or
distribution, all non-participants will receive such
dividend or distribution by check mailed directly to the
record holder by or under the direction of the Plan
Administrator. The number of shares allocated to a
Participant's Plan Account (a "Plan Account") will be
arrived at as follows. Except under the circumstances
outlined in Question 9, the Plan Administrator will buy
shares of Common Stock in the open market, on NASDAQ or
elsewhere, beginning on or before the payment date of the
dividend or distribution, until it has expended for such
purchase all of the cash that would otherwise be payable to
the Participants. The number of shares that will then be
credited to the Participants' Plan Accounts will be based
on the average cost of the shares so purchased, including
brokerage commissions. Each Participant's Plan Account will
be credited with a number of shares, including fractional
shares, equal to the total amount of cash dividend or
distribution, net of any applicable withholding taxes,
otherwise due to the Participant, divided by the price of
the shares.
Neither the Company or any stockholder has the authority or
power to direct the time or price at which shares of Common
Stock may be purchased or the selection of the broker or
dealer through or from whom purchases are to be made. The
Company will absorb all administrative expenses connected
with the operation of the Plan (except brokerage
- 3 -
<PAGE>
commissions which shall be borne pro rata by the
Participants). The Plan Administrator will hold the total
shares of Common Stock purchased for all Participants in
the name of its nominee and will have no responsibility for
the value of such shares after their purchase.
9. Will newly issued shares ever be paid to Participants?
The Board of Directors may (but is not required to) declare
a dividend or distribution to be paid to Participants in
newly issued shares of Common Stock. In that situation, the
price of newly issued shares credited to a Participant's
Plan Account will be equal to the average of the closing
sales prices reported for the shares in The Wall Street
Journal NASDAQ National Market System listings for the five
days on which trading of shares takes place immediately
prior to the dividend payment date (but not less than 95%
of the opening sales price on that date).
Even if the Board of Directors has declared the dividend or
distribution to be payable to Participants in newly issued
shares, the Plan Administrator will be under standing
instructions not to credit newly issued shares, and instead
to buy shares in the market, if (i) the price at which
newly issued shares are to be credited does not exceed 110%
of the last determined net asset value of the Common Stock
or (ii) the Company has advised the Plan Administrator that
since such net asset value was last determined it has
become aware of events that indicate the possibility of a
change in per share net asset value as a result of which
the net asset value of the Common Stock on the payment date
might be higher than the price at which the Plan
Administrator would credit newly issued shares to the
Participants' Plan Accounts.
If the Plan Administrator buys shares on the market, it is
possible that by the time the Plan Administrator has
completed its purchases, the average per share purchase
price paid by the Plan Administrator may exceed the price
at which the newly issued shares would have been credited,
or the shares' current net asset value. As a result, there
would be credited to the Participants' Plan Accounts a
smaller number of
- 4 -
<PAGE>
shares than would have been credited if the dividend or
distribution had been paid in newly issued shares.
10. When will shares of Common Stock be purchased under the
Plan?
In the months in which dividends are paid, dividends will
be invested beginning on the dividend payment date. The
Plan Administrator will make every effort to invest any
dividends it receives promptly beginning on each dividend
payment date, and in no event later than 30 days from such
date, except where necessary under any applicable federal
securities laws.
No interest will be paid on funds held by the Plan
Administrator pending investment.
11. What accounts are maintained for Participants and
what reports on these accounts do Participants receive?
The Plan Administrator will maintain a separate account for
each Participant. All shares issued to a Participant under
the Plan will be credited to the Participant's account. The
Plan Administrator will mail to each Participant a
statement confirming the issuance of shares within fifteen
days after the allocation of shares is made. The statement
will show the amount of the dividend or distribution, the
price at which shares were credited, the number of full and
fractional shares credited, the number of shares previously
credited and the cumulative total of shares credited. In
addition, each Participant will receive copies of the
Company's annual and quarterly reports to stockholders,
proxy statements and dividend income information for tax
purposes.
12. How will a Participant's shares be voted at meetings
of stockholders?
The Participant will receive a proxy card covering the
total number of shares held by the Participant of record,
including shares credited to the Participant's Plan
Account. If a proxy card is returned properly signed, but
without indicating instructions as to the manner in which
shares are to be voted with respect to any item
- 5 -
<PAGE>
thereon, the corresponding shares will be voted in
accordance with the recommendation of the Board of
Directors. If the proxy card is not returned, or it is
unexecuted or improperly executed, the corresponding shares
will not be voted unless the Participant or the
Participant's duly appointed representative votes in person
at the meeting.
13. Will certificates be issued for shares issued under the
Plan?
No. Certificates for shares issued under the Plan will not
be furnished to you until your account is terminated or
unless you request certificates in writing for a specified
number of shares credited to your Plan Account. All written
requests for certificates should be directed to the Plan
Administrator, allowing two weeks for processing. The
issuance of certificates for shares credited to a Plan
Account will not terminate your participation in the Plan.
No certificate for a fractional share will be issued. If
you terminate your participation in the Plan (see Question
16), the Plan Administrator will sell for your account any
fractional share and send you a check for the proceeds.
14. In whose name will certificates be registered when issued?
Accounts under the Plan are maintained in the name in which
share certificates of the Participant were registered at
the time the Participant entered the Plan. Certificates for
whole shares issued at the request of a Participant will be
similarly registered.
15. What happens if the Company issues a stock dividend or
declares a stock split?
Any stock dividends or split shares distributed by the
Company on shares held by the Plan Administrator for the
Participant will be credited to the Participant's account.
16. What is the tax status of reinvested dividends?
- 6 -
<PAGE>
The automatic reinvestment of dividends and distributions
will not relieve a Participant of any income tax liability
associated with such dividend or distribution. A
Participant in the Plan will be treated for Federal income
tax purposes as having received, on the dividend payment
date, a dividend or distribution in an equal amount to the
cash that the Participant could have received instead of
shares. The tax basis of such shares will equal the amount
of such cash.
A Participant will not realize any taxable income upon
receipt of certificate for whole shares credited to the
Participant's account either upon the Participant's request
for a specified number of shares or upon termination of
enrollment in the Plan. Each Participant will receive early
in each year a Form 1099 regarding the Federal income tax
status of all dividends and distributions taxable during
the previous year.
17. What happens if a Participant wishes to terminate
participation?
You may terminate your participation in the Plan at any
time by notifying the Plan Administrator in writing. To be
effective on any given dividend payment date, the notice to
terminate must be received by the Plan Administrator before
the record date for the dividend payment. All dividends
with a record date after receipt of your notification will
be sent directly to you. Upon termination of your
participation, you will receive a certificate for the
number of full shares of Common Stock held for you by the
Plan Administrator at no charge. At the same time, you will
receive a check in payment for any fractional shares in
your account, valued at the then current market price of
the Company's Common Stock, less any applicable brokerage
commissions and any other costs of sale. If you prefer, you
can request that your full shares of Common Stock held by
the Plan Administrator be sold, and you will receive a
check for the proceeds, less any applicable brokerage
commissions and any other costs of sale.
18. May the Plan be Changed or Discontinued?
- 7 -
<PAGE>
The Company and the Plan Administrator may amend, suspend
or terminate the Plan at any time. Notice of any such
amendment, suspension or termination will be sent to all
Participants at least ninety (90) days prior to the
dividend or declaration date for which the amendment,
suspension or termination is to be effective.
19. What are the Plan Administrator's responsibilities under
the Plan?
The Plan Administrator will not be liable under the Plan
for any act done by the Plan Administrator in good faith or
for any good faith omission to act including, without
limitation, any claims for liability (a) arising out of
failure to terminate a Participant's participation in the
Plan upon the Participant's death prior to receipt of
notice in writing of such death; (b) with respect to the
prices at which shares are purchased or sold for the
Participant's account and the time such purchases or sales
are made; and (c) relating to the value of the shares
acquired for the Participant's account.
The Internal Revenue Code of 1986, as amended, imposes
certain reporting obligations upon brokers and other
middlemen. As a result, the Plan Administrator will be
required to report to the Internal Revenue Service and the
Participant any sales of stock by the Plan Administrator on
behalf of a Participant.
- 8 -
Exhibit 2.h.1
American Capital Strategies, Ltd.
8,400,000 Shares of Common Stock
UNDERWRITING AGREEMENT
August ____, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representative of the several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
1001 19th Street North
Arlington, Virginia 22209
Dear Sirs:
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), confirms its agreement with Friedman, Billings, Ramsey & Co., Inc.
and each of the other Underwriters listed on Schedule I hereto (collectively,
the "Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc. is acting
as representative (in such capacity, the "Representative"), with respect to (i)
the sale by the Company and the purchase by the Underwriters, acting severally
and not jointly, of the respective numbers of shares of Common Stock, par value
$0.01 per share, of the Company ("Common Stock") set forth in Schedule I hereto
and (ii) the grant by the Company to the Underwriters, acting severally and not
jointly, of the option described in Section 1(b) hereof to purchase all or any
part of 1,260,000 additional shares of Common Stock to cover over-allotments, if
any. The 8,400,000 shares of Common Stock (the "Initial Shares") to be purchased
by the Underwriters and all or any part of the 1,260,000 shares of Common Stock
subject to the option described in Section 1(b) hereof (the "Option Shares") are
hereinafter called, collectively, the "Shares".
The Company understands that the Underwriters propose to make a public
offering of the Shares as soon as the Underwriters deem advisable after this
Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form N-2 (No. 333-29943) and a
related preliminary prospectus for the registration of the Shares under the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations thereunder (the "Securities Act Regulations"). The Company has
prepared and filed such amendments thereto, if any, and such amended preliminary
prospectuses, if any, as may have been required to the date hereof, and will
file such additional amendments thereto and such amended prospectuses as may
hereafter be required. The registration statement has been declared effective
under the Securities Act by the Commission.
<PAGE>
The registration statement as amended at the time it became effective (including
all information deemed to be a part of the registration statement at the time it
became effective pursuant to Rule 430A(b) of the Securities Act Regulations) is
hereinafter called the "Registration Statement," except that, if the Company
files a post-effective amendment to such registration statement which becomes
effective prior to the Closing Time (as defined below), "Registration Statement"
shall refer to such registration statement as so amended. Any registration
statement filed pursuant to Rule 462(b) of the Securities Act Regulations is
hereinafter called the "Rule 462(b) Registration Statement," and after such
filing the term "Registration Statement" shall include the 462(b) Registration
Statement. Each prospectus included in the registration statement, or amendments
thereof or supplements thereto, before it became effective under the Securities
Act (other than the prospectus filed as part of the Registration Statement on
June 24, 1997) and any prospectus filed with the Commission by the Company with
the consent of the Underwriters pursuant to Rule 424(a) of the Securities Act
Regulations is hereinafter called the "Preliminary Prospectus." The term
"Prospectus" means the final prospectus, as first filed with the Commission
pursuant to paragraph (1) or (4) of Rule 424(b) of the Securities Act
Regulations, and any amendments thereof or supplements thereto. The Commission
has not issued any order preventing or suspending the use of any Preliminary
Prospectus.
The Company also will issue and sell at the Closing Time (as
hereinafter defined) to the Representative for its own account warrants (the
"Warrants") to purchase at an exercise price of $15.00 per share up to an
aggregate of 442,751 shares of Common Stock (the "Warrant Shares"), which
Warrant Shares will be registered under the Securities Act pursuant to the
Registration Statement and which issuance will be consummated in accordance with
the terms and conditions of the Warrant Agreement substantially in the form of
Exhibit A hereto (the "Warrant Agreement").
The Company and the Underwriters agree as follows:
1. Sale and Purchase:
(a) Initial Shares. Upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter agrees, severally and not jointly, to purchase from the Company at
the purchase price per share of $13.95, the number of Initial Shares set forth
in Schedule I opposite such Underwriter's name, plus any additional number of
Initial Shares which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 8 hereof, subject in each case, to such adjustments
among the Underwriters as the Representative in its sole discretion shall make
to eliminate any sales or purchases of fractional shares. The Underwriters may
from time to time increase or decrease the public offering price after the
initial public offering to such extent as the Underwriters may determine.
(b) Option Shares. In addition, upon the basis of the warranties and
representations and other terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase from the Company up to an aggregate of 1,260,000 Option Shares at the
purchase price per share set forth in paragraph (a) above plus any additional
number of Option Shares which such Underwriter may become obligated to purchase
2
<PAGE>
pursuant to the provisions of Section 8 hereof. The option hereby granted will
expire 30 days after the date hereof and may be exercised in whole or in part
from time to time only for the purpose of covering over-allotments which may be
made in connection with the offering and distribution of the Initial Shares upon
notice by the Representative to the Company setting forth the number of Option
Shares as to which the several Underwriters are then exercising the option and
the time and date of payment and delivery for such Option Shares. Any such time
and date of delivery (a "Date of Delivery") shall be determined by the
Representative, but shall not be later than three full business days (or
earlier, without the consent of the Company, than two full business days) after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Shares, each of the Underwriters, acting severally and not jointly, will
purchase that proportion of the total number of Option Shares then being
purchased which the number of Initial Shares set forth in Schedule I opposite
the name of such Underwriter bears to the total number of Initial Shares,
subject in each case to such adjustments as the Representative in its sole
discretion shall make to eliminate any sales or purchases of fractional shares.
The Underwriters may from time to time increase or decrease the public offering
price of the Option Shares after the initial public offering to such extent as
the Underwriters may determine.
(c) Warrants. Upon the basis of the warranties and representations and
other terms and conditions herein set forth, the Company also agrees to issue to
the Representative, in further consideration of the Representative's efforts in
connection with the sale and purchase of the Shares and the Option Shares, the
Warrants to purchase at an exercise price of $15.00 per share up to an aggregate
of 442,751 Warrant Shares.
2. Payment and Delivery:
(a) Initial Shares and Warrants. Payment of the purchase price for the
Initial Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal
(same-day) funds at the offices of Gibson, Dunn & Crutcher LLP located at 1050
Connecticut Avenue, N.W., Washington, D.C. 20036 (unless another place shall be
agreed upon by the Representative and the Company) against delivery of the
certificates for the Initial Shares to the Representative for the respective
accounts of the Underwriters and the delivery of the Warrants, represented by
one or more certificates as the Representative may specify, to the
Representative. Such payment and delivery shall be made at 9:30 a.m., New York
City time, on the third (fourth, if pricing occurs after 4:30 p.m., New York
City time) business day after the date hereof (unless another time, not later
than ten business days after such date, shall be agreed to by the Representative
and the Company). The time at which such payment and delivery are actually made
is hereinafter sometimes called the "Closing Time." Certificates for the Initial
Shares shall be delivered to the Representative in definitive form registered in
such names and in such denominations as the Representative shall specify in
writing to the Company at least two full business days before the Closing Time.
For the purpose of expediting the checking of the certificates for the Initial
Shares by the Representative, the Company agrees to make such certificates
available to the Representative for such purpose at least one full business day
preceding the Closing Time.
3
<PAGE>
(b) Option Shares. In addition, payment of the purchase price for the
Option Shares shall be made to the Company by wire transfer of immediately
available funds or certified or official bank check payable in federal
(same-day) funds at the offices of Gibson, Dunn & Crutcher LLP located at 1050
Connecticut Avenue, N.W., Washington, D.C. 20036 (unless another place shall be
agreed upon by the Representative and the Company), against delivery of the
certificates for the Option Shares to the Representative for the respective
accounts of the Underwriters. Such payment and delivery shall be made at 9:30
a.m., New York City time, on each Date of Delivery. Certificates for the Option
Shares shall be delivered to the Representative in definitive form registered in
such names and in such denominations as the Representative shall specify at
least two full business days before the Closing Time. For the purpose of
expediting the checking of the certificates for the Option Shares by the
Representative, the Company agrees to make such certificates available to the
Representative for such purpose at least one full business day preceding the
relevant Date of Delivery.
3. Representations and Warranties of the Company: The Company
represents and warrants to the Underwriters that:
(a) the Company has in effect a valid election as a "business
development company" as provided for in Sections 54 through 65 of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and its current
business operations and investments and its contemplated business operations and
investments as described in the Prospectus constitute permissible activities and
investments for a "business development company" under the Investment Company
Act;
(b) the Company has an authorized capitalization as set forth in the
Prospectus under the caption "Capitalization;" the outstanding shares of capital
stock of the Company and its subsidiaries ACS Capital Investments Corporation
("ACSCIC") and ACS Labor Research, Inc. ("ACSLR" and, with ACSCIC, the
"Subsidiaries") have been duly and validly authorized and issued and are fully
paid and non-assessable; all of the outstanding shares of capital stock of
ACSCIC are directly or indirectly owned of record and beneficially by the
Company; 85% of the outstanding shares of capital stock of ACSLR are directly or
indirectly owned of record and beneficially by the Company; except as disclosed
in the Prospectus, there are no outstanding (i) securities or obligations of the
Company or any of its Subsidiaries convertible into or exchangeable for any
capital stock of the Company or any such Subsidiary, (ii) warrants, rights or
options to subscribe for or purchase from the Company or any such Subsidiary any
such capital stock or any such convertible or exchangeable securities or
obligations, or (iii) obligations of the Company or any such Subsidiary to issue
any shares of capital stock, any such convertible or exchangeable securities or
obligation, or any such warrants, rights or options;
(c) the Company and the Company's Subsidiaries (all of which are named
in an exhibit to the Registration Statement) each has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation with full corporate power and authority
to own its respective properties and to conduct its respective business as
described in the Registration Statement and Prospectus and, in the case of the
Company, to execute and deliver this Agreement, the Warrant Agreement and the
other agreements described in the Prospectus, including but not limited to the
Employment Agreements
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between the Company and each of David Gladstone, Malon Wilkus, Adam Blumenthal,
Roland Cline and Stephen Hester, and the material contracts of the Company,
including but not limited to the Loan Accounting Agreement between the Company
and Riggs Bank, N.A., the Referral Agreement between the Company and Riggs Bank,
N.A., and the Referral Agreement between the Company and NCB Development
Corporation (the "Other Transaction Documents") and to consummate the
transactions described in each such agreement;
(d) the Company and all of its Subsidiaries are duly qualified or
licensed by each jurisdiction in which they conduct their respective businesses
and in which the failure, individually or in the aggregate, to be so qualified
or licensed could reasonably be expected to have a material adverse effect on
the assets, operations, business or condition (financial or otherwise) of the
Company and its Subsidiaries taken as a whole, and the Company and its
Subsidiaries are duly qualified, and are in good standing, in each jurisdiction
in which they own or lease real property or maintain an office and in which such
qualification is necessary, except where the failure to be so qualified and in
good standing would not have a material adverse effect on the assets,
operations, business or condition (financial or otherwise) of the Company and
its Subsidiaries taken as a whole; except as disclosed in the Prospectus, no
Subsidiary is prohibited or restricted, directly or indirectly, from paying
dividends to the Company, or from making any other distribution with respect to
such Subsidiary's capital stock or from paying the Company or any other
Subsidiary, any loans or advances to such Subsidiary from the Company or such
other Subsidiary, or from transferring any such Subsidiary's property or assets
to the Company or to any other Subsidiary; other than as disclosed in the
Prospectus, the Company does not own, directly or indirectly, any capital stock
or other equity securities of any other corporation or any ownership interest in
any partnership, joint venture or other association;
(e) the Company and its Subsidiaries are in compliance in all material
respects with all applicable laws, rules, regulations, orders, decrees and
judgments, including those relating to transactions with affiliates, except for
non-compliance with which would not have a material adverse effect on the
assets, operations, business or condition (financial or otherwise) of the
Company and its Subsidiaries taken as a whole;
(f) neither the Company nor any of its Subsidiaries is in breach of, or
in default under (nor has any event occurred which with notice, lapse of time,
or both would constitute a breach of, or default under), its respective articles
of incorporation or charter or by-laws or in the performance or observance of
any obligation, agreement, covenant or condition contained in any license,
indenture, mortgage, deed of trust, loan or credit agreement or other agreement
or instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties is bound, except for such
breaches or defaults which would not have a material adverse effect on the
assets, operations, business or condition (financial or otherwise) of the
Company and its Subsidiaries taken as a whole, and the execution, delivery and
performance of this Agreement and the Other Transaction Documents, and
consummation of the transactions contemplated hereby and thereby will not
conflict with, or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time, or both would constitute
a breach of, or default under), (i) any provision of the articles of
incorporation or charter or by-laws of the Company or any of its Subsidiaries,
or (ii) any provision of any license, indenture, mortgage, deed of trust, loan
or credit agreement or other agreement or instrument to which the
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Company or any of its Subsidiaries is a party or by which any of them or their
respective properties may be bound or affected, or under any federal, state,
local or foreign law, regulation or rule or any decree, judgment or order
applicable to the Company or any of its Subsidiaries, except in the case of this
clause (ii) for such breaches or defaults which would not have a material
adverse effect on the assets, operations, business or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole; or result in
the creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company or its Subsidiaries;
(g) this Agreement has been duly authorized, executed and delivered by
the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, and by general principles of equity, and except to
the extent that the indemnification and contribution provisions of Section 9
hereof may be limited by federal or state securities laws and public policy
considerations in respect thereof;
(h) the issuance of the Warrants has been duly authorized; when issued
and delivered pursuant to the terms of the Warrant Agreement, the Warrants will
constitute legal, valid and binding obligations of the Company enforceable in
accordance with their terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, and by general principles of equity; the Warrant Shares have been
duly reserved for issuance upon exercise of the Warrants in accordance with the
terms of the Warrant Agreement; and the Warrants will conform to the description
thereof in the Registration Statement and the Prospectus;
(i) the Warrant Agreement and the Other Transaction Documents have been
duly authorized and will be, upon execution and delivery by the Company, legal,
valid and binding agreements of the Company enforceable in accordance with their
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally, and by general
principles of equity;
(j) no approval, authorization, consent or order of or filing with any
federal, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the execution, delivery and
performance of this Agreement and the Other Transaction Documents, the
consummation of the transaction contemplated hereby and thereby, the sale and
delivery of the Shares, issuance of the Warrants or the Warrant Shares by the
Company as contemplated hereby or in the Warrant Agreement other than (A) such
as have been obtained, or will have been obtained at the Closing Time or the
relevant Date of Delivery, as the case may be, under the Securities Act, (B)
such approvals as have been obtained in connection with the approval of the
quotation of the Shares on the Nasdaq National Market and (C) any necessary
qualification under the securities or blue sky laws of the various jurisdictions
in which the Shares are being offered by the Underwriters;
(k) each of the Company and its Subsidiaries has all necessary
licenses, authorizations, consents and approvals and has made all necessary
filings required under any federal, state or local law, regulation or rule, and
has obtained all necessary authorizations, consents and approvals from other
persons, required in order to conduct their respective businesses as described
in the
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Prospectus, except to the extent that any failure to have any such licenses,
authorizations, consents or approvals, to make any such filings or to obtain any
such authorizations, consents or approvals would not, individually or in the
aggregate, have a material adverse effect on the assets, operations, business or
condition (financial or otherwise) of the Company and its Subsidiaries taken as
a whole; neither the Company nor any of its Subsidiaries is in violation of, in
default under, or has received any notice regarding a possible violation,
default or revocation of any such license, authorization, consent or approval
applicable to the Company or any of its Subsidiaries the effect of which could
be material and adverse to the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole;
and no such license, authorization, consent or approval contains a materially
burdensome restriction that is not adequately disclosed in the Registration
Statement and the Prospectus;
(l) each of the Registration Statement and any Rule 462(b) Registration
Statement has become effective under the Securities Act and no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the Securities Act and no
proceedings for that purpose have been instituted or are pending or, to the
knowledge of the Company, are threatened by the Commission, and any request on
the part of the Commission for additional information has been complied with;
(m) the Preliminary Prospectus and the Registration Statement comply
and the Prospectus and any further amendments or supplements thereto will, when
they have become effective or are filed with the Commission, as the case may be,
comply in all material respects with the requirements of the Securities Act and
the Securities Act Regulations; the Registration Statement did not, and any
amendment thereto will not, in each case as of the applicable effective date,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
the Preliminary Prospectus does not, and the Prospectus or any amendment or
supplement thereto will not, as of the applicable filing date and at the Closing
Time and on each Date of Delivery (if any), contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, however, that the Company
makes no warranty or representation with respect to any statement contained in
the Registration Statement or the Prospectus in reliance upon and in conformity
with the information concerning the Underwriters and furnished in writing by or
on behalf of the Underwriters through the Representative to the Company
expressly for use in the Registration Statement or the Prospectus (that
information being limited to that described in the last sentence of the first
paragraph of Section 9(b) hereof);
(n) the Preliminary Prospectus was and the Prospectus delivered to the
Underwriters for use in connection with this offering will be identical to the
versions of the Preliminary Prospectus and Prospectus created to be transmitted
to the Commission for filing via the Electronic Data Gathering Analysis and
Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T;
(o) all legal or governmental proceedings, contracts or documents of a
character required to be filed as exhibits to the Registration Statement or to
be summarized or described in
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<PAGE>
the Prospectus have been so filed, summarized or described as required and any
such summaries or descriptions present fairly the information required to be
shown;
(p) there are no actions, suits, proceedings, inquiries or
investigations pending or, to the Company's knowledge, threatened against the
Company or any of its Subsidiaries or any of their respective officers and
directors or to which the properties, assets or rights of any such entity are
subject, at law or in equity, before or by any federal, state, local or foreign
governmental or regulatory commission, board, body, authority, arbital panel or
agency which could result in a judgment, decree, award or order having a
material adverse effect on the assets, operations, business or condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole;
(q) the financial statements, including the notes thereto, included in
the Registration Statement and the Prospectus present fairly the consolidated
financial position of the Company and its Subsidiaries as of the dates indicated
and the consolidated results of operations and changes in financial position and
cash flows of the Company and its Subsidiaries for the periods specified; such
financial statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as indicated in the notes thereto); the financial statement schedules
included in the Registration Statement and the amounts in the Prospectus under
the captions "Prospectus Summary -- Summary Financial Information" and "Selected
Financial Information" fairly present the information shown therein and have
been compiled on a basis consistent with the financial statements included in
the Registration Statement and the Prospectus;
(r) Ernst & Young LLP, whose reports on the consolidated financial
statements of the Company and its Subsidiaries are filed with the Commission as
part of the Registration Statement and Prospectus, are and were during the
periods covered by their reports independent public accountants as required by
the Securities Act and the Securities Act Regulations;
(s) subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as may be otherwise
stated in the Registration Statement or Prospectus, there has not been (A) any
material adverse change, in the assets, liabilities, capital, operations,
business or condition (financial or otherwise), present or prospective, of the
Company and its Subsidiaries taken as a whole, whether or not arising in the
ordinary course of business, (B) any transaction, which is material to the
Company and its Subsidiaries taken as a whole, contemplated or entered into by
the Company or any of its Subsidiaries, (C) any obligation, contingent or
otherwise, directly or indirectly incurred by the Company or any of its
Subsidiaries, which is material to the Company and its Subsidiaries taken as a
whole or (D) any dividend or distribution of any kind declared, paid or made by
the Company on any class of its capital stock;
(t) by virtue of its election as a "business development company," the
Company is not, and upon the sale of the Shares as herein contemplated will not
be, an investment company which is required to register under the Investment
Company Act;
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(u) the Shares and the Warrant Shares will conform in all material
respects to the description thereof contained in the Registration Statement and
the Prospectus;
(v) there are no persons with registration or other similar rights to
have any equity securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the Securities Act except as provided
in the Warrant Agreement;
(w) the Shares, the Warrants, and the Warrant Shares have been duly
authorized and, when the Shares and the Warrant Shares have been issued and duly
delivered against payment therefor as contemplated by this Agreement or the
Warrant Agreement, as the case may be, the Shares and the Warrant Shares will be
validly issued, fully paid and nonassessable, free and clear of any pledge,
lien, encumbrance, security interest, or other claim, and the issuance and sale
of the Shares, the Warrants, and the Warrant Shares by the Company is not
subject to preemptive or other similar rights arising by operation of law, under
the articles of incorporation or by-laws of the Company, under any agreement to
which the Company or any of its Subsidiaries is a party or otherwise;
(x) the Company has not taken, and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares;
(y) neither the Company nor any of its affiliates (i) is required to
register as a "broker" or "dealer" in accordance with the provisions of the
Securities Exchange Act of 1934 or the rules and regulations thereunder, or (ii)
directly, or indirectly through one or more intermediaries, controls or has any
other association with (within the meaning of Article 1 of the By-laws of the
National Association of Securities Dealers, Inc. (the "NASD")) any member firm
of the NASD;
(z) any certificate signed by any officer of the Company or any
Subsidiary delivered to the Representative or to counsel for the Underwriters
pursuant to or in connection with this Agreement shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby;
(aa) the form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the articles of incorporation and by-laws of the
Company and the requirements of the Nasdaq National Market;
(bb) the Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences;
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(cc) in connection with this offering, the Company has not offered and
will not offer its Common Stock or any other securities convertible into or
exchangeable or exercisable for Common stock in a manner in violation of the
Act; and
(dd) the Company has not incurred any liability for any finder's fees
or similar payments in connection with the transactions herein contemplated.
4. Certain Covenants of the Company: The Company hereby agrees with
each Underwriter:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the securities or
blue sky laws of such states as the Representative may designate and to maintain
such qualifications in effect as long as required for the distribution of the
Shares, provided that the Company shall not be required to qualify as a foreign
corporation or to consent to the service of process under the laws of any such
state (except service of process with respect to the offering and sale of the
Shares);
(b) to prepare immediately an amended Prospectus in a form approved by
the Underwriters and file or transmit for filing such Prospectus with the
Commission in accordance with Rule 430A and to furnish promptly to the
Underwriters as many copies of the Prospectus (or of the Prospectus as amended
or supplemented if the Company shall have made any amendments or supplements
thereto after the effective date of the Registration Statement) as the
Underwriters may reasonably request for the purposes contemplated by the
Securities Act Regulations, which Prospectus and any amendments or supplements
thereto furnished to the Underwriters will be identical to the version created
to be transmitted to the Commission for filing via EDGAR, except to the extent
permitted by Regulation S-T;
(c) to advise the Representative promptly, confirming such advice in
writing, of (i) the receipt of any comments from, or any request by, the
Commission for amendments or supplements to the Registration Statement or
Prospectus or for additional information with respect thereto, or (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus, or of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes and, if
the Commission or any other government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of such
order as soon as possible; to advise the Representative promptly of any proposal
to amend or supplement the Registration Statement or Prospectus and to file no
such amendment or supplement to which the Representative shall reasonably object
in writing;
(d) to furnish to the Underwriters for a period of five years from the
date of this Agreement (i) as soon as available, copies of all annual, quarterly
and current reports or other communications supplied to holders of shares of
Common Stock, (ii) as soon as practicable after the filing thereof, copies of
all reports filed by the Company with the Commission, the NASD or any securities
exchange and (iii) such other public information as the Underwriters may
reasonably request regarding the Company and its Subsidiaries;
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(e) to advise the Underwriters promptly of the happening of any event
known to the Company within the time during which a Prospectus relating to the
Shares is required to be delivered under the Securities Act Regulations which,
in the judgment of the Company, would require the making of any change in the
Prospectus then being used so that the Prospectus would not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and, during such time,
to prepare and furnish, at the Company's expense, to the Underwriters promptly
such amendments or supplements to such Prospectus as may be necessary to reflect
any such change and to furnish to the Underwriters a copy of such proposed
amendment or supplement before filing any such amendment or supplement with the
Commission;
(f) to furnish promptly to the Representative a signed copy of the
Registration Statement, as initially filed with the Commission, and of all
amendments or supplements thereto (including all exhibits filed therewith or
incorporated by reference therein) and such number of conformed copies of the
foregoing as the Underwriters may reasonably request;
(g) to furnish to the Underwriters, not less than one business day
before filing with the Commission subsequent to the effective date of the
Prospectus and during the period referred to in paragraph (f) above, a copy of
any document proposed to be filed with the Commission pursuant to Section 13,
14, or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act");
(h) to apply the net proceeds of the sale of the Shares in accordance
with its statements under the caption "Use of Proceeds" in the Prospectus;
(i) to make generally available to its security holders as soon as
practicable, but in any event not later than the end of the fiscal quarter first
occurring after the first anniversary of the effective date of the Registration
Statement an earnings statement complying with the provisions of Section 11(a)
of the Securities Act (in form, at the option of the Company, complying with the
provisions of Rule 158 of the Securities Act Regulations) covering a period of
12 months beginning after the effective date of the Registration Statement;
(j) to use its best efforts to effect and maintain the quotation of the
Shares on the Nasdaq National Market and to file with the Nasdaq National Market
all documents and notices required by the Nasdaq National Market of companies
that have securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market;
(k) to refrain during a period of 180 days from the date of the
Prospectus, without the prior written consent of the Representative, from (i)
offering, pledging, selling, contracting to sell, selling any option or contract
to purchase, purchasing any option or contract to sell, granting any option for
the sale of, or otherwise disposing of or transferring, directly or indirectly,
any share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or filing any registration statement under the
Securities Act with respect to any of the foregoing or (ii) entering into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common
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Stock, whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to
be sold hereunder, (B) the Warrants and Warrant Shares, (C) any shares of Common
Stock issued by the Company upon the exercise of an option outstanding on the
date hereof and referred to in the Prospectus or (D) any shares of Common Stock
issued pursuant to the Direct Offering referred to in the Prospectus;
(l) to use its best efforts to maintain its status as a "business
development company" at all times during the period from the Effective Date to
the fifth anniversary of the Effective Date; provided however, the Company may
change the nature of its business so as to cease to be, or to withdraw its
election as, a business development company with the approval of the board of
directors and a vote of shareholders as required by Section 58 of the 1940 Act
or any successor provision;
(m) to comply with the terms of the Warrant Agreement; and
(n) to not itself and to use its best efforts to cause its officers,
directors and affiliates not to, (i) take, directly or indirectly prior to
termination of the underwriting syndicate contemplated by this Agreement, any
action designed to stabilize or manipulate the price of any security of the
Company, or which may cause or result in, or which might in the future
reasonably be expected to cause or result in, the stabilization or manipulation
of the price of any security of the Company, to facilitate the sale or resale of
any of the Shares, (ii) sell, bid for, purchase or pay anyone any compensation
for soliciting purchases of the Shares or (iii) pay or agree to pay to any
person any compensation for soliciting any order to purchase any other
securities of the Company.
5. Payment of Expenses:
(a) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement and the Warrant Agreement,
whether or not the transactions contemplated hereunder or thereunder are
consummated or this Agreement and the Warrant Agreement are terminated,
including expenses, fees and taxes in connection with (i) the preparation and
filing of the Registration Statement, each Preliminary Prospectus, the
Prospectus, and any amendments or supplements thereto, and the printing and
furnishing of copies of each thereof to the Underwriters and to dealers
(including costs of mailing and shipment), (ii) the preparation, issuance and
delivery of the certificates for the Shares to the Underwriters, including any
stock or other transfer taxes or duties payable upon the sale of the Shares to
the Underwriters, (iii) the printing of this Agreement and any dealer agreements
and furnishing of copies of each to the Underwriters and to dealers (including
costs of mailing and shipment), (iv) the qualification of the Shares for
offering and sale under state laws that the Company and the Representative have
mutually agreed are appropriate and the determination of their eligibility for
investment under state law as aforesaid (including the legal fees and filing
fees and other disbursements of counsel for the Underwriters in an amount not to
exceed $15,000 assuming that the Common Stock is approved for quotation on the
Nasdaq National Market) and the printing and furnishing of copies of any blue
sky surveys or legal investment surveys to the Underwriters and to dealers, (v)
filing for review of the public offering of the Shares by the NASD, (vi) the
fees and expenses of any transfer agent or registrar for the Shares and
miscellaneous expenses referred to in the Registration Statement, (vii) the fees
and expenses incurred in connection with the inclusion of the Shares in the
Nasdaq National Market, (viii) its making road show presentations
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with respect to the offering of the Shares, (ix) preparing and distributing
bound volumes of transaction documents for the Representative and its legal
counsel and (x) the performance of the Company's other obligations hereunder
(including, without limitation, costs incurred in closing the purchase of the
Options Shares, if any). Upon the Representative's request, the Company will
provide funds in advance for filing fees.
(b) The Company agrees to reimburse the Representative for its
reasonable and documented out-of-pocket expenses in connection with the
performance of its activities under this Agreement, including, but not limited
to, costs such as printing, facsimile, courier service, direct computer
expenses, accommodations, travel and the fees and expenses of the Underwriters'
outside legal counsel and any other advisors, accountants, appraisers, etc., but
only if the Initial Shares are purchased by the Underwriters as provided in
Section 2(a) hereof. Such expenses shall not exceed $200,000 (not including fees
and expenses of counsel with respect to state securities or blue sky laws),
without the Company's permission.
6. Conditions of the Underwriters' Obligations: The obligations of the
Underwriters hereunder are subject to the accuracy of the representations and
warranties on the part of the Company in all material respects on the date
hereof and at the Closing Time and on each Date of Delivery, the performance by
the Company of its obligations hereunder in all material respects and to the
following further conditions:
(a) The Company shall furnish to the Underwriters at the Closing Time
and on each Date of Delivery an opinion of Arnold & Porter, counsel for the
Company, addressed to the Underwriters and dated the Closing Time and each Date
of Delivery and in form satisfactory to Gibson, Dunn & Crutcher LLP, counsel for
the Underwriters, stating that:
(i) the Company has in effect a valid election as a "business
development company" as provided for in Section 54 through 65 of the
Investment Company Act, and it meets all requirements to qualify as a
"business development company" under the Investment Company Act;
(ii) the Company has an authorized capitalization as set forth
in the Prospectus under the caption "Capitalization"; the outstanding
shares of capital stock of the Company and its Subsidiaries have been
duly and validly authorized and issued and are fully paid and
non-assessable; all of the outstanding shares of capital stock of
ACSCIC are directly or indirectly owned of record and beneficially by
the Company; 85% of the outstanding shares of capital stock of ACSLR
are directly or indirectly owned of record and beneficially by the
Company; except as disclosed in the Prospectus, there are no
outstanding (i) securities or obligations of the Company or any of its
Subsidiaries convertible into or exchangeable for any capital stock of
the Company or any such Subsidiary, (ii) warrants, rights or options to
subscribe for or purchase from the Company or any such Subsidiary any
such capital stock or any such convertible or exchangeable securities
or obligations, or (iii) obligations of the Company or any such
Subsidiary to issue any shares of capital stock, any such convertible
or exchangeable securities or obligation, or any such warrants, rights
or options;
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(iii) the Company and the Subsidiaries each has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its respective jurisdiction of incorporation with
full corporate power and authority to own its respective properties and
to conduct its respective business as described in the Registration
Statement and Prospectus and, in the case of the Company, to execute
and deliver this Agreement, the Warrant Agreement and the other
agreements described in the Prospectus, including but not limited to
the Employment Agreements between the Company and each of David
Gladstone, Malon Wilkus, Adam Blumenthal, Roland Cline and Stephen
Hester, and the Loan Accounting Agreement between the Company and Riggs
Bank, N.A., the Referral Agreement between the Company and Riggs Bank,
N.A., and the Referral Agreement between the Company and NCB
Development Corporation (the "Other Transaction Documents") and to
consummate the transactions described in each such agreement;
(iv) except as disclosed in the Prospectus, no Subsidiary is
prohibited or restricted, directly or indirectly, from paying dividends
to the Company, or from making any other distribution with respect to
such Subsidiary's capital stock or from paying the Company or any other
Subsidiary, any loans or advances to such Subsidiary from the Company
or such other Subsidiary, or from transferring any such Subsidiary's
property or assets to the Company or to any other Subsidiary; other
than as disclosed in the Registration Statement, to the Counsel's
knowledge the Company does not own, directly or indirectly, any capital
stock or other equity securities of any other corporation or any
ownership interest in any partnership, joint venture or other
association;
(v) [Reserved];
(vi) the execution, delivery and performance of this
Agreement, the Warrant Agreement and the Other Transaction Documents by
the Company and the consummation by the Company of the transactions
contemplated under this Agreement, the Warrant Agreement or the Other
Transaction Documents, as the case may be, do not and will not conflict
with, or result in any breach of, or constitute a default under (nor
constitute any event which with notice, lapse of time, or both would
constitute a breach of or default under), (i) any provisions of the
articles of incorporation, charter or by-laws of the Company or any
Subsidiary, (ii) to the counsel's knowledge, any provision of any
license, indenture, mortgage, deed of trust, loan or credit agreement
or other agreement or instrument to which the Company or any Subsidiary
is a party or by which any of them or their respective properties may
be bound or affected, or (iii) to the counsel's knowledge, any law or
regulation or any decree, judgment or order applicable to the Company
or any Subsidiary, except in the case of clause (ii) for such
conflicts, breaches or defaults which individually or in the aggregate
would not have a material adverse effect on the assets, operations,
business or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole; or result in the creation or imposition
of any lien, charge, claim or encumbrance upon any property or assets
of the Company or its Subsidiaries;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement of
the Company enforceable in
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accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, and by general principles of equity, and
except that enforceability of the indemnification and contribution
provisions set forth in Section 9 of this Agreement may be limited by
the federal or state securities laws of the United States or public
policy underlying such laws;
(viii) the Warrant Agreement and the Other Transaction
Documents have been duly authorized, executed, and delivered by the
Company and are legal, valid and binding agreements of the Company
enforceable in accordance with their terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, and by general principles of
equity; the issuance of the Warrants has been duly authorized; when
issued and delivered pursuant to the terms of the Warrant Agreement,
the Warrants will constitute legal, valid and binding obligations of
the Company enforceable in accordance with their terms, except as may
be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, and by general
principles of equity; the Warrant Shares have been duly reserved for
issuance upon exercise of the Warrants in accordance with the terms of
the Warrant Agreement; and the Warrants will conform in all material
respects to the description thereof in the Registration Statement and
the Prospectus;
(ix) no approval, authorization, consent or order of or filing
with any federal or state governmental or regulatory commission, board,
body, authority or agency is required in connection with the execution,
delivery and performance of this Agreement and the Other Transaction
Documents, the consummation of the transaction contemplated hereby and
thereby, the sale and delivery of the Shares by the Company as
contemplated hereby other than such as have been obtained or made under
the Securities Act and except that the counsel need express no opinion
as to any necessary qualification under the state securities or blue
sky laws of the various jurisdictions in which the Shares are being
offered by the Underwriters or any approval of the underwriting terms
and arrangements by the National Association of Securities Dealers,
Inc.;
(x) by virtue of its election as a "business development
company," the Company is not an investment company required to be
registered under the Investment Company Act;
(xi) the Shares, the Warrants, and the Warrant Shares have
been duly authorized and, when the Shares and the Warrant Shares have
been issued and duly delivered against payment therefor as contemplated
by this Agreement or the Warrant Agreement, as the case may be, the
Shares and the Warrant Shares will be validly issued, fully paid and
nonassessable, free and clear of any pledge, lien, encumbrance,
security interest, or other claim;
(xii) the issuance and sale of the Shares, the Warrants, and
the Warrant Shares by the Company is not subject to preemptive or other
similar rights arising by operation of law, under the articles of
incorporation or by-laws of the Company, under any agreement
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<PAGE>
known to the counsel to which the Company or any of its Subsidiaries
is a party or, to the counsel's knowledge, otherwise;
(xiii) the Shares and the Warrant Shares conform in all
material respects to the descriptions thereof contained in the
Registration Statement and Prospectus;
(xiv) the form of certificate used to evidence the Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the articles of
incorporation and by-laws of the Company and the requirements of the
Nasdaq National Market;
(xv) the Registration Statement has become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement has been issued and, to the counsel's knowledge,
no proceedings with respect thereto have been commenced or threatened;
(xvi) as of the effective date of the Registration Statement,
the Registration Statement and the Prospectus (except as to the
financial statements and other financial and statistical data contained
in such Registration Statement or Prospectus, as to which such counsel
need express no opinion) complied as to form in all material respects
with the requirements of the Securities Act and the Securities Act
Regulations;
(xvii) the statements under the captions "Capitalization,"
"Regulation", "Investment Policies," "Tax Status," "Description of
Capital Stock," and "Shares Eligible for Future Sale," in the
Registration Statement and the Prospectus, insofar as such statements
constitute a summary of the legal matters referred to therein,
constitute accurate summaries thereof in all material respects; and
(xviii) to the counsel's knowledge, there are no contracts or
documents of a character which are required to be filed as exhibits to
the Registration Statement or to be described or summarized in the
Prospectus which have not been so filed, summarized or described.
In addition, the counsel shall state that they have participated in
conferences with officers and other representatives of the Company, independent
public accountants of the Company and Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although the counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs
(xiii), (xvi), and (xvii) above), nothing has caused them to believe that the
Registration Statement, the Preliminary Prospectus or the Prospectus, as of
their respective effective or issue dates and as of the date of the counsel's
opinion, contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that, in each case, the counsel
need express no view with respect to the financial statements and other
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<PAGE>
financial and statistical data included in the Registration Statement,
Preliminary Prospectus or Prospectus).
(b) The Representative shall have received from Ernst & Young LLP,
letters dated, respectively, as of the date of this Agreement, the Closing Time
and each Date of Delivery, as the case may be, addressed to the Representative
as representative of the Underwriters and in form and substance satisfactory to
the Representative.
(c) The Underwriters shall have received at the Closing Time and on
each Date of Delivery the favorable opinion of Gibson, Dunn & Crutcher LLP,
dated the Closing Time or such Date of Delivery, addressed to the Representative
and in form and substance satisfactory to the Representative.
(d) No amendment or supplement to the Registration Statement or
Prospectus shall have been filed to which the Underwriters shall have objected
in writing.
(e) Prior to the Closing Time and each Date of Delivery (i) no stop
order suspending the effectiveness of the Registration Statement or any order
preventing or suspending the use of any Preliminary Prospectus or Prospectus has
been issued by the Commission, and no suspension of the qualification of the
Shares for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes, has occurred; and (ii)
the Registration Statement and the Prospectus shall not contain an untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) Between the time of execution of this Agreement and the Closing
Time or the relevant Date of Delivery (i) no material and unfavorable change in
the assets, operations, business, prospects or condition (financial or
otherwise) of the Company and its Subsidiaries taken as a whole shall occur or
become known (whether or not arising in the ordinary course of business), and
(ii) no transaction which is material and unfavorable to the Company shall have
been entered into by the Company or any of its Subsidiaries.
(g) At the Closing Time, the Warrant Agreement and the Other
Transaction Documents shall have been entered into and delivered by all required
parties.
(h) At the Closing Time, the Shares shall have been approved for
inclusion in the Nasdaq National Market.
(i) The NASD shall not have raised any objection with respect to the
fairness and reasonableness of the underwriting terms and arrangements.
(j) The Representative shall have received letters from Malon Wilkus
and each person purchasing shares of the Company's Common Stock in the Direct
Offering described in the Prospectus, in form and substance satisfactory to the
Representative, confirming that for a period of 180 days after the Closing Time,
such persons will not directly or indirectly (i) offer, pledge to secure any
obligation due on or within 180 days after the Closing Time, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option for
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<PAGE>
the sale of, or otherwise dispose of or transfer (other than a disposition or
transfer pursuant to which the acquiror or transferee is subject to the
restrictions on disposition and transfer set forth in this Section 6(j) to the
same extent as such stockholder delivering a letter hereunder), directly or
indirectly, any share of Common Stock (other than by participating as selling
stockholders in a registered offering of Common Stock offered by the Company
with the consent of the Representative) or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise, without the prior written consent of the Representative, which
consent may be withheld at the sole discretion of the Representative.
Notwithstanding the foregoing, Malon Wilkus may enter into a bona fide pledge of
shares to a third party commercial lender for the purpose of financing the
purchase by him of shares of the Company's Common Stock as part of the Direct
Offering.
(l) The Company will, at the Closing Time and on each Date of Delivery,
deliver to the Underwriters a certificate of its two principal executive
officers, David Gladstone and Malon Wilkus, to the effect that, to each of such
officer's knowledge, the representations and warranties of the Company set forth
in this Agreement and the conditions set forth in paragraphs (e), (f), (g) and
(h) have been met and are true and correct as of such date.
(m) The Company shall have furnished to the Underwriters such other
documents and certificates as to the accuracy and completeness of any statement
in the Registration Statement and the Prospectus, the representations,
warranties and statement of the Company contained herein and in the Warrant
Agreement, and the performance by the Company of its covenants contained herein
and therein, and the fulfillment of any conditions contained herein or therein,
as of the Closing Time or any Date of Delivery as the Underwriters may
reasonably request.
(n) The Company shall perform such of its obligations under this
Agreement and the Warrant Agreement as are to be performed by the terms hereof
and thereof at or before the Closing Time or the relevant Date of Delivery.
(o) Neither the Commission nor Nasdaq have suspended trading in any
securities of the Company.
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<PAGE>
7. Termination:
(a) The obligations of the several Underwriters hereunder shall be
subject to termination in the absolute discretion of the Representative, at any
time prior to the Closing Time or any Date of Delivery, (i) if any of the
conditions specified in Section 6 shall not have been fulfilled when and as
required by this Agreement to be fulfilled, or (ii) if there has occurred
outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic, political or other conditions the
effect of which on the financial markets of the United States is such as to make
it, in the judgment of the Representative, impracticable to market the Shares or
enforce contracts for the sale of the Shares, or (iii) if trading generally on
the New York Stock Exchange or in the Nasdaq over-the-counter market has been
suspended (including automatic halt in trading pursuant to market-decline
triggers other than those in which solely program trading is temporarily
halted), or limitations on prices for trading (other than limitations on hours
or numbers of days of trading) have been fixed, or maximum ranges for prices for
securities have been required, by such exchange or the NASD or Nasdaq or by
order of the Commission or any other governmental authority, or (iv) any federal
or state statute, regulation, rule or order of any court or other governmental
authority has been enacted, published, decreed or otherwise promulgated which in
the reasonable opinion of the Representative materially adversely affects or
will materially adversely affect the business or operations of the Company, or
(v) any action has been taken by any federal, state or local government or
agency in respect of its monetary or fiscal affairs which in the reasonable
opinion of the Representative has a material adverse effect on the securities
markets in the United States.
(b) If the Representative elects to terminate this Agreement as
provided in this Section 7, the Company and the Underwriters shall be notified
promptly by telephone, promptly confirmed by facsimile.
(c) At the Company's request, the Representative will refrain from
exercising its right to terminate this Agreement pursuant to Section 7(a)(i) of
this Agreement for a period of up to three business days, in order for the
Company to fulfill one or more of the conditions set forth in Section 6 of this
Agreement. This provision shall not apply, however, if the Representative
determines that any such condition cannot reasonably be expected to be fulfilled
within three business days.
(d) If the sale to the Underwriters of the Shares, as contemplated by
this Agreement, is not carried out by the Underwriters for any reason permitted
under this Agreement or if such sale is not carried out because the Company
shall be unable to comply in all material respects with any of the terms of this
Agreement, the Company shall not be under any obligation or liability under this
Agreement (except to the extent provided in Sections 5 and 9 hereof) and the
Underwriters shall be under no obligation or liability to the Company under this
Agreement (except to the extent provided in Section 9 hereof) or to one another
hereunder.
8. Increase in Underwriters' Commitments: If any Underwriter shall
default at the Closing Time or on a Date of Delivery in its obligation to take
up and pay for the Shares to be purchased by it under this Agreement on such
date the Representative shall have the right, within 36 hours after such
default, to make arrangements for one or more of the non-defaulting
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Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Shares which such Underwriter shall have agreed but failed to take up and
pay for (the "Defaulted Shares"). Absent the completion of such arrangements
within such 36 hour period, (i) if the total number of Defaulted Shares does not
exceed 10% of the total number of Shares to be purchased on such date, each
non-defaulting Underwriter shall take up and pay for (in addition to the number
of Shares which it is otherwise obligated to purchase on such date pursuant to
this Agreement) the portion of the total number of Shares agreed to be purchased
by the defaulting Underwriter on such date in the proportion that its
underwriting obligations hereunder bears to the underwriting obligations of all
non-defaulting Underwriters; and (ii) if the total number of Defaulted Shares
exceeds 10% of such total, the Representative may terminate this Agreement by
notice to the Company, without liability to any non-defaulting Underwriter.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Shares hereunder on such date unless all of the Shares to be
purchased on such date are purchased on such date by the Underwriters (or by
substituted Underwriters selected by the Representative with the approval of the
Company or selected by the Company with the approval of the Representative).
If a new Underwriter or Underwriters are substituted for a defaulting
Underwriter in accordance with the foregoing provision, the Company or the
non-defaulting Underwriters shall have the right to postpone the Closing Time or
the relevant Date of Delivery for a period not exceeding five business days in
order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and
include any Underwriter substituted under this Section 8 with the like effect as
if such substituted Underwriter had originally been named in this Agreement.
9. Indemnity and Contribution by the Company and the Underwriters:
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and any person who controls any such Underwriter within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any loss, expense, liability, damage or claim (including the reasonable
cost of investigation) which, jointly or severally, any such Underwriter or
controlling person may incur under the Securities Act, the Exchange Act or
otherwise, insofar as such loss, expense, liability, damage or claim arises out
of or is based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or in the Registration
Statement as amended by any post-effective amendment thereof by the Company) or
in a Prospectus (the term Prospectus for the purpose of this Section 9 being
deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus
as amended or supplemented by the Company), or arises out of or is based upon
any omission or alleged omission to state a material fact required to be stated
in either such Registration Statement or Prospectus or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading, except insofar as any such loss, expense, liability,
damage or claim arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
and in conformity with information
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furnished in writing by the Underwriters through the Representative to the
Company expressly for use in such Registration Statement or such Prospectus,
provided, however, that the indemnity agreement contained in this subsection (a)
with respect to the Preliminary Prospectus or the Prospectus shall not inure to
the benefit of an Underwriter (or to the benefit of any person controlling such
Underwriter) with respect to any person asserting any such loss, expense,
liability, damage or claim which is the subject thereof if the Prospectus or any
supplement thereto prepared with the consent of the Representative and furnished
to the Underwriters prior to the Closing Time corrected any such alleged untrue
statement or omission and if such Underwriter failed to send or give a copy of
the Prospectus or supplement thereto to such person at or prior to the written
confirmation of the sale of Shares to such person, unless such failure resulted
from noncompliance by the Company with Section 4(b).
If any action is brought against an Underwriter or controlling person
in respect of which indemnity may be sought against the Company pursuant to the
preceding paragraph, such Underwriter shall promptly notify the Company in
writing of the institution of such action and the Company shall assume the
defense of such action, including the employment of counsel and payment of
expenses, provided, however, that any failure or delay to so notify the Company
will not relieve the Company of any obligation hereunder, except to the extent
that its ability to defend is actually impaired by such failure or delay. Such
Underwriter or controlling person shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of such Underwriter or such controlling person unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action or the Company shall not have
employed counsel to have charge of the defense of such action within a
reasonable time or such indemnified party or parties shall have reasonably
concluded (based on the advice of counsel) that there may be defenses available
to it or them which are different from or additional to those available to the
Company and which counsel to the Underwriter believes may present a conflict for
counsel representing the Company and the Underwriter (in which case the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties), in any of which events such fees and expenses
shall be borne by the Company and paid as incurred (it being understood,
however, that the Company shall not be liable for the expenses of more than one
separate firm of attorneys for the Underwriters or controlling persons in any
one action or series of related actions in the same jurisdiction representing
the indemnified parties who are parties to such action). Anything in this
paragraph to the contrary notwithstanding, the Company shall not be liable for
any settlement of any such claim or action effected without the its written
consent.
(b) Each Underwriter agrees, severally and not jointly, to indemnify,
defend and hold harmless the Company, its directors, the officers that signed
the Registration Statement and any person who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any loss, expense, liability, damage or claim (including the
reasonable cost of investigation) which, jointly or severally, the Company or
any such person may incur under the Securities Act, the Exchange Act or
otherwise, insofar as such loss, expense, liability, damage or claim arises out
of or is based upon any untrue statement or alleged untrue statement of a
material fact contained in and in conformity with information furnished in
writing by such Underwriter through the Representative to the Company expressly
for use in the Registration Statement (or in the Registration Statement as
amended by any post-
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effective amendment thereof by the Company) or in a Prospectus, or arises out of
or is based upon any omission or alleged omission to state a material fact in
connection with such information required to be stated either in such
Registration Statement or Prospectus or necessary to make such information, in
the light of the circumstances under which made, not misleading. The statements
set forth in the last paragraph on the cover page and under the caption
"Underwriting" in the Preliminary Prospectus and the Prospectus (to the extent
such statements relate to the Underwriters) constitute the only information
furnished by or on behalf of any Underwriter through the Representative to the
Company for purposes of Section 3(m) and this Section 9.
If any action is brought against the Company or any such person in
respect of which indemnity may be sought against any Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify the
Representative in writing of the institution of such action and the
Representative, on behalf of the Underwriters, shall assume the defense of such
action, including the employment of counsel and payment of expenses, provided,
however, that any failure or delay to so notify the Representative will not
relieve any such Underwriter of any obligation hereunder, except to the extent
that its ability to defend is actually impaired by such failure or delay. The
Company or such person shall have the right to employ its own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
the Company or such person unless the employment of such counsel shall have been
authorized in writing by the Representative in connection with the defense of
such action or the Representative shall not have employed counsel to have charge
of the defense of such action within a reasonable time or such indemnified party
or parties shall have reasonably concluded (based on the advice of counsel) that
there may be defenses available to it or them which are different from or
additional to those available to the Underwriters (in which case the
Representative shall not have the right to direct the defense of such action on
behalf of the indemnified party or parties), in any of which events such fees
and expenses shall be borne by such Underwriter and paid as incurred (it being
understood, however, that the Underwriters shall not be liable for the expenses
of more than one separate firm of attorneys in any one action or series of
related actions in the same jurisdiction representing the indemnified parties
who are parties to such action). Anything in this paragraph to the contrary
notwithstanding, no Underwriter shall be liable for any settlement of any such
claim or action effected without the written consent of the Representative.
(c) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 9 in respect of any losses, expenses, liabilities, damages or claims
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, expenses,
liabilities, damages or claims (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if (but
only if) the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and of the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, expenses,
liabilities, damages or claims, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total proceeds from the offering (net of underwriting discounts and
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commissions but before deducting expenses) received by the Company bear to the
underwriting discounts and commissions received by the Underwriters. The
relative fault of the Company on the one hand and of the Underwriters on the
other shall be determined by reference to, among other things, whether the
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission relates to information supplied by the Company or by the
Underwriters and the parties', relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, claims, damages and
liabilities referred to above shall be deemed to include any legal or other fees
or expenses reasonably incurred by such party in connection with investigating
or defending any claim or action.
(d) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in subsection (c)(i) and, if applicable
(ii), above. Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the underwriting
discounts and commissions applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to their respective underwriting commitments
and not joint.
10. Survival: The indemnity and contribution agreements contained in
Section 9 and the covenants, warranties and representations of the Company
contained in Sections 3, 4 and 5 of this Agreement shall remain in full force
and effect regardless of any investigation made by or on behalf of any
Underwriter, or any person who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, or by or on
behalf of the Company, its directors and officers or any person who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and shall survive any termination of this Agreement or the
sale and delivery of the Shares. The Company and each Underwriter agree promptly
to notify the others of the commencement of any litigation or proceeding against
it and, in the case of the Company, against any of the Company's officers and
directors, in connection with the sale and delivery of the Shares, or in
connection with the Registration Statement or Prospectus.
11. Notices: Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered to Friedman,
Billings, Ramsey & Co., Inc., 1001 19th Street North, Arlington, Virginia 22209,
Attention: Syndicate Department; if to the Company, shall be sufficient in all
respects if delivered to the Company at the offices of the Company at 3 Bethesda
Metro Center, Suite 860, Bethesda, Maryland 20814, Attention: President.
12. Governing Law; Headings: THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES. The
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section headings in this Agreement have been inserted as a matter of convenience
of reference and are not a part of this Agreement.
13. Parties at Interest: The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters, the Company and the controlling
persons, directors and officers referred to in Sections 9 and 10 hereof, and
their respective successors, assigns, executors and administrators. No other
person, partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.
14. Counterparts: This Agreement may be signed by the parties in
counterparts which together shall constitute one and the same agreement among
the parties.
24
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company and the Underwriters, please so indicate in the space provided below for
the purpose, whereupon this Agreement shall constitute a binding agreement among
the Company and the Underwriters.
Very truly yours,
AMERICAN CAPITAL STRATEGIES, LTD.
-------------------------------
By:
Title:
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY &
CO., INC.
- -------------------------------------
By:
Title:
For themselves and as Representative
of the other Underwriters named on
Schedule I hereto.
25
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Number of Initial
Underwriter Shares to be Purchased
- ----------- ----------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc...................................................... 6,540,000
Bear, Stearns & Co. Inc.................................................................... 125,000
Keefe, Bruyette & Woods, Inc............................................................... 125,000
Montgomery Securities...................................................................... 125,000
PaineWebber Incorporated................................................................... 125,000
Smith Barney, Inc.......................................................................... 125,000
Advest, Inc................................................................................ 65,000
J.C. Bradford & Co......................................................................... 65,000
Cleary Gull Reiland & McDevitt Inc......................................................... 65,000
Cruttenden Roth Incorporated............................................................... 65,000
Equitable Securities Corporation........................................................... 65,000
Everen Securities, Inc..................................................................... 65,000
Fahnestock & Co. Inc....................................................................... 65,000
Ferris, Baker Watts, Inc................................................................... 65,000
J.J.B. Hillard, W.L. Lyons, Inc............................................................ 65,000
Legg Mason Wood Walker, Incorporated...................................................... 65,000
Morgan Keegan & Company, Inc............................................................... 65,000
The Ohio Company........................................................................... 65,000
Parker/Hunter Incorporated................................................................. 65,000
Scott & Stringfellow, Inc.................................................................. 65,000
The Seidler Companies Incorporated......................................................... 65,000
Stephens Inc............................................................................... 65,000
Stifel, Nicolaus & Company, Incorporated.................................................. 65,000
Sutro & Co. Incorporated................................................................... 65,000
Tucker Anthony Incorporated................................................................ 65,000
---------
Total................................................................................. 8,400,000
---------
---------
</TABLE>
<PAGE>
Exhibit A
================================================================================
AMERICAN CAPITAL STRATEGIES, LTD.
and
[NAME OF WARRANT AGENT],
as Warrant Agent
----------------------------------------
WARRANT AGREEMENT
Dated as of ----------, 1997
----------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
-----
PARTIES .............................................. 1
RECITALS .............................................. 1
ARTICLE I. ISSUANCE, EXECUTION AND TRANSFER OF
WARRANT CERTIFICATES.......................... 2
1.01. Form of Warrant Certificates.................. 2
1.02. Execution of Warrant Certificates............. 2
1.03. Issuance, Delivery and Registration of
Warrant Certificates.......................... 3
1.04. Exercise of and Adjustments to the
Optional Warrants............................. 3
1.05 Transfer and Exchange of Warrant
Certificates.................................. 3
ARTICLE II. SHARES OF COMMON STOCK ISSUABLE, WARRANT
PRICE, EXPIRATION DATE AND EXERCISE OF
WARRANTS...................................... 4
2.01. Warrant Shares Issuable; Exercise Price;
Expiration Date............................... 4
2.02. Exercise of Warrants.......................... 5
2.03. No Fractional Shares to Be Issued............. 6
2.04. Cancellation of Warrants...................... 6
ARTICLE III. MERGER, ACQUISITION, ETC.; RESERVATION OF
SHARES OF COMMON STOCK; PAYMENT OF TAXES...... 7
3.01. Adjustment of Exercise Price and Number of
Warrant Shares................................ 7
3.02. Exercise Price Adjustment Formula............. 7
3.03. Constructive Issuance of Shares............... 7
3.04. Stock Dividends............................... 10
3.05. Extraordinary Dividends and Distributions..... 10
(i)
<PAGE>
Page
-------
3.06. Stock Splits and Reverse Stock Splits......... 10
3.07. Reorganizations and Asset Sales............... 11
3.08. Covenant to Reserve Shares for Issuance on
Exercise...................................... 11
3.09. Warrant Agent Not Responsible for Validity
of Shares..................................... 12
3.10. Statements on Warrants........................ 12
3.11. Notice of Change in Securities Issuable....... 12
3.12. References to Common Stock.................... 13
ARTICLE IV. OTHER PROVISIONS RELATING TO RIGHTS OF
HOLDERS OF WARRANTS........................... 13
4.01. No Rights as Shareholders..................... 13
4.02. Mutilated or Missing Warrant Certificates..... 13
4.03. Liquidation, Merger, etc.; Notice to
Warrantholders................................ 14
ARTICLE V. CONCERNING THE WARRANT AGENT.................. 15
5.01. Change of Warrant Agent....................... 15
5.02. Compensation; Further Assurances.............. 16
5.03. Reliance on Counsel........................... 17
5.04. Proof of Actions Taken........................ 17
5.05. Correctness of Statements..................... 17
5.06. Validity of Agreement......................... 17
5.07. Use of Agents................................. 18
5.08. Liability of Warrant Agent.................... 18
5.09. Legal Proceedings............................. 18
5.10. Other Transactions in Shares of the Company... 18
5.11. Actions as Agent.............................. 18
(ii)
<PAGE>
Page
-------
5.12. Appointment and Acceptance of Agency.......... 19
ARTICLE VI. MISCELLANEOUS................................. 19
6.01. Reservation of Shares......................... 19
6.02. Registration of Warrant Shares................ 19
6.03. Enforcement of Warrant Rights................. 21
6.04. Negotiability and Ownership................... 21
6.05. Warrant Legend................................ 21
6.06. Supplements and Amendments.................... 22
6.07. Covenant as to Status as a Business
Development Company........................... 23
6.08. Successors and Assigns........................ 23
6.09. Notices....................................... 23
6.10. Applicable Law................................ 24
6.11. Benefits of this Agreement.................... 24
6.12. Registered Warrantholders..................... 24
6.13. Inspection of Agreement....................... 24
6.14. Headings...................................... 25
6.15. Counterparts.................................. 25
SIGNATURES AND SEALS....................................... 26
EXHIBIT A. FORM OF FIRM WARRANT CERTIFICATE.............. A-1
EXHIBIT B. FORM OF OPTIONAL WARRANT CERTIFICATE.......... B-1
(iii)
<PAGE>
WARRANT AGREEMENT
This Agreement is made as of ____________, 1997 between American
Capital Strategies, Ltd., a Delaware corporation (the "Company"), and [Name of
Warrant Agent] (the "Warrant Agent").
RECITALS
A. The Company proposes to sell, pursuant to an Underwriting Agreement
dated ____________, 1997 between the Company and Friedman, Billings, Ramsey &
Co., Inc. ("FBR") (the "Underwriting Agreement"), 8,400,000 shares (the "Initial
Shares") of Common Stock, par value $.01 per share, of the Company (the "Common
Stock"), to certain underwriters, for which FBR is acting as representative (the
"Underwriters") and up to 1,260,000 (the "Option Shares") of Common Stock, to
cover over-allotments, if any.
B. The Company deems it advisable, in consideration for the services
rendered to the Company by FBR in connection with the offering of the Common
Stock, to issue to FBR warrants (the "Firm Warrants") entitling the holders
thereof to purchase an aggregate of 442,751 shares of Common Stock. The Company
also deems it advisable, for the same consideration, to issue to FBR certain
additional warrants (the "Optional Warrants") entitling the holders thereof to
purchase an aggregate of 50,400 shares of Common Stock, subject to certain
adjustments as provided for in Section 1.04. (The Firm Warrants and the Optional
Warrants shall together be referred to as the "Warrants".) The shares of Common
Stock issued upon exercise of the Warrants are referred to as the "Warrant
Shares".
C. The Company desires to enter into this Agreement to set forth the
terms and conditions of the Warrants and the rights of the holders thereof.
D. The Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to act in connection with the
issuance, exchange, transfer, substitution and exercise of Warrants;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements herein contained, the parties hereto agree as follows:
1
<PAGE>
ARTICLE I
ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF
WARRANT CERTIFICATES
SECTION 1.01. Form of Warrant Certificates. The Warrants shall be
evidenced by certificates in temporary or definitive fully registered form (the
"Warrant Certificates") substantially in the form of Exhibit A in the case of
the Firm Warrants or, in the case of the Optional Warrants, in the form of
Exhibit B, and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon as may be required to comply
with any law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any securities exchange, or to conform to usage, or as
consistently herewith may be determined by the officers executing such Warrant
Certificates as evidenced by their execution of the Warrant Certificates. Each
Warrant Certificate shall evidence the right, subject to the provisions of this
Agreement and of the Warrant Certificate, to purchase the number of shares of
Common Stock stated therein, adjusted as provided for in Article III, upon
payment of the Exercise Price (as defined in Section 2.01).
SECTION 1.02. Execution of Warrant Certificates. Each Warrant
Certificate, whenever issued, shall be dated as of the date of countersignature
thereof by the Warrant Agent either upon initial issuance or upon exchange,
substitution or transfer, shall be signed manually by, or bear the facsimile
signature of, the Chairman of the Board or the President or a Treasurer or a
Vice President of the Company, shall have the Company's seal or a facsimile
thereof affixed or imprinted thereon and shall be attested by the manual or
facsimile signature of the Secretary or an Assistant Secretary of the Company.
In case any officer of the Company whose manual or facsimile signature has been
placed upon any Warrant Certificate shall have ceased to be such before such
Warrant Certificate is issued, it may be issued with the same effect as if such
officer had not ceased to be such at the date of issuance. Warrant Certificates
shall be countersigned manually by the Warrant Agent (or successor Warrant
Agent) and shall not be valid for any purpose unless so countersigned. Warrant
Certificates may be countersigned by the Warrant Agent (or successor Warrant
Agent), however, notwithstanding that the persons whose manual or facsimile
signatures appear thereon as proper officers of the Company shall have ceased to
be such officers at the time of such countersignature, issuance or delivery. Any
Warrant Certificate may be signed on behalf of the Company by any person who, at
the actual date of the execution of such Warrant Certificate, shall be a proper
officer of the Company to sign such Warrant
2
<PAGE>
Certificate, although at the date of the execution of this Agreement any such
person was not such an officer.
SECTION 1.03. Issuance, Delivery and Registration of Warrant
Certificates. Upon receipt of written instructions from the Company, the Warrant
Agent shall issue and deliver, at the closing of the sale of the Initial Shares
to the Underwriters as provided in the Underwriting Agreement, to FBR or its
designees, who shall be persons to whom the Warrants could be transferred under
Section 6.04: (a) a Warrant Certificate representing the Firm Warrants, in
substantially the form of Exhibit A, and (b) a Warrant Certificate representing
the Optional Warrants, substantially in the form of Exhibit B. Additionally, the
Warrant Agent shall countersign and deliver Warrant Certificates upon exchange,
transfer or substitution for one or more previously countersigned Warrant
Certificates as hereinafter provided. The Warrant Agent shall maintain books for
the registration of transfer and registration of Warrant Certificates (the
"Warrant Register").
SECTION 1.04. Exercise of and Adjustments to the Optional Warrants. The
Optional Warrants shall not be exercisable in whole or in part until the
Expiration Date, which shall be the day sixty days following the date of the
Underwriting Agreement between the Company and FBR. The number of shares of
Common Stock which a holder of the Optional Warrants is entitled to receive upon
the exercise of the Optional Warrants is subject to certain adjustments. In the
event that FBR fails to exercise its right to purchase the total maximum number
of Option Shares provided for in the Underwriting Agreement, then the Optional
Warrants shall cease to be exercisable with respect to that number of shares of
Common Stock equal to (i) 1,260,000, minus (ii) the total number of Option
Shares purchased by and delivered to FBR, multiplied by (iii) 0.04. In the event
that FBR does not purchase any Option Shares within sixty days following the
date hereof, the Optional Warrants will expire in their entirety. The Warrant
Agent may not deliver Warrant Shares unless and until the Warrant Agent receives
written notice signed by both the Company and FBR which sets out the number of
shares of Common Stock which the holder of the Optional Warrants will be
entitled to receive upon exercise of the Optional Warrants, after making the
adjustments described in this Section 1.04.
SECTION 1.05. Transfer and Exchange of Warrant Certificates. The
Warrant Agent, from time to time, shall register the transfer of any outstanding
Warrant Certificates in the Warrant Register upon surrender at the office or
agency maintained in The City of New York for such purpose or at the principal
office of the Warrant Agent (or successor Warrant
3
<PAGE>
Agent) of Warrant Certificates accompanied by a written instrument or
instruments of transfer, in form satisfactory to the Company and the Warrant
Agent, duly executed by the Warrantholder or the Warrantholders' attorney duly
authorized in writing, and evidence, satisfactory to the Warrant Agent, of
compliance with the provisions of Section 6.04. Upon any such registration of
transfer, a new Warrant Certificate shall be countersigned by the Warrant Agent
and issued to the transferee and the surrendered Warrant Certificate shall be
canceled by the Warrant Agent. Warrant Certificates may be exchanged at the
option of the holder thereof, upon surrender, properly endorsed, at the office
or agency maintained in The City of New York for such purpose or at the
principal office of the Warrant Agent (or successor Warrant Agent), with written
instructions, for other Warrant Certificates countersigned by the Warrant Agent
entitling the registered holder thereof, subject to the provisions thereof and
of this Agreement, to purchase in the aggregate a like number of shares of
Common Stock as the Warrant Certificate so surrendered. In the case of a Warrant
Certificate representing Optional Warrants, if such Warrant Certificate is
exchanged for a new certificate prior to the Expiration Date, the newly issued
Warrant Certificate shall also represent Optional Warrants. The Company or the
Warrant Agent may require the payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any such exchange or
transfer.
ARTICLE II
SHARES OF COMMON STOCK ISSUABLE, EXERCISE PRICE,
EXPIRATION DATE AND EXERCISE OF WARRANTS
SECTION 2.01. Warrant Shares Issuable; Exercise Price; Expiration Date.
Each Warrant Certificate shall entitle the registered holder thereof, subject to
the provisions thereof and of this Agreement, to purchase from the Company at
any time from the effective date (the "Effective Date") of the registration
statement filed on Form N-2 under the Securities Act of 1933, as amended (the
"Securities Act") (or, in the case of the Optional Warrants, at any time from
the Expiration Date) to the close of business on the fifth anniversary of such
date (or, if such date is not a Business Day (as defined below), the first
following Business Day) the number of shares of Common Stock stated therein,
adjusted as provided in Article III, upon payment of $15.00 per share (which
price is equal to the initial public offering price), adjusted as provided in
Article III. Such price, as in effect from time to time as provided in Article
III, is referred to as the "Exercise Price". Each share of Common Stock issuable
upon exercise of a Warrant is referred to as a "Warrant Share". Each Warrant not
exercised during the period set forth above shall become void, and all rights
thereunder and all rights in respect thereof under this Agreement shall
4
<PAGE>
cease, at the end of such period. For purposes of this Agreement, the term
"Business Day" means any day of the week other than a Saturday, Sunday or a day
which in The City of New York or in the city in which the principal office of
the Warrant Agent is located shall be a legal holiday or a day on which banking
institutions are authorized or required by law to close.
SECTION 2.02. Exercise of Warrants. (a) Warrants may be exercised by
surrendering the Warrant Certificate evidencing such Warrants at the office or
agency maintained in The City of New York for such purpose or at the principal
office of the Warrant Agent (or successor Warrant Agent), with the Election to
Exercise form set forth on the reverse of the Warrant Certificate duly completed
and signed, and by paying in full to the Warrant Agent for the account of the
Company (i) in cash, or (ii) by certified or official bank check, or (iii) by
any combination of the foregoing, the Exercise Price for each Warrant Share as
to which Warrants are exercised and any applicable taxes, other than taxes that
the Company is required to pay hereunder. A Warrantholder may exercise such
holder's Warrant for the full number of Warrant Shares issuable upon exercise
thereof or any lesser number of whole Warrants Shares.
(b) As soon as practicable after the exercise of any Warrants and
payment by the Warrantholder of the full Exercise Price for the Warrant Shares
as to which such Warrants are then being exercised, the Warrant Agent shall
requisition from the transfer agent of the shares of Common Stock and deliver to
or upon the order of such Warrantholder a certificate or certificates for the
number of full Warrant Shares to which such Warrantholder is entitled,
registered in the name of such Warrantholder or as such Warrantholder shall
direct. Fractional Warrant Shares that otherwise would be issuable in respect of
such exercise shall be paid in cash as provided in Section 2.03, and the number
of Warrant Shares issuable to such Warrantholder shall be rounded down to the
next nearest whole number. If such Warrant Certificate shall not have been
exercised in full, the Warrant Agent on behalf of the Company will issue to such
Warrantholder a new Warrant Certificate exercisable for the number of shares of
Common Stock as to which such Warrant shall not have been exercised. The Warrant
Agent on behalf of the Company will cancel all Warrants so surrendered.
(c) Each person in whose name any such certificate for Warrant Shares
is issued shall for all purposes be deemed to have become the holder of record
of such Warrant Shares on the date on which the Warrant Certificate was
surrendered to the Warrant Agent and payment of the Exercise Price and any
applicable taxes was made to the Warrant Agent for the account
5
<PAGE>
of the Company, irrespective of the date of delivery of such certificate for
Warrant Shares.
(d) All Warrant Shares will be duly authorized, validly issued, fully
paid and nonassessable. The Company will pay all documentary stamp taxes
attributable to the initial issuance of Warrant Shares. The Company will not be
required, however, to pay any tax imposed in connection with any transfer
involved in the issue of the Warrant Shares in a name other than that of the
Warrantholder. In such case, the Company will not be required to issue any
certificate for Warrant Shares until the person or persons requesting the same
shall have paid to the Company the amount of any such tax or shall have
established to the Company's satisfaction that the tax has been paid or that no
tax is due.
(e) Promptly after the Warrant Agent shall have taken the action
required in Section 2.02(b) or at such later time as may be mutually agreeable
to the Company and the Warrant Agent, the Warrant Agent shall account to the
Company with respect to any Warrants exercised and shall pay to the Company the
amount of money received by it upon the exercise of Warrants.
SECTION 2.03. No Fractional Shares to Be Issued. If more than one
Warrant Certificate shall be surrendered for exercise at one time by the same
holder, the number of full Warrant Shares which shall be issuable upon exercise
thereof shall be computed on the basis of the aggregate number of Warrants so
surrendered. The Warrantholders, by their acceptance of the Warrant
Certificates, expressly waive their right to receive any fraction of a Warrant
Share or a share certificate representing a fraction of a Warrant Share. In lieu
thereof, the Company will purchase such fractional interest for an amount in
cash equal to the current market value of such fractional interest, as
reasonably determined by the Board of Directors of the Company.
SECTION 2.04. Cancellation of Warrants. The Warrant Agent shall cancel
any Warrant Certificate delivered to it for exercise, in whole or in part, or
delivered to it for transfer, exchange or substitution, and no Warrant
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. On request of the Company, the Warrant
Agent shall destroy canceled Warrant Certificates held by it and shall deliver
its certificates of destruction to the Company. If the Company shall acquire any
of the Warrants, such acquisition shall not operate as a redemption or
termination of the right represented by such Warrants unless and until the
Warrant Certificates evidencing such Warrants are surrendered to the Warrant
Agent for cancellation.
6
<PAGE>
ARTICLE III
ADJUSTMENT OF EXERCISE PRICE; MERGER, ACQUISITION,
ETC.; RESERVATION OF SHARES OF COMMON STOCK; PAYMENT
OF TAXES
SECTION 3.01. Adjustment of Exercise Price and Number of Warrant
Shares. (a) The Exercise Price shall be subject to adjustment from time to time
as provided in this Article III. After each adjustment of the Exercise Price,
each Warrantholder shall at any time thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant to the
provisions of such Warrant immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment.
(b) For purposes of making adjustments of the Exercised Price pursuant
to this Article III, the "Current Market Price" shall be determined as of the
date of the issuance or sale giving rise to the adjustment and shall be equal to
the last sale price with respect to shares of Common Stock as reported in the
consolidated transaction reporting system on that date. If there are no reported
transactions in the consolidated transaction reporting system on that date, the
"Current Market Price" shall be the average of the highest current independent
bid and lowest current independent offer for the shares in the consolidated
transaction reporting system.
SECTION 3.02. Exercise Price Adjustment Formula. If the Company issues
or sells any shares of Common Stock for a price per share that is less than the
Current Market Price in effect at the time of such issuance or sale, the
Exercise Price immediately shall be adjusted by multiplying the Exercise Price
by (a) an amount equal to the sum of (i) the number of shares of Common Stock
outstanding and deemed (in accordance with the provisions of Section 3.03) to be
outstanding immediately prior to such issuance and sale multiplied by the
Current Market Price at the time of such issuance or sale and (ii) the total
consideration received and deemed (in accordance with the provisions of Section
3.03) to be received by the Company upon such issuance and sale and (b) dividing
the result by an amount equal to (i) the sum of (A) the amount determined in (a)
and (B) the product of the number of shares issued or sold multiplied by the
Current Market Price, minus (ii) the consideration received.
SECTION 3.03. Constructive Issuance of Shares. (a) If the Company
grants any rights or options (collectively referred to as "options") to
subscribe for or purchase any shares of Common Stock or any securities
(collectively referred to as "convertible securities") convertible into or
exchangeable for shares of Common Stock, whether or not any such options or the
right to convert or exchange any such convertible securities are immediately
exercisable, and the price per share for which shares of Common Stock are
issuable upon the exercise of such options or upon conversion or exchange of
such convertible securities (determined by dividing (i) the total consideration
received or receivable by the Company for the granting of such options, plus any
additional consideration payable to the Company upon the exercise of such
options, plus in the case of any such options which relate to convertible
securities any additional
7
<PAGE>
consideration payable to the Company upon the conversion or exchange thereof by
(ii) the maximum number of shares of Common Stock issuable upon the exercise of
such options or upon the conversion or exchange of such convertible securities)
shall be less than the Current Market Price in effect as of the time of granting
such options, the maximum number of shares of Common Stock issuable upon the
exercise of such options or upon conversion or exchange of all convertible
securities issuable upon the exercise of such options shall be deemed, upon the
granting of such options, to be outstanding and to have been issued for such
price per share. Except as provided in Section 3.03(c), no further adjustment of
the Exercise Price shall be made upon the issue or sale of shares of Common
Stock upon the exercise of such options or the conversion or exchange of such
convertible securities.
(b) If the Company issues or sells any convertible securities (other
than securities referred to in Section 3.03(a)), whether or not the right to
convert or exchange any such convertible securities is immediately exercisable,
and the price per share for which the shares of Common Stock are issuable upon
such conversion or exchange (determined by dividing (i) the total consideration
received or receivable by the Company for the issue or sale of such convertible
securities, plus any additional consideration payable to the Company upon the
conversion or exchange of such convertible securities by (ii) the maximum number
of shares of Common Stock issuable upon the conversion or exchange of such
convertible securities) shall be less than the Current Market Price in effect as
of the time of such issue or sale, the maximum number of shares of Common Stock
issuable upon conversion or exchange of all such convertible securities shall be
deemed, upon the issue or sale of such convertible securities, to be outstanding
and to have been issued for such price per share. Except as provided in Section
3.03(c), no further adjustment of the Exercise Price shall be made upon the
issue or sale of shares of Common Stock upon conversion or exchange of any such
convertible securities.
(c) If the exercise price provided for in any option referred to in
Section 3.03(a), or the rate at which any convertible security referred to in
Section 3.03(a) or 3.03(b) is convertible into or exchangeable for shares of
Common Stock, shall change or a different exercise price or rate shall become
effective at any time or from time to time, the Exercise Price immediately shall
be adjusted to the Exercise Price that would have obtained had the adjustments
made and required to be made under this Section 3.03 upon the issuance or sale
of such options or such convertible securities been made upon the basis of (i)
the issuance of the number of shares of Common Stock theretofore delivered upon
the exercise of such options or upon the conversion or
8
<PAGE>
exchange of such convertible securities and the total consideration received
therefor, (ii) the issuance of all shares of Common Stock and all other options
or convertible securities and the total consideration received therefor and
(iii) the original issuance at the time of such change of exercise price or rate
of any such options or convertible securities then outstanding and the total
consideration received therefor. On the expiration of any such option or the
termination of any such right to convert or exchange any such convertible
securities, the Exercise Price immediately shall be adjusted to the Exercise
Price that would have obtained (iv) had the adjustments made upon the issuance
of such options or such convertible securities been made upon the issuance of
only the number of shares of Common Stock actually delivered and the total
consideration received therefor upon the exercise of such options or upon the
conversion or exchange of such convertible securities and (v) had adjustments
been made on the basis of the Exercise Price as adjusted under clause (iv) of
this Section 3.03(c) for all issues or sales of shares of Common Stock, options
or convertible securities made after the issuance of such options or convertible
securities. If the exercise price provided for in any option referred to in
Section 3.03(a), or the rate at which any convertible security referred to in
Section 3.03(a) or 3.03(b) is convertible or exchangeable for shares of Common
Stock, shall decrease at any time pursuant to applicable provisions thereof
designed to protect against dilution, the Exercise Price immediately shall be
decreased in the case of delivery of shares of Common Stock upon the exercise of
any such option or upon the conversion or exchange of any such convertible
securities, to the Exercise Price that would have obtained had the adjustments
made upon the issue or sale of such option or such convertible security been
made upon the basis of the issuance of the shares of Common Stock so delivered
and the total consideration received therefor.
(d) If any shares of Common Stock or any convertible securities or any
option shall be issued or sold for cash, the consideration received by the
Company shall be deemed to be the amount payable to the Company therefor without
deduction of any expense incurred or any underwriting commission, concession or
discount paid or allowed by the Company in connection therewith. If any shares
of Common Stock or any convertible securities or any option shall be issued or
sold for a consideration other than cash, the consideration received by the
Company shall be deemed to be the fair value of such consideration as determined
by the Board of Directors of the Company without deduction of any expense
incurred or any underwriting commission, concession or discount paid or allowed
by the Company in connection therewith. If any shares of Common Stock or any
convertible securities or any option shall be issued in connection with a
9
<PAGE>
merger of another corporation into the Company, the consideration received by
the Company shall be deemed to be the fair value as determined by the Board of
Directors of the Company of such portion of the assets of such merged
corporation as the Board of Directors shall reasonably determine to be
attributable to such shares of Common Stock or such option or convertible
securities, as the case may be.
SECTION 3.04. Stock Dividends. If the Company shall declare a dividend
or any other distribution upon any capital stock which is payable in shares of
Common Stock, the Exercise Price shall be reduced to the quotient obtained by
dividing (i) the number of shares of Common Stock outstanding and deemed (in
accordance with the provisions of Section 3.03(c)) to be outstanding immediately
prior to such declaration multiplied by the then effective Exercise Price by
(ii) the total number of shares of Common Stock outstanding and deemed (in
accordance with the provisions of Section 3.03(c)) to be outstanding immediately
after such declaration. All shares of Common Stock and all convertible
securities issuable in payment of any dividend or other distribution upon the
capital stock of the Company shall be deemed to have been issued or sold without
consideration.
SECTION 3.05. Extraordinary Dividends and Distributions. If the Company
shall declare a dividend or any other distribution upon the shares of Common
Stock payable otherwise than out of current earnings, retained earnings or
earned surplus and otherwise than in shares of Common Stock or convertible
securities, the Exercise Price shall be reduced by an amount equal, in the case
of a dividend or distribution in cash, to the amount thereof payable per share
of Common Stock or, in the case of any other dividend or other distribution, to
the fair value thereof per share of Common Stock at the time such dividend or
other distribution was declared, as reasonably determined by the Board of
Directors of the Company. A dividend or distribution other than in cash shall be
considered payable out of current earnings, retained earnings or earned surplus
only to the extent that such current earnings, retained earnings or earned
surplus are charged an amount equal to the fair value of such dividend or
distribution as reasonably determined by the Board of Directors of the Company.
SECTION 3.06. Stock Splits and Reverse Stock Splits. If the Company
shall subdivide its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price shall be proportionately reduced and the number of
Warrant Shares issuable upon exercise of each Warrant shall be proportionately
increased. If the Company shall combine the outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price shall be proportionately
increased
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and the number of Warrant Shares issuable upon exercise of each Warrant shall be
proportionately decreased.
SECTION 3.07. Reorganizations and Asset Sales. If any capital
reorganization or reclassification of the Company, or any consolidation or
merger of the Company with another corporation, or the sale of all or
substantially all of the assets of the Company shall be effected in such a way
that the holders of the shares of Common Stock shall be entitled to receive
securities or assets with respect to or in exchange for shares of Common Stock,
adequate provision shall be made, prior to and as a condition of such
reorganization, reclassification, consolidation, merger or sale, whereby each
Warrantholder shall have the right to receive, upon the terms and conditions
specified herein and in lieu of the Warrant Shares otherwise receivable upon the
exercise of such Warrants, such securities or assets as may be issued or payable
with respect to or in exchange for the number of outstanding shares of Common
Stock equal to the number of Warrant Shares otherwise receivable had such
reorganization, reclassification, consolidation, merger or sale not taken place.
In any such case appropriate provision shall be made with respect to the rights
and interests of such Warrantholder so that the provisions of this Agreement
shall be applicable with respect to any securities or assets thereafter
deliverable upon exercise of the Warrants. The Company shall not effect any such
consolidation, merger or sale unless prior to or simultaneously with the
consummation thereof the survivor or successor corporation resulting from such
consolidation or merger or the purchaser of such assets shall assume by written
instrument delivered to each holder of Warrants the obligation to deliver to
such holder such securities or assets as such holder may be entitled to receive.
SECTION 3.08. Covenant to Reserve Shares for Issuance on Exercise. (a)
The Company will cause an appropriate number of shares of Common Stock to be
duly and validly authorized and reserved and will keep available out of its
authorized shares of Common Stock, solely for the purpose of issue upon exercise
of Warrants as herein provided, the full number shares of Common Stock, if any,
then issuable if all outstanding Warrants then exercisable were to be exercised.
The Company covenants that all shares of Common Stock that shall be so issuable
shall be duly and validly issued and, upon payment of the Exercise Price, fully
paid and non-assessable.
(b) The Company hereby authorizes and directs its current and future
transfer agents for the shares of Common Stock at all times to reserve such
number of authorized shares as shall be requisite for such purpose. The Warrant
Agent is hereby authorized to requisition from time to time from any
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such transfer agents share certificates required to honor outstanding Warrants
upon exercise thereof in accordance with the terms of this Agreement, and the
Company hereby authorizes and directs such transfer agents to comply with all
such requests of the Warrant Agent. The Company will supply such transfer agents
with duly executed stock certificates for such purposes. Promptly after the date
of expiration of the Warrants, the Warrant Agent shall certify to the Company
the aggregate number of Warrants then outstanding, and thereafter no shares
shall be reserved in respect of such Warrants.
SECTION 3.09. Warrant Agent Not Responsible for Validity of Shares. The
Warrant Agent shall not be accountable with respect to the validity or value (or
the kind or amount) of any shares of Common Stock or of any securities or
property that at any time may be issued or delivered upon the exercise of any
Warrant or upon any adjustment pursuant to Article III, and it makes no
representation with respect thereto. The Warrant Agent shall not be responsible
for any failure of the Company to make any cash payment or to issue, transfer or
deliver any shares of Common Stock or share certificates or other securities or
property upon the surrender of any Warrant for the purpose of exercise or upon
any adjustment pursuant to Article III, or to comply with any of the covenants
of the Company contained in this Article III.
SECTION 3.10. Statements on Warrants. The form of Warrant Certificate
need not be changed because of any adjustment made pursuant to this Article III,
and Warrant Certificates issued after such adjustment may state the same
Exercise Price and the same number of shares of Common Stock as are stated in
the Warrant Certificates initially issued pursuant to this Agreement. The
Company, however, may at any time in its sole discretion (which shall be
conclusive) make any change in the form of Warrant Certificate that it may deem
appropriate and that does not affect the substance thereof; and any Warrant
Certificates thereafter issued or countersigned, whether in exchange or
substitution for an outstanding Warrant Certificate or otherwise, may be in the
form as so changed.
SECTION 3.11. Notice of Change in Securities Issuable, etc. Whenever
the securities issuable or deliverable in exchange for Warrants is changed
pursuant to this Article III, the Company promptly shall file with the Warrant
Agent a certificate executed by its chief financial officer, setting forth in
reasonable detail the facts requiring the change and specifying the effective
date of such change and the number or amount of, and describing the shares or
other securities issuable or deliverable in exchange for, each Warrant as so
changed. The Company also shall mail such a notice to each Warrantholder.
Failure to file such
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statement or to publish such notice, or any defect in such statement or notice,
shall not affect the legality or validity of any such change.
SECTION 3.12. References to Common Stock. Unless the context otherwise
indicates, all references to Common Stock in this Agreement and in the Warrant
Certificates, in the event of a change under this Article III, shall be deemed
to refer also to any other securities issuable or deliverable in exchange for
Warrants pursuant to such change.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF
WARRANTS
SECTION 4.01. No Rights as Shareholders. Nothing contained in this
Agreement or in any Warrant Certificate shall be construed as conferring on any
Warrantholder any rights whatsoever as a shareholder of the Company, including
the right to vote at, or to receive notice of, any meeting of shareholders of
the Company; nor shall the consent of any such holder be required with respect
to any action or proceeding of the Company; nor shall any such holder, by reason
of the ownership or possession of a Warrant or the Warrant Certificate
representing the same, either at, before or after exercising such Warrant, have
any right to receive any cash dividends, stock dividends, allotments or rights,
or other distributions (except as specifically provided herein), paid, allotted
or distributed or distributable to the shareholders of the Company prior to the
date of the exercise of such Warrant, nor shall such holder have any right not
expressly conferred by such holder's Warrant or Warrant Certificate.
SECTION 4.02. Mutilated or Missing Warrant Certificates. If any Warrant
Certificate is lost, stolen, mutilated or destroyed, the Company in its
discretion may issue and the Warrant Agent may countersign, in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and substitution for the Warrant Certificate lost, stolen or
destroyed, upon receipt of a proper affidavit or other evidence satisfactory to
the Company and the Warrant Agent (and surrender of any mutilated Warrant
Certificate) and bond of indemnity in form and amount and with corporate surety
satisfactory to the Company and the Warrant Agent in each instance protecting
the Company and the Warrant Agent, a new Warrant Certificate of like tenor and
exercisable for an equivalent number of shares of Common Stock as the Warrant
Certificate so lost, stolen, mutilated or destroyed. Any such new Warrant
Certificate shall constitute an original contractual obligation of the Company,
whether or not the allegedly lost, stolen, mutilated or destroyed Warrant
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Certificate at any time shall be enforceable by anyone. An applicant for such a
substitute Warrant Certificate also shall comply with such other reasonable
regulations and pay such other reasonable charges as the Company or the Warrant
Agent may prescribe. All Warrant Certificates shall be held and owned upon the
express condition that the foregoing provisions are exclusive with respect to
the replacement of lost, stolen, mutilated or destroyed Warrant Certificates,
and shall preclude any and all other rights or remedies notwithstanding any law
or statute existing or hereafter enacted to the contrary with respect to the
replacement of negotiable instruments or other securities without their
surrender.
SECTION 4.03. Liquidation, Merger, etc.; Notice to Warrantholders. If:
(a) the Company shall authorize the issuance to all holders of Common
Stock of rights or warrants to subscribe for or purchase capital stock of the
Company or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or cash distributions payable out of current earnings, retained
earnings or earned surplus or dividends payable in Common Stock); or
(c) there shall be proposed any consolidation or merger to which the
Company is to be a party and for which approval of the holders of Common Stock
is required, or the conveyance or transfer of the properties and assets of the
Company substantially as an entirety; or
(d) there shall be proposed the voluntary or involuntary dissolution,
liquidation or winding up of the Company; the Company shall cause to be filed
with the Warrant Agent and shall cause to be given to each Warrantholder, by
first-class mail, postage prepaid, a written notice stating (i) the date as of
which the holders of record of shares of Common Stock to be entitled to receive
any such rights, warrants or distribution are to be determined or (ii) the date
on which any consolidation, merger, conveyance, transfer, reorganization,
reclassification, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of record of
shares of Common Stock shall be entitled to exchange the shares for securities
or other property, if any, deliverable upon the consolidation, merger,
conveyance, transfer, reorganization, reclassification, dissolution, liquidation
or winding up. Such notice shall be filed and mailed in the case of a notice
pursuant to (i) above at least ten calendar days before the record date
specified and in the case of a notice pursuant to
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clause (ii) above at least 20 calendar days before the earlier of the dates
specified. From the time notice is required to be given pursuant to this Section
4.03, the holders of Warrants shall be entitled to exercise such Warrants
regardless of the provisions of Section 2.01.
ARTICLE V
CONCERNING THE WARRANT AGENT
SECTION 5.01. Change of Warrant Agent. (a) The Warrant Agent, or any
successor to it hereafter appointed, may resign its duties and be discharged
from all further duties and liabilities hereunder after giving 60 days' notice
in writing to the Company, except that such shorter notice may be given as the
Company, in writing, shall accept as sufficient. If the office of the Warrant
Agent becomes vacant by resignation or incapacity to act or otherwise, the
Company shall appoint a successor Warrant Agent in place of the Warrant Agent.
If the Company shall fail to make such appointment within a period of 60 days
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent or by any holder of Warrants (who, with
such notice, shall submit such holder's Warrant Certificate for inspection by
the Company), then the holder of any Warrants may apply to any court of
competent jurisdiction for the appointment of a successor Warrant Agent.
(b) The Warrant Agent may be removed by the Company at any time upon 30
days' written notice to the Warrant Agent; provided, however, that the Company
shall not remove the Warrant Agent until a successor Warrant Agent meeting the
requirements hereof shall have been appointed.
(c) Any successor Warrant Agent, whether appointed by the Company or by
a court of competent jurisdiction, shall be a corporation or association
(including the Company) organized, in good standing and doing business under the
laws of the United States of America or any state thereof or the District of
Columbia. After appointment, any successor Warrant Agent shall be vested with
all the authority, powers, rights, immunities, duties and obligations of its
predecessor Warrant Agent with like effect as if originally named as Warrant
Agent hereunder, without any further act or deed; but if for any reason it
becomes necessary or appropriate, the predecessor Warrant Agent shall execute
and deliver, at the expense of the Company, an instrument transferring to such
successor Warrant Agent all the authority, powers and rights of such predecessor
Warrant Agent hereunder; and upon request of any successor Warrant Agent, the
Company shall make, execute, acknowledge and deliver any and all instruments in
writing to more fully and effectually vest in and confirm to such successor
Warrant
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Agent all such authority, powers, rights, immunities, duties and obligations.
Upon assumption by a successor Warrant Agent of the duties and responsibilities
hereunder, the predecessor Warrant Agent shall deliver and transfer, at the
expense of the Company, to the successor Warrant Agent any property at the time
held by it hereunder. As soon as practicable after such appointment, the Company
shall give notice thereof to the predecessor Warrant Agent, the Warrantholders
and each transfer agent for the shares of Common Stock. Failure to give such
notice, or any defect therein, shall not affect the validity of the appointment
of the successor Warrant Agent.
(d) Any corporation or association into which the Warrant Agent may be
merged or with which it may be consolidated, or any corporation or association
resulting from any merger or consolidation to which the Warrant Agent shall be a
party, shall be the successor Warrant Agent under this Agreement without any
further act. In case at the time such successor to the Warrant Agent shall
succeed to the agency created by this Agreement, any of the Warrant Certificates
shall have been countersigned but not delivered, any such successor to the
Warrant Agent may adopt the countersignature of the original Warrant Agent and
deliver such Warrant Certificates so countersigned, and in case at that time any
of the Warrant Certificates shall not have been countersigned, any successor to
the Warrant Agent may countersign such Warrant Certificates either in the name
of the predecessor Warrant Agent or in the name of the successor Warrant Agent;
and in all such cases Warrant Certificates shall have the full force provided in
the in the Warrant Certificates and in this Agreement.
(e) In case at any time the name of the Warrant Agent shall be changed
and at such time any of the Warrant Certificates shall have been countersigned
but not delivered, the Warrant Agent may adopt the countersignatures under its
prior name and deliver such Warrant Certificates so countersigned; and in case
at that time any of the Warrant Certificates shall not have been countersigned,
the Warrant Agent may countersign such Warrant Certificates either in its prior
name or in its changed name; and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in this
Agreement.
SECTION 5.02. Compensation; Further Assurances. The Company agrees (i)
that it will pay the Warrant Agent reasonable compensation for its services as
Warrant Agent hereunder and, except as otherwise expressly provided, will pay or
reimburse the Warrant Agent upon demand for all reasonable expenses,
disbursements and advances incurred or made by the Warrant Agent in accordance
with any of the provisions of this Agreement (including the reasonable
compensation, expenses and disbursements of its agents and
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counsel) except any such expense, disbursement or advance as may arise from its
or any of their negligence or bad faith; and (ii) that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as
reasonably may be required by the Warrant Agent for the carrying out or
performing of the provisions of this Agreement.
SECTION 5.03. Reliance on Counsel. The Warrant Agent may consult with
legal counsel (who may be legal counsel for the Company), and the written
opinion of such counsel or any advice of legal counsel subsequently confirmed by
a written opinion of such counsel shall be full and complete authorization and
protection to the Warrant Agent as to any action taken or omitted by it in good
faith and in accordance with such written opinion or advice.
SECTION 5.04. Proof of Actions Taken. Whenever in the performance of
its duties under this Agreement the Warrant Agent shall deem it necessary or
desirable that any matter be proved or established by the Company prior to
taking or suffering or omitting any action hereunder, such matter (unless other
evidence in respect thereof be herein specifically prescribed), in the absence
of bad faith on the part of the Warrant Agent, may be deemed to be conclusively
proved and established by an Officers' Certificate delivered to the Warrant
Agent; and such Officers' Certificate, in the absence of bad faith on the part
of the Warrant Agent, shall be full warrant to the Warrant Agent for any action
taken, suffered or omitted in good faith by it under the provisions of this
Agreement in reliance upon such certificate; but in its discretion the Warrant
Agent in lieu thereof may accept other evidence of such fact or matter or may
require such further or additional evidence as to it may seem reasonable.
SECTION 5.05. Correctness of Statements. The Warrant Agent shall not be
liable for or by reason of any of the statements of fact or recitals contained
in this Agreement or in the Warrant Certificates (except its countersignature
thereon) or be required to verify the same, and all such statements and recitals
are and shall be deemed to have been made by the Company only.
SECTION 5.06. Validity of Agreement. The Warrant Agent shall not be
under any responsibility in respect of the validity of this Agreement or the
execution and delivery hereof or in respect of the validity or execution of any
Warrant Certificates (except its countersignature thereon); nor shall it be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Warrant Certificate; nor shall it by any act
hereunder be
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deemed to make any representation or warranty as to the authorization or
reservation of any shares of Common Stock to be issued pursuant to this
Agreement or any Warrants or as to whether any shares of Common Stock, when
issued, will be validly issued and fully paid and nonassessable.
SECTION 5.07. Use of Agents. The Warrant Agent may execute and exercise
any of the rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents and the Warrant Agent
shall not be responsible for the misconduct or negligence of any agent or
attorney, provided due care had been exercised in the appointment and continued
employment thereof.
SECTION 5.08. Liability of Warrant Agent. The Warrant Agent shall incur
no liability or responsibility to the Company or to any holder of Warrants for
any action taken in reliance on any notice, resolution, waiver, consent, order,
certificate, or other paper, document or instrument believed by it to be genuine
and to have been signed, sent or presented by the proper party or parties. The
Company agrees to indemnify the Warrant Agent and save it harmless against any
and all liabilities, including judgments, costs and reasonable counsel fees, for
anything done or omitted in good faith by the Warrant Agent in the execution of
this Warrant Agreement, except as a result of the Warrant Agent's negligence or
willful misconduct or bad faith.
SECTION 5.09. Legal Proceedings. The Warrant Agent shall be under no
obligation to institute any action, suit or legal proceeding or to take any
other action likely to involve expense unless the Company or one or more holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses that may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity.
SECTION 5.10. Other Transactions in Shares of the Company. The Warrant
Agent in its individual or any other capacity may become the owner of the
Warrants or other securities of the Company, or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Warrant Agent under this Warrant Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for any other
legal entity.
SECTION 5.11. Actions as Agent. The Warrant Agent shall act hereunder
solely as agent and not in a ministerial capacity, and its duties shall be
determined solely by the
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provisions hereof. The Warrant Agent shall not be liable for anything which it
may do or refrain from doing in good faith in connection with this Agreement
except for its own negligence or willful misconduct or bad faith.
SECTION 5.12. Appointment and Acceptance of Agency. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the instructions set forth in this Agreement, and the Warrant Agent hereby
accepts the agency established by this Agreement and agrees to perform the same
upon the terms and conditions herein set forth.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. Reservation of Shares. The Company at all times shall
reserve and keep available such number of shares of its authorized but unissued
Common Stock as from time to time shall be sufficient to permit the exercise of
all outstanding Warrants. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient for such purpose, the Company
will take such action as, in the opinion of its counsel, may be necessary to
increase its authorized but unissued Common Stock to such number of shares as
shall be sufficient for such purpose. Prior to the issuance of any Warrant
Shares, the Company shall secure the listing of such Warrant Shares upon any
securities exchange upon which shares of Common Stock are then listed, if any.
SECTION 6.02. Registration of Warrant Shares. (a) The Company shall
cause the Warrant Shares to be registered under the Securities Act on the date
that they are issuable to FBR pursuant to the Underwriting Agreement and will
use its best efforts to keep such registration effective through the close of
business on the fifth anniversary of the Effective Date. Thereafter, the Company
will use its best efforts to keep such registration effective through the close
of business on the seventh anniversary of the Effective Date.
(b) If, at any time prior to the close of business on the fifth
anniversary of the Effective Date, there is no registration statement in effect
for the Warrant Shares, the
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Company, upon the written request of holders of Warrants and of Warrant Shares
representing an aggregate of 50% or more of the Warrant Shares, will file with
the Securities and Exchange Commission under the Securities Act, such
registration statements and amendments thereto and such other filings as may be
required to permit the public offering and sale of such Warrant Shares in
compliance with the Securities Act. The Company shall be required to register
Warrant Shares only once pursuant to this Section 6.02(b).
(c) The Company will permit any Warrant Shares to be included, at the
request of the holders of such Warrant Shares, in any registration of securities
of the Company (other than shares of Common Stock for an employees' option or
stock purchase plan) under a registration statement filed by the Company under
the Securities Act at any time prior to the close of business on the seventh
anniversary of the Effective Date. The Company shall provide written notice to
the record holders of all Warrants and Warrant Shares at least 30 days prior to
the filing of any such registration statement sent by registered mail to the
address of record of each such holder.
(d) Each such holder shall pay the underwriting discount attributable
to such holder's Warrant Shares, any transfer tax payable with respect thereto
and the fees and expenses of such holder's counsel. All other expenses of
registration under Section 6.02(a), Section 6.02(b) or Section 6.02(c) shall be
borne by the Company.
(e) The Company will agree to indemnify the holders of Warrant Shares
that are included in a registration statement or amendments to existing
registration statements pursuant to this Section 6.02 substantially to the same
extent as the Company has agreed to indemnify the Underwriters in the
Underwriting Agreement and such holders will agree to indemnify the Company and
any underwriter with respect to information furnished by them in writing to the
Company for inclusion therein substantially to the same extent as the
Underwriters have indemnified the Company in the Underwriting Agreement.
(f) If the offering pursuant to any registration statement provided for
herein is made through underwriters, the Company will enter into an underwriting
agreement in customary form and indemnify, in customary form, such underwriters
and each person who controls any such underwriter within the meaning of the
Securities Act. Such underwriting agreement shall contain provisions for the
indemnification of the Company in customary form, provided that the aggregate
amount that may be recovered from any such underwriter pursuant to such
provisions shall be limited to the total price at which the Warrant Shares
purchased by any such
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underwriter under such underwriting agreement were offered to the public.
SECTION 6.03. Enforcement of Warrant Rights. All rights of action are
vested in the respective Warrantholders. Any holder of any Warrant, in his own
behalf and for his own benefit, may enforce, and may institute and maintain any
suit, action or proceeding against the Company or the Warrant Agent suitable to
enforce, or otherwise in respect of, his right to exercise his Warrant for the
purchase of the number of Warrant Shares issuable or deliverable in exchange
therefor, in the manner provided in the Warrant and in this Agreement.
SECTION 6.04. Negotiability and Ownership. The Warrants issued
hereunder shall not, for a period of one year following the Effective Date, be
sold, transferred, assigned or hypothecated by the holders thereof except (a) to
persons who are officers of FBR or (b) in the case of an individual, pursuant to
such individual's last will and testament or the laws of descent and
distribution and, in any case, only in compliance with the Securities Act. For
the purposes of this Section 6.04, the term "officers" shall refer to those
persons who are officers of FBR who become officers of FBR at any time before
the expiration of the Warrants regardless of whether such persons are officers
of FBR at the time they sell, transfer, assign or hypothecate a Warrant. Any
attempt to sell, transfer, assign or hypothecate in contravention of this
Section shall be null and void.
SECTION 6.05. Warrant Legend. (a) Each Warrant shall contain a legend
in substantially the following form:
"THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE
AGREEMENT, DATED ____________, 1997, BETWEEN AMERICAN CAPITAL STRATEGIES,
INC. AND [NAME OF WARRANT AGENT]. ANY ATTEMPT TO TRANSFER THIS WARRANT OR
ANY SHARE OF COMMON STOCK ISSUED UPON EXERCISE OF THIS WARRANT, PRIOR TO
____________ [FIRST ANNIVERSARY OF EFFECTIVE DATE], TO ANY UNAUTHORIZED
TRANSFEREE, SHALL BE NULL AND VOID. NO TRANSFER IN VIOLATION OF SAID
AGREEMENT SHALL BE EFFECTIVE. THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED WITHOUT AN
EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POSTEFFECTIVE AMENDMENT
THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT REGISTRATION
IS NOT REQUIRED UNDER THAT ACT."
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(b) Each certificate representing Warrant Shares, unless registered
pursuant to Section 6.02, shall contain a legend substantially in the following
form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR
TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR
POSTEFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF
1933 OR AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER THAT ACT. THE SHARES
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS SPECIFIED IN
THE AGREEMENT, DATED ____________, 1997, BETWEEN AMERICAN CAPITAL
STRATEGIES, INC. AND [NAME OF WARRANT AGENT]. ANY ATTEMPT TO TRANSFER THE
SHARES REPRESENTED BY THIS CERTIFICATE, PRIOR TO ____________ [FIRST
ANNIVERSARY OF EFFECTIVE DATE], TO ANY UNAUTHORIZED TRANSFEREE, SHALL BE
NULL AND VOID. NO TRANSFER IN VIOLATION OF SAID AGREEMENT SHALL BE
EFFECTIVE."
SECTION 6.06. Supplements and Amendments. (a) Notwithstanding the
provisions of Section 6.06(b), the Warrant Agent, without the consent or
concurrence of the registered holders of the Warrants, may enter into one or
more supplemental agreements or amendments with the Company for the purpose of
evidencing the rights of Warrantholders upon consolidation, merger, sale,
transfer or reclassification pursuant to Section 3.07, making any changes or
corrections in this Agreement that are required to cure any ambiguity, to
correct or supplement any provision contained herein that may be defective or
inconsistent with any other provision herein or any clerical omission or mistake
or manifest error herein contained, or making such other provisions in regard to
matters or questions arising under this Agreement as shall not adversely affect
the interests of the holders of the Warrants or be inconsistent with this
Agreement or any supplemental agreement or amendment.
(b) With the consent of the registered holders of at least a majority
in number of the Warrants at the time outstanding, the Company and the Warrant
Agent at any time and from time to time by supplemental agreement or amendment
may add any provisions to or change in any manner or eliminate any of the
provisions of this Agreement or of any supplemental agreement or modify in any
manner the rights and obligations of the Warrantholders and of the Company;
provided, however, that no such supplemental agreement or amendment, without the
consent of the registered holder of each outstanding Warrant affected thereby,
shall:
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(1) alter the provisions of this Agreement so as to affect adversely
the terms upon which the Warrants are exercisable or may be redeemed; or
(2) reduce the number of Warrants outstanding the consent of whose
holders is required for any such supplemental agreement or amendment.
SECTION 6.07. Covenant as to Status as a Business Development Company.
The Company shall use its best efforts, until the fifth anniversary of the
Effective Date, to maintain its status as a "business development company"
within the meaning of the Investment Company Act of 1940 ("1940 Act").
Notwithstanding the foregoing, the Company may change the nature of its business
so as to cease to be, or to withdraw its election as a business development
Company with the approval of the board of directors and a vote of shareholders
as required by Section 58 of the 1940 Act, or any successor provision.
SECTION 6.08. Successors and Assigns. All the covenants and provisions
of this Agreement by or for the benefit of the Company or the Warrant Agent
shall bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 6.09. Notices. Any notice or demand authorized by this
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or on the Company shall be sufficiently given or made if sent by mail
first-class, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent), as follows:
American Capital Strategies, Ltd.
3 Bethesda Metro Center
Bethesda, Maryland 20814
Attention: Mr. Malon Wilkus
Any notice or demand authorized by this Agreement to be given or made
by the holder of any Warrant or by the Company to or on the Warrant Agent shall
be sufficiently given or made if sent by mail first-class, postage prepaid,
addressed (until another address is filed in writing by the Warrant Agent with
the Company), as follows:
[Name of Warrant Agent]
---------------
---------------
---------------
Attention: _______________
23
<PAGE>
Any notice or demand authorized by this Agreement to be given or made
to the holder of any Warrants shall be sufficiently given or made if sent by
first-class mail, postage prepaid to the last address of such holder as it shall
appear on the Warrant Register.
SECTION 6.10. Applicable Law. The validity, interpretation and
performance of this Agreement and of the Warrant Certificate shall be governed
by the law of the State of New York without giving effect to the principles of
conflicts of laws thereof.
SECTION 6.11. Benefits of this Agreement. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the holders of the Warrants any
right, remedy or claim under or by reason of this Agreement or of any covenant,
condition, stipulation, promise or agreement hereof, and all covenants,
conditions, stipulations, promises and agreements in this Agreement contained
shall be for the sole and exclusive benefit of the parties hereto and their
successors and of the holders of the Warrants.
SECTION 6.12. Registered Warrantholders. Prior to due presentment for
registration of transfer, the Company and the Warrant Agent may deem and treat
the person in whose name any Warrants are registered in the Warrant Register as
the absolute owner thereof for all purposes whatever (notwithstanding any
notation of ownership or other writing thereon made by anyone other than the
Company or the Warrant Agent) and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary or be bound to recognize any
equitable or other claim to or interest in any Warrants on the part of any other
person and shall not be liable for any registration of transfer of Warrants that
are registered or to be registered in the name of a fiduciary or the nominee of
a fiduciary unless made with actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration of transfer or with
such knowledge of such facts that its participation therein amounts to bad
faith. The terms "Warrantholder" and "holder of any "Warrants" and all other
similar terms used herein shall mean such person in whose name Warrants are
registered in the Warrant Register.
SECTION 6.13. Inspection of Agreement. A copy of this Agreement shall
be available at all reasonable times for inspection by any Warrantholder at the
principal office of the Warrant Agent (or successor Warrant Agent). The Warrant
Agent may require any such Warrantholder to submit his Warrant
24
<PAGE>
Certificate for inspection by it before allowing such Warrantholder to inspect a
copy of this Agreement.
SECTION 6.14. Headings. The Article and Section headings herein are for
convenience only and are not a part of this Agreement and shall not affect the
interpretation thereof.
SECTION 6.15. Counterparts. The Agreement may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original.
25
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto under their respective seals as of the day and year first above
written.
AMERICAN CAPITAL STRATEGIES,
LTD.
[CORPORATE SEAL]
By:
-------------------------------
Name:
Title:
Attest:
Name:
Title:
[NAME OF WARRANT AGENT],
as Warrant Agent
[CORPORATE SEAL]
By:
-------------------------------
Name:
Title:
Attest:
Name:
Title:
26
<PAGE>
EXHIBIT A
Exhibit A
[FORM OF FIRM WARRANT CERTIFICATE]
No. __________ __________ Warrants
WARRANTS
TO PURCHASE SHARES OF COMMON STOCK OF
AMERICAN CAPITAL STRATEGIES, LTD.
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), for value received, hereby certifies that
-------------------------------------
or registered assigns, is the owner of the number of Firm Warrants,
set forth above, each of which represents the right, subject to the terms and
conditions hereof and of the Warrant Agreement hereafter referred to (the
"Warrant Agreement"), to purchase from the Company at any time, or from time to
time, from the date of original issuance of the Firm Warrants to the close of
business on the fifth anniversary of such date (or, if such date is not a
Business Day (as defined below), the first following Business Day) (the
"Exercise Period"), the number of shares of Common Stock, par value $.01 per
share, of the Company (the "Common Stock") described in the Warrant Agreement
(each share of Common Stock issuable upon exercise of a Firm Warrant is referred
to as a "Warrant Share"). Subject to the terms and conditions of the Warrant
Agreement, the exercise price per Firm Warrant represented by this Warrant
Certificate shall be $15.00 per share, adjusted as provided in Article III of
the Warrant Agreement, payable in full as to each Firm Warrant exercised at the
time of purchase. The term "Underwriting Agreement" as used herein refers to the
Underwriting Agreement dated ____________, 1997 between the Company and
Friedman, Billings, Ramsey & Co., Inc. The term "Exercise Price" as used herein
refers to the foregoing price per share in effect at any time.
This Firm Warrant may be exercised in whole or in part at any time or
from time to time during the Exercise Period. The portion of any Firm Warrant
not exercised during the Exercise Period shall become void, and all rights
hereunder and all rights in respect hereof and under the
A-1
<PAGE>
Warrant Agreement shall cease at the end of the Exercise Period.
Each such purchase of Warrant Shares shall be made, and shall be
deemed effective for the purpose of determining the date of exercise, only upon
surrender hereof to the Company at the office or agency maintained for such
purpose in The City of New York or the principal office of [Name of Warrant
Agent], Warrant Agent (or any successor Warrant Agent), with the form of
Election to Exercise on the reverse hereof duly filled in and signed, and upon
payment in full to the Warrant Agent for the account of the Company of the
Exercise Price (i) in cash or (ii) by certified or official bank check or (iii)
by any combination of the foregoing, all as provided in the Warrant Agreement
and upon compliance with and subject to the conditions set forth herein and in
the Warrant Agreement.
This Warrant Certificate is issued under and in accordance with the
Warrant Agreement dated as of ____________, 1997 (the "Warrant Agreement"),
between the Company and the Warrant Agent and is subject to the terms and
provisions of the Warrant Agreement, which terms and provisions are hereby
incorporated by reference herein and made a part hereof. Copies of the Warrant
Agreement and of the Underwriting Agreement are available for inspection by the
registered holder at the principal office of the Warrant Agent (or successor
Warrant Agent).
The Company shall not be required upon the exercise of the Firm
Warrants represented hereby to issue fractions of Warrant Shares or to
distribute share certificates that evidence fractional Warrant Shares. Every
holder of this Warrant Certificate expressly waives its right to receive any
fraction of a Warrant Share or a share certificate representing a fraction of a
Warrant Share. Fractional Warrant Shares that otherwise would be issuable in
respect of such exercise shall be paid in cash as provided in the Warrant
Agreement, and the number of Warrant Shares issuable to such Warrantholder shall
be rounded down to the next nearest whole number. If such Warrant Certificate
shall not have been exercised in full, the Warrant Agent on behalf of the
Company will issue to such Warrantholder a new Warrant Certificate exercisable
for the number of shares of Common Stock as to which such Firm Warrant shall not
have been exercised.
This Warrant Certificate may be exchanged either separately or in
combination with other Warrant Certificates at the office or agency maintained
in The City of New York for such purpose or at the principal office of the
Warrant Agent (or successor Warrant Agent) for new Warrant Certificates
representing the same aggregate number of Firm Warrants as
A-2
<PAGE>
were evidenced by the Warrant Certificate or Warrant Certificates exchanged,
upon surrender of this Warrant Certificate and upon compliance with and subject
to the conditions set forth herein and in the Warrant Agreement.
This Warrant Certificate is transferable (subject to restrictions set
forth in the Warrant Agreement) at the office or agency maintained in The City
of New York for such purpose or at the principal office of the Warrant Agent (or
successor Warrant Agent) by the registered holder hereof in person or by his
attorney duly authorized in writing, upon (i) surrender of this Warrant
Certificate and (ii) upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement. Upon any such transfer, a new Warrant
Certificate or new Warrant Certificates of different denominations, representing
in the aggregate a like number of Firm Warrants, will be issued to the
transferee. Every holder of Firm Warrants, by accepting this Warrant
Certificate, consents and agrees with the Company, the Warrant Agent and with
every subsequent holder of this Warrant Certificate that until due presentation
for the registration of transfer of this Warrant Certificate on the Warrant
Register maintained by the Warrant Agent, the Company and the Warrant Agent may
deem and treat the person in whose name this Warrant Certificate is registered
as the absolute and lawful owner for all purposes whatsoever and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary.
Nothing contained in the Warrant Agreement or in this Warrant
Certificate shall be construed as conferring on the holder of any Firm Warrants
or his transferee any rights whatsoever as a shareholder of the Company.
This Warrant Certificate shall not be valid unless countersigned
manually by the Warrant Agent.
The Warrant Agreement and each Warrant Certificate, including this
Warrant Certificate, shall be deemed a contract made under the laws of the State
of New York and for all purposes shall be construed in accordance with the laws
of the State of New York without giving effect to the principles of conflicts of
law thereof.
A-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated:
AMERICAN CAPITAL STRATEGIES,
LTD.
(CORPORATE SEAL) By:
-------------------------------
A-4
<PAGE>
ATTEST:
--------------------------------
COUNTERSIGNED: [NAME OF WARRANT AGENT], as
Warrant Agent
By:
----------------------------
Authorized Signature
A-5
<PAGE>
Exhibit B
[FORM OF OPTIONAL WARRANT CERTIFICATE]
No. __________ _________ Warrants
WARRANTS
TO PURCHASE SHARES OF COMMON STOCK OF
AMERICAN CAPITAL STRATEGIES, LTD.
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), for value received, hereby certifies that
-----------------------------------------
or registered assigns, is the owner of the number of Optional
Warrants, set forth above, each of which represents the right, subject to the
terms and conditions hereof and of the Warrant Agreement hereafter referred to
(the "Warrant Agreement"), to purchase from the Company at any time, or from
time to time, from the Expiration Date, which is sixty days following the date
of the Underwriting Agreement, to the close of business on the fifth anniversary
of such date (or, if such date is not a Business Day (as defined below), the
first following Business Day) (the "Exercise Period"), the number of shares of
Common Stock, par value $.01 per share, of the Company (the "Common Stock")
described in the Warrant Agreement (each share of Common Stock issuable upon
exercise of an Optional Warrant is referred to as a "Warrant Share"), subject to
certain adjustments. Subject to the terms and conditions of the Warrant
Agreement, the exercise price per Optional Warrant represented by this Warrant
Certificate shall be $15.00 per share, adjusted as provided in Article III of
the Warrant Agreement, payable in full as to each Optional Warrant exercised at
the time of purchase. The term "Underwriting Agreement" as used herein refers to
the Underwriting Agreement dated ____________, 1997 between the Company and
Friedman, Billings, Ramsey & Co., Inc. The term "Exercise Price" as used herein
refers to the foregoing price per share in effect at any time.
Subject to the terms and conditions of the Warrant Agreement, the
number of shares of Common Stock which the holder of this Warrant Certificate is
entitled to receive upon exercise of the Optional Warrants represented hereby is
B-1
<PAGE>
subject to certain adjustments, as follows: in the event that FBR fails to
exercise its right to receive the total maximum number of Option Shares, then
the Optional Warrants shall cease to be exercisable with respect to that number
of shares of Common Stock equal to (i) 1,050,000, minus (ii) the total number of
Option Shares purchased by and delivered to FBR, multiplied by (iii) 0.04. In
the event that FBR does not purchase any Option Shares within sixty days
following the date hereof, the Optional Warrants will expire in their entirety.
The Warrant Agent may not deliver Warrant Shares pursuant to this Optional
Warrant unless and until the Warrant Agent receives written notice signed by
both the Company and FBR which sets out the number of shares of Common Stock
which the holder of the Optional Warrants will be entitled to receive.
This Optional Warrant may be exercised in whole or in part at any time
or from time to time during the Exercise Period. The portion of any Optional
Warrant not exercised during the Exercise Period shall become void, and all
rights hereunder and all rights in respect hereof and under the Warrant
Agreement shall cease at the end of the Exercise Period.
Each such purchase of Warrant Shares shall be made, and shall be
deemed effective for the purpose of determining the date of exercise, only upon
surrender hereof to the Company at the office or agency maintained for such
purpose in The City of New York or the principal office of [Name of Warrant
Agent], Warrant Agent (or any successor Warrant Agent), with the form of
Election to Exercise on the reverse hereof duly filled in and signed, and upon
payment in full to the Warrant Agent for the account of the Company of the
Exercise Price (i) in cash or (ii) by certified or official bank check or (iii)
by any combination of the foregoing, all as provided in the Warrant Agreement
and upon compliance with and subject to the conditions set forth herein and in
the Warrant Agreement.
This Warrant Certificate is issued under and in accordance with the
Warrant Agreement dated as of ____________, 1997 (the "Warrant Agreement"),
between the Company and the Warrant Agent and is subject to the terms and
provisions of the Warrant Agreement, which terms and provisions are hereby
incorporated by reference herein and made a part hereof. Copies of the Warrant
Agreement and of the Underwriting Agreement are available for inspection by the
registered holder at the principal office of the Warrant Agent (or successor
Warrant Agent).
The Company shall not be required upon the exercise of the Firm
Warrants represented hereby to issue fractions of
B-2
<PAGE>
Warrant Shares or to distribute share certificates that evidence fractional
Warrant Shares. Every holder of this Warrant Certificate expressly waives its
right to receive any fraction of a Warrant Share or a share certificate
representing a fraction of a Warrant Share. Fractional Warrant Shares that
otherwise would be issuable in respect of such exercise shall be paid in cash as
provided in the Warrant Agreement, and the number of Warrant Shares issuable to
such Warrantholder shall be rounded down to the next nearest whole number. If
such Warrant Certificate shall not have been exercised in full, the Warrant
Agent on behalf of the Company will issue to such Warrantholder a new Warrant
Certificate exercisable for the number of shares of Common Stock as to which
such Firm Warrant shall not have been exercised.
This Warrant Certificate may be exchanged either separately or in
combination with other Warrant Certificates at the office or agency maintained
in The City of New York for such purpose or at the principal office of the
Warrant Agent (or successor Warrant Agent) for new Warrant Certificates
representing the same aggregate number of Firm Warrants as were evidenced by the
Warrant Certificate or Warrant Certificates exchanged, upon surrender of this
Warrant Certificate and upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement.
This Warrant Certificate is transferable (subject to restrictions set
forth in the Warrant Agreement) at the office or agency maintained in The City
of New York for such purpose or at the principal office of the Warrant Agent (or
successor Warrant Agent) by the registered holder hereof in person or by his
attorney duly authorized in writing, upon (i) surrender of this Warrant
Certificate and (ii) upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement. Upon any such transfer, a new Warrant
Certificate or new Warrant Certificates of different denominations, representing
in the aggregate a like number of Firm Warrants, will be issued to the
transferee. Every holder of Firm Warrants, by accepting this Warrant
Certificate, consents and agrees with the Company, the Warrant Agent and with
every subsequent holder of this Warrant Certificate that until due presentation
for the registration of transfer of this Warrant Certificate on the Warrant
Register maintained by the Warrant Agent, the Company and the Warrant Agent may
deem and treat the person in whose name this Warrant Certificate is registered
as the absolute and lawful owner for all purposes whatsoever and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary.
Nothing contained in the Warrant Agreement or in this Warrant
Certificate shall be construed as conferring on
B-3
<PAGE>
the holder of any Firm Warrants or his transferee any rights whatsoever as a
shareholder of the Company.
This Warrant Certificate shall not be valid unless countersigned
manually by the Warrant Agent.
The Warrant Agreement and each Warrant Certificate, including this
Warrant Certificate, shall be deemed a contract made under the laws of the State
of New York and for all purposes shall be construed in accordance with the laws
of the State of New York without giving effect to the principles of conflicts of
law thereof.
B-4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated:
AMERICAN CAPITAL STRATEGIES,
LTD.
(CORPORATE SEAL) By:
-------------------------------
B-5
<PAGE>
ATTEST:
--------------------------------
COUNTERSIGNED: [NAME OF WARRANT AGENT], as
Warrant Agent
By:
------------------------------
Authorized Signature
B-6
<PAGE>
ELECTION TO EXERCISE
(To be executed upon exercise of Warrant)
TO [NAME OF COMPANY]:
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ___________ shares of Common Stock, as provided for therein, and
tenders herewith payment of the purchase price in full in the form of cash or a
certified or official bank check (or combination thereof) in the amount of
$__________________.
Please issue a certificate or certificates for such shares of Common
Stock in the name of:
PLEASE INSERT SOCIAL SECURITY Name
OR OTHER IDENTIFYING NUMBER --------------------------------
OF ASSIGNEE
Address
- ----------------------------- ------------------------------
Signature
- ----------------------------- ----------------------------
--------------------------------
Note: The above signature
should correspond
exactly with the name
on the face of this
Warrant Certificate
or with the name of
assignee appearing in
the assignment form
below.
Dated: ______________________, 1997
<PAGE>
ASSIGNMENT
(To be executed only upon assignment of Warrant Certificate)
For value received,__________________________ hereby sells, assigns and transfer
unto ___________________________the within Warrant Certificate, together with
all right, title and interest therein, and does hereby irrevocably constitute
and appoint _______________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company, with full power of
substitution in the premises.
Dated: _____________________, 1997
-------------------------------------------------
NOTE: The above signature should correspond
exactly with the name on the face of this
Warrant Certificate
Exhibit 2.h.2
AMERICAN CAPITAL STRATEGIES, LTD.
COMMON STOCK
AGREEMENT AMONG UNDERWRITERS
______________, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
As Representative of the
Several Underwriters
1001 Nineteenth Street North
Arlington, Virginia 22209
Dear Sirs:
1. Underwriting Agreement. The undersigned Underwriters
("Underwriters") agree among themselves as follows with reference to their
proposed purchases severally from American Capital Strategies, Ltd., a Delaware
corporation (the "Company"), of 8,400,000 shares of Common Stock, par value
$0.01 per share, of the Company (the "Initial Shares") and the proposed
purchase, severally of up to an additional 1,260,000 shares of Common Stock (the
"Option Shares") from the Company. The Initial Shares and the Option Shares are
collectively referred to herein as the "Shares." Each Underwriter will agree to
purchase (a) the number of the Initial Shares set forth opposite its name in
Schedule I to the Underwriting Agreement between you, as Representative of the
several Underwriters, and the Company, and (b) that portion of the Option Shares
as to which the option is exercised equal to the proportion which such
Underwriter's share of the number of the Initial Shares bears to the total
number of Initial Shares.
2. Registration Statement and Prospectus. The Shares are more
particularly described in a registration statement on Form N-2 (No. 333-29943)
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"). Amendments to such
registration statement have been or are being filed in which, with our consent
hereby confirmed, we have been named as one of the Underwriters of the Shares. A
copy of the registration statement as filed and a copy of each amendment as
filed (excluding exhibits) have heretofore been delivered to us. We confirm that
we have examined the registration statement, including amendments thereto,
relating to the Shares, as filed with the Commission, that we are willing to
accept the responsibilities of an Underwriter under the Securities Act in
respect of the registration statement and we are willing to proceed with a
public offering of the Shares in the manner described in the registration
statement. The registration statement and the related prospectus may be further
amended, but no such amendment or change shall release or affect our obligations
hereunder or under the Underwriting Agreement. As used
<PAGE>
herein, the terms "Registration Statement," "Preliminary Prospectus" and
"Prospectus" shall have the same meaning as that specified in the Underwriting
Agreement.
3. Authority of the Representative. We hereby authorize you, acting on
our behalf, as our representative (the "Representative") (a) to complete,
execute and deliver the Underwriting Agreement, to determine the public offering
price of the Shares and the underwriting discount with respect thereto and to
make such variations, if any, as in your judgment are appropriate and are not
material, provided that the respective aggregate number of Initial Shares set
forth opposite our respective names in Schedule I thereto shall not be increased
without our consent, except as provided herein, (b) to waive performance or
satisfaction by the Company of obligations or conditions included in the
Underwriting Agreement if in your judgment such waiver will not have a material
adverse effect upon the interests of the Underwriters and (c) to take such
actions as in your discretion may be necessary or advisable to carry out the
Underwriting Agreement, this Agreement and the transactions for the accounts of
the several Underwriters contemplated thereby and hereby. We also authorize you
to determine all matters relating to the public advertisement of the Shares. The
parties on whose behalf you execute the Underwriting Agreement are herein called
the "Underwriters."
4. Public Offering. We authorize you, with respect to any Shares which
we so agree to purchase, to reserve for sale, and on our behalf to sell, to
dealers selected by you (including you or any of the other Underwriters, such
dealers so selected being hereinafter called "Selected Dealers") and to others
all or part of our Shares as you may determine. Reservations for sales to
persons other than Selected Dealers shall be as nearly as practicable in
proportion to the respective underwriting obligations of the Underwriters,
unless you agree to a smaller proportion at the request of an Underwriter.
Reservations for sales to Selected Dealers need not be in such proportion. All
sales of reserved Shares shall be as nearly as practicable in proportion to the
respective reservations as calculated from day to day.
In your discretion, from time to time, you may add to the reserved
Shares any Shares retained by us remaining unsold, and you may upon our request
release to us any of our Shares reserved but not sold. Any Shares so released
shall not thereafter be deemed to have been reserved. Upon termination of this
Agreement, or prior thereto at your discretion, you shall deliver to us any of
our Shares reserved but not sold and delivered, except that if the aggregate of
all reserved but unsold and undelivered Shares is less than 10% of the Shares,
you are authorized to sell such Shares for the accounts of the several
Underwriters at such price or prices as you may determine. Sales of reserved
Shares shall be made to Selected Dealers at the public offering price less a
concession initially not in excess of $.63 per share (the "Selected Dealers'
Concession") and to others at the public offering price. Underwriters and
Selected Dealers may reallow a portion of such concession not in excess of $.10
per share to any other members of the National Association of Securities
Dealers, Inc. ("NASD"), acting as principal or buyer's agent, provided such
member agrees that the reallowance is to be retained and not reallowed in whole
or in part and also agrees in writing to comply with Section 2740 of the Conduct
Rules of the NASD.
After advice from you that the Shares are released for sale to the
public, we will offer to the public in conformity with the terms of the offering
set forth in the Prospectus such of our Shares as you advise us are not
reserved. We authorize you after the Shares are released for sale
2
<PAGE>
to the public, in your discretion, to change the public offering price of the
Shares and the concession, and to buy Shares for our account from Selected
Dealers at the public offering price less such amount not in excess of the
Selected Dealers' Concession as you may determine.
Sales of Shares between Underwriters may be made with your prior
consent, or as you deem advisable for state securities laws purposes.
We agree that we will not sell to any accounts over which we exercise
discretionary authority any Shares which we have agreed to purchase under the
Underwriting Agreement.
5. Additional Provisions Regarding Sales. Any Shares sold by us
(otherwise than through you) which you contract for or purchase in the open
market or otherwise for the account of any Underwriter shall be repurchased by
us on demand at the cost of such purchase plus commissions and taxes on
redelivery. Shares delivered on such repurchase need not be the identical Shares
purchased by you. In lieu of demanding repurchase by us, you may in your
discretion (a) sell for our account the Shares so purchased by you, at such
price and upon such terms as you may determine, and debit or credit our account
with the loss and expense or net profit resulting from such sale or (b) charge
our account with an amount not in excess of the Selected Dealers' Concession
with respect to such Shares. If we are a member of, or clear through a member
of, the Depository Trust Company ("DTC"), you, in your discretion, may deliver
our Shares through the facilities of DTC.
6. Payment and Delivery. At or before the Closing Time (as defined in
the Underwriting Agreement) and on any Date of Delivery (as defined in the
Underwriting Agreement), we will deliver to you at DTC or at your office at 1001
Nineteenth Street North, Arlington, Virginia 22209, a certified or bank
cashiers' check payable to your order, in clearing house funds, in the amount
equal to the offering price set forth in the Prospectus less the Selected
Dealers' Concession in respect of the number of Initial Shares or Option Shares,
as the case may be, to be purchased by us pursuant to the Underwriting
Agreement. We authorize you for our account to make payment of the purchase
price for the Initial Shares or Option Shares, as the case may be, to be
purchased by us against delivery to you of such Shares, and the difference
between such price and the amount of our check delivered to you therefor shall
be credited to our account. Unless we notify you at least three (3) full
business days prior to such Closing Time or Date of Delivery to make other
arrangements, you may, in your discretion, advise the Company to prepare our
certificates in our name. If you have not received our funds as requested, you
may in your discretion make such payment on our behalf, in which event we will
reimburse you promptly. Any such payment by you shall not relieve us from any of
our obligations hereunder or under the Underwriting Agreement.
We authorize you for our account to accept delivery of our Shares from
the Company and to hold such of our Shares as you have reserved for sale to
Selected Dealers and others and to deliver such Shares against such sales. You
will deliver to us our unreserved Shares as promptly as practicable.
3
<PAGE>
Notwithstanding the foregoing provisions of this Section 6, payment for
our Shares may be made through the facilities of DTC, if we are a member, unless
we have otherwise notified you prior to a date to be specified by you, or, if we
are not a member, settlement may be made through a correspondent who is a member
pursuant to instructions we may send to you prior to such specified date.
As promptly as practicable after you receive payment for reserved
Shares sold for our account, you will remit to us the purchase price paid by us
for such Shares and credit or debit our account with the difference between the
sale price and such purchase price.
7. Authority to Borrow. In connection with the transactions
contemplated in the Underwriting Agreement or this Agreement, we authorize you,
in your discretion, to advance your own funds for our account, charging current
interest rates, to arrange loans for our account and in connection therewith to
execute and deliver any notes or other instruments and hold or pledge as
security therefor any of our Shares purchased for our account. Any lender may
rely upon your instructions in all matters relating to any such loan.
Any of our Shares purchased for our account held by you may from time
to time be delivered to us for carrying purposes, and any such securities will
be redelivered to you upon demand.
8. Stabilization and Other Matters. We authorize in your discretion to
make purchases and sales of the Shares for our account in the open market or
otherwise, for long or short account, on such terms as you deem advisable and in
arranging sales to over-allot. We also authorize you, either before or after the
termination of the offering provisions of this Agreement, to cover any short
position incurred pursuant to this Section 8 on such terms as you deem
advisable. All such purchases and sales and over-allotments shall be made for
the accounts of the several Underwriters as nearly as practicable in proportion
to their respective underwriting obligations. Our net commitment under this
Section 8 (excluding any commitment incurred under the Underwriting Agreement
upon exercise of the right to purchase Option Shares) shall not, at the end of
any business day, exceed 15% of our underwriting obligation. We will on your
demand take up and pay for at cost any Shares so purchased or sold or
overalloted for our account, and, if any other Underwriter defaults in its
corresponding obligation, we will assume our proportionate share of such
obligation without relieving the defaulting Underwriter from liability. We will
be obligated in respect of purchases and sales made for our account hereunder
whether or not any proposed purchase of Shares is consummated. The existence of
this provision is no assurance that the price of the Shares will be stabilized
or that if stabilizing is commenced, it may not be discontinued at any time.
We agree to advise you, from time to time upon your request, during the
term of this Agreement, of the number of Shares retained by us remaining unsold,
and will, upon your request, sell to you for the accounts of one or more of the
several Underwriters such number of such Shares as you may designate at such
prices, not less than the net price to Selected Dealers nor more than the public
offering price, as you may determine.
4
<PAGE>
If you effect any stabilizing purchase pursuant to this Section 8, you
will notify us promptly of the date and time when the first stabilizing purchase
was effected and the date and time when stabilizing was terminated. We authorize
you on our behalf to file any reports required to be filed with the Commission
in connection with any transactions made by you for our account pursuant to this
Section 8 and we agree to furnish you with any information needed for such
reports. We agree to transmit to you for filing with the Commission any and all
reports required to be made by us pursuant to paragraph (c) of Rule 17a-2 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as a
result of any transactions in connection with the offering of the Shares.
With respect to the Underwriting Agreement, you are also authorized in
your discretion (a) to exercise the option therein as to all or any part of the
Option Shares, and to terminate such option in whole or in part prior to its
expiration, (b) to postpone either or both the Closing Time and any Date of
Delivery referred to in the Underwriting Agreement, and any other time or date
specified therein, (c) to exercise any right of cancellation or termination, (d)
to arrange for the purchase by other persons (including yourself or any other
Underwriter) of any Shares not taken up by any defaulting Underwriter and (e) to
consent to such other changes in the Underwriting Agreement as in your judgment
do not materially adversely affect the substance of our rights and obligations
thereunder.
We further agree that (a) prior to the termination of this Agreement we
will not, directly or indirectly, bid for or purchase any Shares for our own
account, except as provided in this Agreement and in the Underwriting Agreement
and (b) prior to the completion (as defined in Regulation M under the Exchange
Act) of our participation in the distribution, we will otherwise comply with
Regulation M under the Exchange Act.
9. Allocation of Expenses and Settlement. We authorize you to charge
our account with (a) all transfer taxes on Shares purchased by us pursuant to
the Underwriting Agreement and sold by you for our account, (b) Selected
Dealers' Concessions in connection with the purchase, marketing and sale of the
Shares for our account and (c) our proportionate share (based upon our
underwriting obligation) of all other expenses incurred by the Underwriters in
connection with the purchase, carrying, sale and distribution of the Shares.
Your determination of the amount and allocation of such expenses shall be
conclusive. In the event of the default of any Underwriter in carrying out its
obligations hereunder, the expenses chargeable to such Underwriter pursuant to
this Agreement and not paid by it, as well as any additional losses or expenses
arising from such default, may be proportionately charged by you against the
other Underwriters not so defaulting, without, however, relieving such
defaulting Underwriter from its liability therefor.
As soon as practicable after termination of this Agreement, the
accounts hereunder will be settled, but you may reserve from distribution such
amount as you deem necessary to cover possible additional expenses. You may at
any time make partial distributions of credit balances or call for payment of
debt balances. Any of our funds in your hands may be held with your general
funds without accountability for interest. Notwithstanding the termination of
this Agreement or any settlement, we will pay on demand (a) our proportionate
share (based on our underwriting obligation) of all expenses and liabilities
which may be incurred by or for the accounts of the Underwriters, including any
liability based on the claim that the Underwriters constitute an
5
<PAGE>
association, unincorporated business or other separate entity, and of any
expenses incurred by you or any other Underwriter with your approval in
contesting any such claim or liability and (b) any transfer taxes paid after
such settlement on account of any sale or transfer for our account.
10. Termination. This Agreement shall terminate thirty (30) days after
the Shares are released by you for sale to the public unless extended by you.
You may extend said provisions for a period or periods not exceeding an
additional thirty (30) days in the aggregate, provided the Selected Dealer
Agreements, if any, are similarly extended. Whether said provisions may be
terminated in whole or in part by notice from you, you may, in your discretion,
on notice to us prior to such time, terminate the effectiveness of this
Agreement or any portion of it.
11. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations hereunder or under the Underwriting Agreement shall
not release us from any of our obligations or in any way affect the liability of
any defaulting Underwriter to the other Underwriters for damages resulting from
such default. In case of such default by one or more Underwriters, you are
authorized to increase, pro rata with other non-defaulting Underwriters, the
number of Shares which we shall be obligated to purchase pursuant to the
Underwriting Agreement, provided that the aggregate amount of all such increases
for our account shall not exceed our pro rata shares (together with other
non-defaulting Underwriters) of ___________ Shares; and you are further
authorized to arrange, but shall not be obligated to arrange, for the purchase
by other persons, who may include yourselves or other Underwriters, of all or a
portion of any aggregate number not taken up. If any such arrangements are made,
the amount of Shares to be purchased by the non-defaulting Underwriters and by
any such other persons shall be taken as the basis for the underwriting
obligations under this Agreement.
12. Position of the Representative. Except as in this Agreement
otherwise specifically provided, you shall have full authority to take such
action as you may deem advisable in respect of all matters pertaining to the
Underwriting Agreement and this Agreement and in connection with the purchase,
carrying, sale and distribution of the Shares (including authority to terminate
the Underwriting Agreement as provided therein). You shall be under no liability
to us for or in respect of the value of the Shares or the validity or the form
thereof, the Registration Statement, the Preliminary Prospectus, the Prospectus,
the Underwriting Agreement or other instruments executed by the Company or
others; or for in respect of the issuance, transfer or delivery of the Shares;
or for the performance by the Company or others of any agreement on its or their
part; nor shall you, as Representatives or otherwise, be liable under any of the
provisions hereof or for any matters connected herewith, except for your own
want of good faith, for obligations expressly assumed by you in this Agreement
and for any liabilities imposed upon you by the Securities Act. No obligations
on your part shall be implied or inferred herefrom. Authority with respect to
matters to be determined by you, or by you and the Company, pursuant to the
Underwriting Agreement, shall survive the termination of this Agreement.
In taking all actions hereunder, except in the performance of your own
obligations hereunder and under the Underwriting Agreement, you shall act only
as Representative of each of the Underwriters. The commitments and liabilities
of each of the several Underwriters are several in accordance with their
respective purchase obligations and are not joint or joint and several. Nothing
contained herein shall constitute the Underwriters partners or render any of
them liable to
6
<PAGE>
make payments otherwise than as herein provided. If for federal income tax
purposes the Underwriters should be deemed to constitute a partnership, then
each Underwriter elects to be excluded from the application of Subchapter &
Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended, and
agrees not to take any position inconsistent with such election. You, as
Representative of the several Underwriters, are authorized, in your discretion,
to execute such evidence of such election as may be required by the Internal
Revenue Service.
13. Compensation to the Representative. As compensation for the
services of the managing underwriter in connection with the purchase of the
Shares and the management of the public offering of the Shares we agree to pay
you and authorize you to charge our account with an amount equal to $1.05 for
each Share which we have agreed to purchase pursuant to the Underwriting
Agreement. In addition, we acknowledge that any Warrants (as that term is
defined in the Underwriting Agreement) given to the Representative in connection
with the offering will be retained wholly by the Representative and will not be
shared among the participating Underwriters.
14. Indemnification and Future Claims. Each Underwriter, including
yourselves, agrees to indemnify, hold harmless and reimburse each other
Underwriter and each person, if any, who controls any other underwriter within
the meaning of Section 15 of the Securities Act, and any successor of any other
Underwriter, to the extent that, and upon the terms upon which, each Underwriter
agrees to indemnify, hold harmless and reimburse the Company and other specified
persons as set forth in the Underwriting Agreement.
In the event that at any time any person other than an Underwriter
asserts a claim against one or more of the Underwriters or against you as
Representative of the Underwriters arising out of an alleged untrue statement or
omission in the Registration Statement (or any amendment thereto) or in any
Preliminary Prospectus or the Prospectus (or any amendment or supplement
thereto) or any Blue Sky Application or relating to any transaction contemplated
by this Agreement, we authorize you to make such investigation, to retain such
counsel for the Underwriters and to take such action in the defense of such
claim as you may deem necessary or advisable. You may settle such claim with the
approval of a majority in interest of the Underwriters. We will pay our
proportionate share (based upon our underwriting obligation) of all expenses
incurred by you (including the fees and expenses of counsel for the
Underwriters) in investigating and defending against such claim and our
proportionate share of the aggregate liability incurred by all Underwriters in
respect of such claim (after deducting any contribution or indemnification
obtained pursuant to the Underwriting Agreement, or otherwise, from persons
other than Underwriters), whether such liability is the result of a judgment
against one or more of the Underwriters or the result of any such settlement
there shall be credited against any amount paid or payable by us pursuant to
this paragraph any loss, damage, liability or expense which is incurred by us as
a result of any such claim asserted against us, and if such loss, claim, damage,
liability or expense is incurred by us subsequent to any payment by us pursuant
to this paragraph, appropriate provisions shall be made to effect such credit,
by refund or otherwise. Any Underwriter may retain separate counsel at its own
expense. A claim against or liability incurred by a person who controls an
Underwriter shall be deemed to have been made against or incurred by such
Underwriter. In the event of default by any Underwriter in respect of its
obligations under this Section 14, the non-defaulting Underwriters shall be
obligated to pay the full amount
7
<PAGE>
thereof in the proportions that their respective underwriting obligations bear
to the underwriting obligations of all non-defaulting Underwriters, without
relieving such defaulting Underwriter of its liability hereunder. Our agreements
contained in this Section 14 will remain in full force and effect regardless of
any investigation made by or on behalf of such other Underwriter or controlling
person and will survive the delivery of and payment for the Shares and the
termination of this Agreement and the similar agreements entered into with the
other Underwriters. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
15. Blue Sky and Other Matters. You will not have any responsibility
with respect to the right of any Underwriter or other person to sell the Shares
in any jurisdiction notwithstanding any information you may furnish in that
connection. We authorize you to file a New York Further State Notice, if
required, and to make and carry out on our behalf any agreements which you may
deem necessary in order to procure registration or qualification of any of the
Shares in any jurisdiction, and we will at your request make such payments, and
furnish to you such information, as you may deem required by reason of any such
agreements.
We authorize you to file on behalf of the several Underwriters with the
NASD such documents and information, if any, which are available or have been
furnished to you for filing pursuant to applicable rules, statements and
interpretations of the NASD.
16. Title of Shares. The Shares purchased by the respective
Underwriters and any other securities purchased by you hereunder for their
respective accounts shall remain the property of such Underwriters until sold
and no title to any such Shares or other securities shall in any event pass to
you, as Representatives, by virtue of any of the provisions of this Agreement.
17. Capital Requirements. We confirm that our net capital and the ratio
of our aggregate indebtedness to our net capital is such that we may, in
accordance with and pursuant to Rule 15c3-l under the Exchange Act, obligate
ourselves to purchase, and purchase, the Shares which we agree to purchase under
the Underwriting Agreement and hereunder.
18. Liability for Future Claims. Neither any statement by you, as
Representative of the several Underwriters, of any credit or debit balance in
our account nor any reservation from distribution to cover possible additional
expenses relating to the Shares will constitute any representation by you as to
the existence or nonexistence of possible unforeseen expenses or liabilities of
or charges against the several Underwriters. Notwithstanding the distribution of
any net credit balance to us, we will be and remain liable for, and will pay on
demand, (a) our proportionate share (based upon our underwriting obligation) of
all expenses and liabilities which may be incurred by or for the accounts of the
Underwriters, including any liability which may be incurred by the Underwriters
or any of them based on the claim that the Underwriters constitute an
association, unincorporated business, partnership or any separate entity, and
(b) any transfer taxes paid after such settlement on account of any sale or
transfer for our account.
19. Acknowledgment of Registration Statement, Etc. We hereby confirm
that we have examined the Registration Statement (including any amendments or
supplements thereto) relating
8
<PAGE>
to the Shares filed with the Commission, that we are willing to accept the
responsibilities of an underwriter thereunder and that we are willing to proceed
as therein contemplated. We confirm that we have authorized you to advise the
Company on our behalf (a) as to the statements to be included in any Preliminary
Prospectus and in the Prospectus relating to the Shares under the heading
"Underwriting," insofar as they relate to us, and (b) that there is no
information about us required to be stated in said Registration Statement or
said Preliminary Prospectus or the Prospectus other than as set forth in the
Underwriters' Questionnaire previously delivered by us to you. We understand
that the aforementioned documents are subject to further change and that we will
be supplied with copies of any amendment or amendments to the Registration
Statement and of any amended Prospectus promptly, if and when received by you,
but the making of such changes and amendments will not release us or affect our
obligations hereunder or under the Underwriting Agreement.
20. Notices and Governing Law. Any notice from you to us shall be
mailed, telephoned, sent by facsimile or telegraphed to us at our address as set
forth in the Underwriters' Questionnaire. Any notice from us to you shall be
deemed to have been duly given if mailed, telephoned, sent by facsimile or
telegraphed to you at 1001 Nineteenth Street North, Arlington, Virginia 22209.
This Agreement shall be governed by and construed in accordance with the laws of
the State of New York.
21. Other Provisions. We represent that we are actually engaged in the
investment banking and securities business and are a member in good standing of
the NASD or, if we are not such a member, that we are a foreign dealer not
eligible for membership in said Association and that we will not offer or sell
any Shares in, or to persons who are nationals or residents of, the United
States of America. In making sales of Shares, if we are such a member, we agree
to comply will all applicable rules of the NASD, including, without limitation,
the NASD's Interpretation With Respect to Free-Riding and Withholding and
Section 2740 of the NASD's Conduct Rules, or if we are a foreign bank, dealer or
institution, we agree to comply with such Interpretation and Sections 2730,
2740, 2420 (as such Section applies to foreign non-members) and 2750 of the
Conduct Rules as that Section applies to a non-member broker or dealer in a
foreign country. We confirm that we have complied or will comply with
requirements of the Securities Act concerning delivery of each Preliminary
Prospectus and the Prospectus. We are aware of our statutory responsibilities
under the Securities Act, and you are authorized on our behalf to so advise the
Commission.
We additionally represent that we have no association or affiliation
(within the meaning of Article 1 of the By-laws of the National Association of
Securities Dealers, Inc.) with the Company or any of its officers or directors,
other than as Underwriters with respect to the offering discussed herein.
9
<PAGE>
22. Counterparts. This Agreement may be signed in any number of
counterparts which, taken together, shall constitute one and the same
instrument.
Very truly yours,
-------------------------------------------
As Attorney-in-Fact for each of the several
Underwriters named in Schedule I to the
Underwriting Agreement
Confirmed as of the date first above written.
As Representative of the
Several Underwriters:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: ________________________________
Name:
Title: Managing Director
10
Exhibit 2.j.2
CUSTODIAN AGREEMENT
THIS CUSTODIAN AGREEMENT (the "Agreement") dated as of August 27, 1997,
is entered into by and between AMERICAN CAPITAL STRATEGIES, LTD., a Delaware
corporation ("ACS") and RIGGS BANK N.A., a national banking association
("Riggs").
PRELIMINARY STATEMENT
WHEREAS, ACS has requested that Riggs act as custodian (the "Custodian")
for the purpose of receiving and holding certain property from time to time.
WHEREAS, Riggs is willing to act in such capacity as Custodian.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01 Definitions. As used herein, the following terms shall have
the meanings assigned thereto below:
"Authorized Employee" means any ACS employee listed on Schedule I hereto
and any other ACS employee hereafter authorized in writing by an existing
Authorized Employee to act as an Authorized Employee of ACS hereunder; provided,
however, that any Authorized Employee may send the Custodian a notice informing
them of any other Authorized Employee who ceases to be an Authorized Employee.
"Property" means securities, notes, loan documents, loan files and other
property reasonably acceptable to Riggs.
"Termination Date" means the date upon which this Agreement is terminated
pursuant to Section 4.05 hereto.
<PAGE>
.2.
ARTICLE 2
CUSTODIAN
SECTION 2.01 Designation and Appointment of Riggs as Custodian. Riggs is
hereby designated as, and hereby agrees to perform the duties and obligations
of, the Custodian under and as set forth in this Agreement. Riggs shall serve as
Custodian from the date hereof until the Termination Date.
SECTION 2.02 Duties of Custodian. At all times that Riggs shall be the
Custodian, it shall duly discharge its duties of receiving and holding the
Property in accordance with this Agreement. As to any matters not expressly
provided for by this Agreement, the Custodian shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the written instructions of ACS (executed by an Authorized
Employee); provided, however, that the Custodian shall not be required to take
any action which is contrary to this Agreement or applicable law, or which is
not reasonably incidental to its duties and responsibilities under this
Agreement or is of a type unrelated to its business.
SECTION 2.03 Property. (a) From time to time ACS may deliver Property to
the Custodian. At all times, ACS shall remain the owner of the Property. All
such Property shall be held by the Custodian pursuant to the terms of this
Agreement. Such Property shall be placed by the Custodian for safekeeping in a
fireproof vault (or similar safekeeping device) located on the Custodian's
premises and shall be held in a manner which allows such Property to be released
within two business days following the Custodian's receipt of notice pursuant to
the terms set forth in Section 2.04 below.
(b) Property held by the Custodian shall at all times be individually
segregated from the securities and other property of all persons other than ACS
and marked in an appropriate manner (including by attaching tags or labels to
the Property or by placing the Property in labeled containers that contain only
ACS Property) to identify clearly ACS' ownership, both upon physical inspection
thereof and upon examination of the books and records of Custodian.
<PAGE>
.3.
SECTION 2.04 Removal of Property. (a) ACS shall have the unlimited right,
upon written notice (by facsimile or otherwise), to remove all or any portion of
the Property from the Custodian.
(b) Other than as described in the this Section 2.04 and as otherwise
required by law, the Custodian shall have no authority to release any Property.
SECTION 2.05 No Liens or Encumbrances. The Custodian hereby agrees not to
assert any statutory or possessory liens or encumbrances of any kind with
respect to the Property, and hereby waives all such liens and encumbrances. The
Custodian shall not assign, hypothecate, pledge or otherwise dispose of any
Property, except pursuant to written instructions of ACS and only for the
account of ACS.
SECTION 2.06 Maintenance of Records. The Custodian shall implement and
maintain administrative and operating procedures pursuant to which it shall keep
and maintain all records and information necessary to permit the regular
identification of all Property held or released by it.
SECTION 2.07 Reports; Visitation Rights; Other Information. (a) The
Custodian shall furnish to ACS a monthly report (a "Report"), setting forth, (i)
the Property held by the Custodian as of the Report's date (the "Report
Effective Date") and as of the Report Effective Date for the immediately
preceding Report, (ii) the Property delivered to the Custodian since the Report
Effective Date for the immediately preceding Report, and (iii) the Property
released by the Custodian since the Report Effective Date for the immediately
preceding Report. For purposes of clauses (ii) and (iii) above with respect to
the first Report delivered by the Custodian hereunder, "the Report Effective
Date for the immediately preceding Report" shall be deemed to mean the date on
which the Property is initially delivered to the Custodian hereunder.
(b) From time to time, upon reasonable prior notification, during normal
business hours, any Authorized Employee shall have the right (i) to visit the
Custodian's office where the Property is maintained, (ii) to examine the
facilities for the storage and safekeeping of the
<PAGE>
.4.
Property, (iii) to review the procedures with which such Property is stored and
catalogued, (iv) to examine and make copies of and abstracts from any documents
relating to the Property, and (v) to discuss matters relating to the Property
and the Custodian's performance hereunder with any officer of the Custodian
having knowledge of such matters.
(c) The Custodian shall provide to ACS such other information concerning
the Property as it may from time to time reasonably request.
SECTION 2.08 Custodian's Liability. The Custodian shall have no liability
whatsoever by reason of any error of judgment for any act done or step taken or
omitted by it, or for any mistake of fact or law for anything which it may do or
refrain from doing in connection herewith, unless caused by or arising out of
its own negligence or willful misconduct.
ARTICLE 3
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 3.01 Representations and Warranties of the Custodian. The
Custodian hereby represents and warrants to ACS as follows:
(a) The Custodian (i) is a national banking association duly
incorporated, validly existing and in good standing under the laws of the United
States of America; (ii) shall at all times during the effectiveness of this
Agreement maintain an aggregate capital, surplus, and undivided profits of not
less than $500,000; and (iii) has all required corporate power and authority to
enter into and perform its obligations under this Agreement.
(b) The execution, delivery and performance by the Custodian of this
Agreement have been duly authorized by all necessary corporate action on the
part of the Custodian.
(c) The Custodian has, and has created, no liens against any Property.
(d) There are no actions or proceedings pending or, to the actual
knowledge of any officers of the Custodian, threatened against it before any
court or other
<PAGE>
.5.
governmental authority (A) which question the validity or enforceability of this
Agreement; or (B) which, if determined adversely to the position of the
Custodian, would materially and adversely affect the ability of the Custodian to
perform its obligations as Custodian under this Agreement.
(e) This Agreement has been duly executed and delivered by the Custodian.
ARTICLE 4
MISCELLANEOUS
SECTION 4.01 Fees and Expenses of the Custodian. ACS agrees to pay the
Custodian an annual fee of $10,000 (the "Custodian Fee") for the services
rendered hereunder. Such fee shall be in effect for one year from the date
hereof. The fee for periods thereafter shall be subject to negotiation by the
parties.
SECTION 4.02 Amendments, Etc. No amendment or waiver of any provision of
this Agreement nor consent to any departure therefrom, shall in any event be
effective unless the same shall be in writing and signed by each party hereto,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
SECTION 4.03 Notices, Etc. All notices and other communications provided
for hereunder shall be in writing (including telex communication and
communication by facsimile copy) and mailed, telexed, transmitted or delivered,
as to each party hereto, at its address set forth under its name on the
signature pages hereof or at such other address as shall be designated by such
party in a written notice to the other parties hereto. All such notices and
communications shall be effective upon receipt, or in the case of delivery by
facsimile copy, when verbal communication of receipt is obtained.
SECTION 4.04 Binding Effect; Assignability; Term. This Agreement shall be
binding upon and inure to the benefit of ACS and the Custodian and their
respective successors and permitted assigns. ACS may assign at any time its
rights and obligations hereunder and interests herein without the consent of the
Custodian. The Custodian may not assign any of its rights, duties and
<PAGE>
.6.
obligations hereunder or any interest herein without ACS's prior written
consent. This Agreement shall create and constitute the continuing obligations
of the parties hereto in accordance with its terms, and shall remain in full
force and effect until the Termination Date, provided, however, that the
provisions of Section 2.08 shall be continuing and shall survive the termination
of this Agreement.
SECTION 4.05 Resignation and Removal. The Custodian may resign at any
time by giving written notice thereof to ACS not less than 120 days prior to the
effective date of such resignation. The Custodian may be removed by ACS at any
time, with or without cause, by giving written notice thereof to the Custodian
not less than ten (10) days prior to the effective date of such removal. Upon
any such resignation or removal, ACS shall have the right to appoint a successor
Custodian. Any such successor shall, upon its acceptance thereof, succeed to and
become vested with all the rights, powers, privileges and duties of the retiring
Custodian, and the retiring Custodian shall be discharged from its duties and
obligations as Custodian under this Agreement.
SECTION 4.06 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws and decisions of the State of Maryland.
SECTION 4.07 Execution in Counterparts; Severability. This Agreement may
be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
agreement. In case any provision in or obligation under this Agreement shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
<PAGE>
.7.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized as of the date first
above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By ___________________________________
Name:
Title:
Notice Address:
3 Bethesda Metro Center
Suite 860
Bethesda, Maryland 20814
Attn: Chief Financial Officer
Telecopier: (301) 654-6714
RIGGS BANK N.A.,
as Custodian
By ___________________________________
Name:
Title:
Notice Address:
808 17th Street, N.W.,
Washington, D.C. 20006
Attn:
Telecopier: (202) -
<PAGE>
Schedule I
AUTHORIZED EMPLOYEES
Malon Wilkus
Adam Blumenthal
Stephen L. Hester
Samantha Blizzard
[ARNOLD & PORTER LETTERHEAD]
August 27, 1997
Board of Directors
American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Re: Registration Statement on Form N-2
File No. 333- 29943
Gentlemen:
We have acted as your special counsel in connection with your preparation
of a registration statement on Form N-2, as amended by Pre-Effective Amendment
No. 1 and Pre-Effective Amendment No. 2 thereto (as amended, the "Registration
Statement"), filed by you with the Securities and Exchange Commission covering
9,144,973 shares (the "Shares"), of Common Stock, $0.01 par value (the "Common
Stock"), of American Capital Strategies, Ltd. (the "Company"). Of the Shares,
(i) 8,050,000 shares (including 1,050,000 shares that may be purchased by the
Company's underwriters upon exercise of an option to cover over-allotments) (the
"Underwritten Shares") are to be sold to the Company's underwriters (the
"Underwriters") represented by Friedman, Billings, Ramsey & Co., Inc. (the
"Representative"), for public distribution pursuant to the Underwriting
Agreement between the Company and the Representative filed as an exhibit to the
Registration Statement); (ii) 378,127 shares (the "Warrant Shares") may be
issued upon the exercise of warrants (the "Warrants") which are to be issued to
the Representative or its designees pursuant to a Warrant Agreement filed as an
exhibit to the Registration Statement (the "Warrant Agreement"); and (iii)
716,846 shares (the "Direct Offering Shares") may be sold by the Company
directly to certain purchasers in the Direct Offering (as defined in the
Registration Statement).
In connection with rendering the opinions set forth in this letter, we
have examined such corporate
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Board of Directors
American Capital Strategies, Ltd.
August 27, 1997
Page 2
records of the Company, including forms of the Warrants and the Warrant
Agreement, the Company's Second Amended and Restated Certificate of
Incorporation, its Second Amended and Restated By-laws, and resolutions of the
Board of Directors, as well as made such investigation of matters of fact and
law and examined such other documents as we deem necessary for rendering the
opinions hereinafter expressed.
The opinions set forth herein are subject to the following
qualifications, which are in addition to any other qualifications contained
herein:
A. We have assumed without verification the genuineness of all signatures
on all documents, the authority of the parties (other than the Company)
executing such documents, the authenticity of all documents submitted to us as
originals, and the conformity to original documents of all documents submitted
to us as copies.
B. The opinions set forth herein are based on existing laws, ordinances,
rules, regulations, court and administrative decisions as they presently have
been interpreted and we can give no assurances that our opinions would not be
different after any change in any of the foregoing occurring after the date
hereof.
C. We have assumed without verification that, with respect to the minutes
of any meetings of the Board of Directors or any committees thereof of the
Company that we have examined, due notice of the meetings was given or duly
waived, the minutes accurately and completely reflect all actions taken at the
meetings and a quorum was present and acting throughout the meetings.
D. We have assumed without verification the accuracy and completeness of
all corporate records made available to us by the Company.
E. We express no opinion as to the effect or application of any laws or
regulations other than the general corporation law of the State of Delaware and
the federal laws of the United States. As to matters governed by the laws
specified in the foregoing sentence, we have relied exclusively on the latest
standard compilations
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Board of Directors
American Capital Strategies, Ltd.
August 27, 1997
Page 3
of such statutes and laws as reproduced in commonly accepted unofficial
publications available to us.
Based on the foregoing, upon the assumptions that there will be no
material changes in the documents we have examined and the matters investigated
referred to above, we are of the opinion that the Underwritten Shares and the
Direct Offering Shares, when issued and delivered in the manner and on the terms
described in the Registration Statement (after the same is declared effective),
will be validly issued, fully paid and nonassessable.
Also based on the foregoing and subject to the qualifications set forth
in the preceding paragraph, we are of the opinion that the Warrant Shares that
may be issued to holders of Warrants have been duly authorized by the Company
and, upon issuance of such Warrant Shares in accordance with the terms of the
Warrants, such Warrant Shares will be validly issued, fully paid and
nonassessable under the Delaware General Corporation Law as in effect on this
date.
This letter does not address any matters other than those expressly
addressed herein. This letter is given for your sole benefit and use. No one
else is entitled to rely hereupon. This letter speaks only as of the date
hereof. We undertake no responsibility to update or supplement it after such
date.
We hereby consent to your filing of this opinion as an exhibit to the
Registration Statement, and to reference to our firm under the captions "Legal
Opinion" contained in the Prospectus included therein. In giving such consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,
ARNOLD & PORTER
By: /s/ Samuel A. Flax
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