SECURITIES AND EXCHANGE COMMISSION
===============================================================================
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursunt to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1997.
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number:
AMERICAN CAPITAL STRATEGIES, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1451377
------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
--------------------------------------
(Address of principal executive office)
(301) 951-6122
-----------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes ___. No /X/.
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date. The number of shares of the
issuer's Common Stock, $0.01 par value, outstanding as of November 12, 1997
was 11,068,767.
================================================================================
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 (Unaudited) and
December 31, 1996.................................................. 3
Consolidated Schedules of Investments as of
September 30, 1997 (Unaudited) and December 31, 1996............... 4
Consolidated Statements of Operations (Unaudited) for the three and
nine months ended September 30, 1997 and 1996...................... 5
Consolidated Statements of Shareholders' Equity (Unaudited) for the
nine months ended September 30, 1997 and 1996..................... 6
Consolidated Statements of Cash Flows (Unaudited) for the three and
nine months ended September 30, 1997 and 1996..................... 7
Notes to Unaudited Consolidated Financial Statements................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction......................................................... 10
Results of Operations................................................ 10
Financial Condition, Liquidity and Capital Resources................. 11
Part II. Other Information............................................ 14
Item 1. Legal Proceedings............................................ 14
Item 2. Changes in Securities........................................ 14
Item 3. Defaults upon Senior Securities.............................. 14
Item 4. Submission of Matters to a Vote of Security Holders.......... 14
Item 5. Other Information............................................ 14
Item 6. Exhibits and Reports on Form 8-K............................. 14
Signatures
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 30,
1996 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Investments at fair value (cost or initial value of $3,980,421 $ 9,751,451
$905,748 and $1,778,638, respectively)
Investment in securities -- 129,892,219
Cash and cash equivalents 322,664 13,341,155
Interest receivable on investment in securities -- 436,741
Accounts receivable (net of allowance for doubtful
accounts of $249,609 and $0, respectively) 917,625 608,625
Income taxes receivable 52,225 27,671
Property and equipment:
Computer equipment 154,182 176,690
Office furniture and equipment 96,827 100,042
Less: accumulated depreciation (130,495) (160,143)
----------------- -----------------
120,514 116,589
Other 38,816 147,942
================= =================
Total assets $5,432,265 $154,322,393
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 322,252 $ 450,671
Due to related parties 78,142 --
Deferred taxes 1,230,536 3,332,771
Notes payable 429,684 --
----------------- -----------------
Total liabilities 2,060,614 3,783,442
Shareholders' equity:
Preferred stock, $.01 par value, 100,000 shares
authorized and 6,857 and 0 issued and
outstanding, respectively 1,419,399 --
Unearned ESOP shares (116,668) --
Common stock, $.01 par value, 20,000,000 shares
authorized and 481,058 and 11,068,767 issued
and outstanding, respectively 4,811 110,688
Capital in excess of par value 10,407 144,939,913
Retained earnings 2,053,702 5,488,350
----------------- -----------------
Total shareholders' equity 3,371,651 150,538,951
================= =================
Total liabilities and shareholders' equity $5,432,265 $154,322,393
================= =================
</TABLE>
See accompanying notes.
3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED SCHEDULES OF INVESTMENTS
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1997
-------------------------------------------------------
Number of 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. 50,000 120,750 120,750
Mobile Tool International, Inc. 7,633 296,349 1,293,259
Biddeford Textile Corporation 118,500 592,500 4,542,105
------------------ --------------
$1,778,638 $9,751,451
================== ==============
</TABLE>
<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>
See accompanying notes.
4
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
1996 1997 1996 1997
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Operating Income
Financial advisory fees $ 413,544 $ 261,926 $1,252,169 $1,122,357
Financial performance fees -- 54,000 240,980 797,600
Interest income -- 553,267 -- 553,267
Other 52,388 89,919 264,823 427,577
------------------ ----------------- ----------------- -----------------
Total operating income 465,932 959,112 1,757,972 2,900,801
Operating expenses
Salaries and benefits 317,181 593,760 935,316 1,220,907
General and administrative 213,037 388,800 772,001 1,514,122
Provision for doubtful accounts 64,031 -- 164,281 (177,198)
Interest 9,880 18,325 21,103 60,034
Depreciation and amortization 10,144 11,332 28,494 33,164
------------------ ----------------- ----------------- -----------------
Total operating expenses 614,273 1,012,217 1,921,195 2,651,029
------------------ ----------------- ----------------- -----------------
Net operating income (loss) (148,341) (53,105) (163,223) 249,772
Change in unrealized appreciation
(depreciation) of investments 42,583 (10,948) 441,081 5,321,421
------------------ ----------------- --- ----------------- -----------------
Income (loss) before income taxes (105,758) (64,053) 277,858 5,571,193
Provision for (benefit from)
income taxes (40,231) (22,283) 109,223 2,128,610
================== ================= ================= =================
Net increase (decrease) in
shareholders' equity
resulting from operations (65,527) $ (41,770) $ 168,635 $3,442,583
================== ================= ================= =================
Per share:
Pretax operating income (loss) $ (0.02) $ 0.13
Net increase (decrease) in
shareholders' equity
resulting from operations (0.01) 1.84
Weighted average shares
outstanding 3,446,681 1,875,426
</TABLE>
See accompanying notes.
5
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Capital
Unearned Common Stock in Excess Total
Preferred ESOP ------------------------- of Par Retained Shareholders'
Stock Shares Shares Amount 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 increase in
shareholders'
equity resulting
from operations -- -- -- -- -- 168,635 168,635
Options exercised -- -- 746 7 963 -- 970
ESOP shares earned -- 161,996 -- -- -- -- 161,996
=========== ========= ======= ======== ============= ========== ============
Balance at September 30, 1996 $ 1,419,399 $(170,555) 481,058 $ 4,811 $ 10,407 $2,013,198 $ 3,277,260
=========== ========= ======= ======== ============= ========== ============
Balance at December 31, 1996 $ 1,419,399 $(116,668) 481,058 $ 4,811 $ 10,407 $2,053,702 $ 3,371,651
Net increase in
shareholders'
equity resulting from
operations -- -- -- -- -- 3,442,583 3,442,583
Contribution of
common stock to
ESOP -- -- 529 5 7,930 (7,935) --
Conversion of preferred
stock to common
stock (1,419,399) -- 204,743 2,047 1,417,352 -- --
Issuance of common
stock -- 10,382,437 103,825 143,504,224 -- 143,608,049
ESOP shares earned -- 116,668 -- -- -- -- 116,668
=========== ========= ========== ======== ============ ========== ============
Balance at September 30, 1997 $ -- $ -- 11,068,767 $110,688 $144,939,913 $5,488,350 $150,538,951
=========== ========= ========== ======== ============ ========== ============
</TABLE>
See accompanying notes.
6
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
1996 1997 1996 1997
-------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Operating activities
Net increase (decrease) in shareholders' equity
resulting from operations $(65,527) $ (41,770) $ 168,635 $ 3,442,583
Adjustments to reconcile net increase (decrease)
in shareholders' equity resulting from
operations to net cash provided by operating
activities:
Depreciation and amortization 7,929 10,500 26,279 32,332
Unrealized appreciation (depreciation) of
investments (42,583) 10,948 (441,081) (5,321,421)
Net amortization of securities -- (337,159) -- (337,159)
Amortization of deferred finance costs 3,296 832 7,393 3,357
Provision for (benefit from) deferred income taxes (40,229) 5,506 109,223 2,102,243
ESOP shares earned 58,668 109,372 161,996 116,668
Provision for doubtful accounts 64,031 -- 164,281 (177,198)
(Increase) decrease in accounts receivable 13,291 63,588 (254,517) 486,198
Increase in interest receivable -- (122,074) -- (122,074)
(Increase) decrease in income taxes receivable 55,703 (27,671) 62,251 24,554
(Increase) decrease in other assets 2,599 17,177 1,634 (112,483)
Increase (decrease) in accounts payable and
accrued liabilities (75,167) 330,482 (14,487) 128,419
-------- ------------ --------- ------------
Net cash provided by (used in) operating activities (17,989) 19,731 (8,393) 266,019
Investing activities
Purchases of investments -- (50,000) -- (482,889)
Purchases of securities -- (129,896,447) -- (129,896,447)
Sale of investment -- -- -- 60,000
Purchase of property and equipment, net of
disposals (8,674) (7,343) (25,256) (28,415)
-------- ------------ --------- ------------
Net cash used in investing activities (8,674) (129,953,790) (25,256) (130,347,751)
Financing activities
Proceeds from notes payable -- -- -- 589,625
Principal payments of notes payable (19,375) (1,019,309) (58,125) (1,019,309)
Increase (decrease) in due to related parties 2,120 (39,612) (142) (78,142)
Issuance of common stock -- 143,608,049 -- 143,608,049
Options exercised -- -- 970 --
-------- ------------ --------- ------------
Net cash (used in) provided by financing activities (17,255) 142,549,128 (57,297) 143,100,223
-------- ------------ --------- ------------
Net (decrease) increase in cash and cash equivalents
(43,918) 12,615,069 (90,946) 13,018,491
Cash and cash equivalents at beginning of period 312,001 726,086 359,029 322,664
======== ============ ========= ============
Cash and cash equivalents at end of period $268,083 $ 13,341,155 $ 268,083 $ 13,341,155
======== ============ ========= ============
Supplemental disclosure:
Non-cash transactions:
Common stock contributed to ESOP $ -- $ 7,935 $ -- $ 7,935
</TABLE>
See accompanying notes.
7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Organization
On August 29, 1997, American Capital Strategies (the Company) completed an
initial public offering (the IPO), and elected to be treated as a Business
Development Company under the Investment Company Act of 1940, as amended. On
October 1, 1997, the Company elected to be taxed under Subchapter M of the
Internal Revenue Code. After the IPO, the Company changed its primary business
from investing in and arranging commercial loans for small and medium sized
businesses to being a buyout and specialty finance company investing in the debt
and equity securities of small to medium sized businesses. As a result of the
IPO, the Company's predominant source of operating income is anticipated to
change from financial performance and advisory fees earned from advising
companies, to interest and dividend income earned from investing the Company's
assets in the senior debt, subordinated debt, and equity of 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 shareholders' 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. It also
will provide financial advisory services to certain of these businesses through
a subsidiary. Prior to the IPO, the Company was principally engaged in arranging
commercial loans for small and medium sized businesses throughout the United
States, and made equity investments in certain of these businesses. It also
provided other financial services to these companies. 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 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.
8
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Notes Payable
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 August 1997, the Company repaid the note payable to its president. Also
in August 1997, the Company repaid the entire $636,000 balance of an acquisition
credit facility.
4. Common Stock
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 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.
5. Earnings Per Share
Earnings per share for the three and nine months ended September 30, 1997 were
calculated using weighted average outstanding shares of common stock of
3,446,681 and 1,875,426, respectively, as adjusted for the stock split effected
in the form of a stock dividend and the conversion of preferred stock described
in Note 4. For all other periods, earnings per share was not presented since it
was not considered to be meaningful.
9
<PAGE>
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Company to be different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Although the Company believes the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be attained.
The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
The following analysis of the financial condition and results of operations of
the Company should be read in conjunction with the Company's consolidated
financial statements and the notes therein. On August 27, 1997, during the
eighth month of the nine-month period considered in this discussion and
analysis, the Company completed an initial public offering (the IPO). After the
IPO, the Company changed its primary business from investing in and arranging
commercial loans for small and medium sized businesses to being a buyout and
specialty finance company investing in the debt and equity securities of small
to medium sized businesses. As a result of the IPO, the Company's predominant
source of operating income is anticipated to change from financial performance
and advisory fees earned from advising companies, to interest and dividend
income earned from investing the Company's assets in the senior debt,
subordinated debt, and equity of small and medium sized businesses. As a result,
the financial results of the Company for the periods discussed herein are not
expected to be representative of the financial results of the Company in the
future.
10
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total operating income .................. $ 465,932 $ 959,112 $ 1,757,972 $ 2,900,801
Operating expenses ...................... 614,273 1,012,217 1,921,195 2,651,029
----------- ----------- ----------- -----------
Net operating income (loss) ............. (148,341) (53,105) (163,223) 249,772
Change in unrealized appreciation
(depreciation) of investments ........ 42,583 (10,948) 441,081 5,321,421
Provision for (benefit from) income taxes (40,231) (22,283) 109,223 2,128,610
----------- ----------- ----------- -----------
Net increase (decrease) in shareholders'
equity resulting from operations ..... $ (65,527) $ (41,770) $ 168,635 $ 3,442,583
=========== =========== =========== ===========
</TABLE>
Total Operating Income
Total operating income was $2.9 million for the nine months ended September
30, 1997 compared to $1.8 million for the nine months ended September 30, 1996,
a 65.0% increase. Total operating income was $959,000 for the three months ended
September 30, 1997 compared to $466,000 for the three months ended September 30,
1996, a 105.9% increase. Net increase in shareholders' equity resulting from
operations was $3.4 million for the nine months ended September 30, 1997, or
$1.84 per share, compared to $169,000 for the nine months ended September 30,
1996. Net decrease in shareholders' equity resulting from operations was $42,000
for the three months ended September 30, 1997, or ($0.01) per share, compared to
a decrease of $65,000 for the three months ended September 30, 1996. The press
release issued by the Company on November 6, 1997 incorrectly reported an
increase in shareholders' equity resulting from operations for the three months
ended September 30, 1997 of $56,000 or $0.02 per share.
Financial advisory fees were $1.1 million and $1.3 million for the nine
months ended September 30, 1997 and 1996, respectively. The decline in financial
advisory fees was attributable to a relative increase in management attention to
engagements producing financing performance fees, and to the IPO. Financial
performance fees were $798,000 and $241,000 for the nine months ended September
30, 1997 and 1996, respectively. The increase in financial performance fees was
associated with the Company's successful completion of an engagement to advise
the Allied Pilots Association on the structuring of an employee stock option
plan at American Airlines. Other operating income was $428,000 and $265,000 for
the nine months ended September 30, 1997 and 1996, respectively. The increase in
other operating income was attributable to a higher level of expense
reimbursement for the Company. Included in total operating revenue for the three
months ended September 30, 1997 was interest income earned on investment
securities and overnight repurchase agreements of $553,000.
11
<PAGE>
Operating Expenses
Total operating expenses for the nine months ended September 30, 1997 and
1996 were $2.7 million and $1.9 million, respectively, an increase of 38.0%.
Salaries and benefits for the nine months ended September 30, 1997 and 1996 were
$1.2 million and $935,000, respectively, a 30.6% increase which was
predominantly associated with increased levels of staffing. General and
administrative expenses for the nine months ended September 30, 1997 and 1996
were $1.5 million and $772,000, respectively, a 96.1% increase primarily
associated with the increased use of consultants by the Company. The increase in
other expenses is attributable to a variety of expenses associated with
potential transactions. For the nine months ended September 30, 1997 and 1996,
interest expense was $60,000 and $21,000, respectively. The increase in interest
expense relates to the Company's increased levels of working capital for the
period in 1997 prior to the initial public offering.
During the nine months ended September 30, 1997, 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. During the nine months ended
September 30, 1996, the Company had accrued $164,000 as a provision for doubtful
accounts related to two companies, one of which was Martino's Bakery, Inc.
Unrealized Appreciation of Investments
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 among
other factors. For the nine months ended September 30, 1997 and 1996, the
Company recorded net increases in unrealized appreciation of investments in its
portfolio companies of $5.5 million and $441,000, respectively. Included in
unrealized appreciation of investments during the first nine 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. In the second quarter of 1997, 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. 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. Also included in unrealized
appreciation of investments during the first nine months of 1997 was
appreciation of $731,000 associated with the Company's investment in Mobile Tool
International, Inc., appreciation of $356,000 associated with Good Stuff Food
Company, Inc., and depreciation of $158,000 associated with Martino's Bakery,
Inc. The increase in unrealized appreciation at Mobile Tool was predominantly
associated with increased revenues and operating efficiencies at Mobile Tool,
combined with a refinancing which strengthened Mobile Tool's balance sheet. The
increase in unrealized appreciation at Good Stuff Food Company was primarily
associated with improved operating performance, also combined with a refinancing
which strengthened Good Stuff's balance sheet. The unrealized depreciation at
Martino's was associated with below-plan results at that company. The following
table sets forth the components of unrealized appreciation of investments for
the three and nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1996 1997 1996 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Erie Forge and Steel, Inc. ................. $ 50,877 $ -- $ 152,930 $ --
Good Stuff Food Company, Inc. .............. (27,000) -- (54,000) 355,675
Indiana Steel & Wire Corporation ........... 2,265 -- 6,792 --
Martino's Bakery, Inc. ..................... 13,041 (158,250) 143,459 (138,250)
Mobile Tool International, Inc. ............ 3,400 174,022 191,900 731,111
Biddeford Textile Corporation .............. -- -- -- 4,399,605
----------- ----------- ----------- -----------
Total Unrealized Appreciation of Investments $ 42,583 $ 15,772 $ 441,081 $ 5,348,141
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
Provision for Income Taxes
The Company recorded provisions for income taxes for the nine months ended
September 30, 1997 and 1996 of $2.1 million and $109,000, respectively.
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).
Actual income taxes paid may differ substantially from the provision for income
taxes, giving rise to the deferred tax liability shown on the balance sheet.
Effective October 1, 1997, the Company has elected to be taxed as a
regulated investment company (RIC) under Subchapter M of the Internal Revenue
Code. As long as 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. As a result, the provision for income taxes and associated deferred
income tax liability shown in the periods ending September 30, 1997 and 1996 are
not expected to be representative of future results.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The Company received net proceeds of $143.6 million in connection with its
initial public offering which closed on September 9, 1997. At September 30,
1997, the Company had $13.3 million in cash and cash equivalents and $130.0
million in investments in Federal agency securities. Because it is a business
development company, the Company is required to distribute quarterly 90% or more
of its net operating income and net realized short-term capital gains to
shareholders. While the Company will provide shareholders 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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company, nor any of the Company's subsidiaries, are presently
subject to any material litigation nor, to the Company's knowledge is any
material litigation threatened against the Company or any subsidiary, other than
routine litigation and administrative proceedings arising in the ordinary course
of business. Such proceedings are not expected to have a material adverse effect
on the business, financial conditions, or results of operation of the Company or
any subsidiary.
ITEM 2. CHANGES IN SECURITIES
Not applicable because all sales of securities sold by the registrant during the
period covered by this report were registered sales.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
3.1 Articles of Incorporation, incorporated herein by reference to Exhibit
2.a of the Amendment No. 1 to Form N-2 filed by American Capital
Strategies, Ltd. on August 12, 1997.
3.2 By-Laws, incorporated herein by reference to Exhibit 2.b of the
Amendment No. 1 to Form N-2 filed by American Capital Strategies, Ltd.
on August 12, 1997.
4 Instruments defining rights of security holders, including indentures,
incorporated herein by reference to Exhibits 2.d.1 and 2.d.2 of the
Amendment No. 1 to Form N-2 filed by American Capital Strategies, Ltd.
on August 12, 1997.
10 Material Contracts, incorporated herein by reference to Exhibits 2.k.1
and 2.k.2 of the Amendment No. 1 to Form N-2 filed by American Capital
Strategies, Ltd. on August 12, 1997.
11 Statement regarding computation of earnings per share.
27 Financial Data Schedule.
b. The registrant has not filed any reports on a Current Report on Form 8-K
during the quarter for which this report 10-Q is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN CAPITAL STRATEGIES, LTD.
November 14, 1997 By: /s/ Adam Blumenthal
------------------------------
Adam Blumenthal
Executive Vice President,
Chief Financial Officer
and Secretary
16
Exhibit 11
American Capital Strategies, Ltd.
Computation of Earnings Per Share
Three Months Nine Months
Ended Ended
September 30, September 30,
1997 1997
------------- ------------
Primary earnings per share:
Net increase (decrease) in shareholders'
equity resulting from operations ...... $ (41,770) $ 3,442,583
Weighted average common shares
outstanding ........................... 3,056,234 1,484,979
Net effect of dilutive stock options and
warrants (1) .......................... 390,447 390,447
----------- -----------
Weighted average common and equivalent
shares outstanding .................... 3,446,681 1,875,426
Primary earnings (loss) per share ....... $ (0.01) $ 1.84
=========== ===========
Fully diluted earnings per share:
Net increase (decrease) in shareholders'
equity resulting from operations ...... $ (41,770) $ 3,442,583
Weighted average common equivalent shares
outstanding ........................... 3,056,234 1,484,979
Net effect of dilutive stock options and
warrants (2) .......................... 436,364 436,364
----------- -----------
Weighted average common and equivalent
shares outstanding .................... 3,492,598 1,921,343
Fully diluted earnings (loss) per share $ (0.02) $ 1.79
=========== ===========
(1) Based on the treasury stock method using average market price.
(2) Based on the treasury stock method using the higher of ending or average
market price.
17
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains financial information extracted from the
consolidated financial statement of American Capital Strategies, Ltd. for the
three months ended September 30, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000817473
<NAME> American Capital Strategies, Ltd.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 131,675,085
<INVESTMENTS-AT-VALUE> 139,643,670
<RECEIVABLES> 1,073,037
<ASSETS-OTHER> 147,942
<OTHER-ITEMS-ASSETS> 13,457,744
<TOTAL-ASSETS> 154,322,393
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,783,442
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<PAID-IN-CAPITAL-COMMON> 145,050,601
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<AVG-DEBT-OUTSTANDING> 214,842
<AVG-DEBT-PER-SHARE> 0.06
</TABLE>
