AMERICAN CAPITAL STRATEGIES LTD, 497, 1997-09-04

AMERICAN CAPITAL STRATEGIES LTD
497, 1997-09-04

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Filed Pursuant to Rule 497(c)
File No. 333-29943

[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.

<PAGE>

<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.

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

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
----------------------------
----------------------------

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

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.

21
<PAGE>
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.

22
<PAGE>
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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<PAGE>
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

24
<PAGE>

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.

25
<PAGE>
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.

26
<PAGE>
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.

27
<PAGE>
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

28
<PAGE>
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

37
<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.

38
<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.

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<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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<PAGE>
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

(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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<PAGE>
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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<PAGE>
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.

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<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:

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 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>

================================================================================

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

================================================================================