As filed with the Securities and Exchange Commission on March 31, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
-----------
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number __________
---------------------
AMERICAN CAPITAL STRATEGIES, LTD.
<TABLE>
<CAPTION>
<S> <C> <C>
3 Bethesda Metro Center
Suite 860
Delaware Bethesda, Maryland 20814 52-1451377
-------- --------------------------------------- ----------
(State or other jurisdiction of (Address of principal executive offices) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
Registrant's telephone number, including area code: (301) 951-6122
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.01 par value Nasdaq Stock Market
per share
Indicate by check mark whether the registrant (1) has filed all report
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter earlier period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On March 26, 1998, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was approximately
$224,000,000 based upon a closing price of the Registrant's common stock of
$22.00 per share as reported on the NASDAQ National Market System on that date.
(For this computation, the registrant has excluded the market value of all
shares of its Common Stock reported as beneficially owned by executive officers
and directors of the registrant and certain other stockholders; such an
exclusion shall not be deemed to constitute an admission that any such person is
an "affiliate" of the registrant.) On March 26, 1998, there were 11,068,767
shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. The Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 14, 1998 is
incorporated by reference into certain sections of Part III herein.
Certain exhibits previously filed with the Securities and Exchange
Commission are incorporated by reference into Part IV of this report.
================================================================================
EXPLANATORY STATEMENT
This Amendment to Form 10-K amends and supersedes in its entirety the Form
10-K filed on March 30, 1998. Such prior Form 10-K was filed as a result of a
printer's error and was not filed under instruction of the issuer. Such prior
Form 10-K should be considered to be withdrawn.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS OF THE COMPANY
BACKGROUND
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), was incorporated in 1986 to provide financial advisory services to
and invest in small and medium sized businesses. On August 29, 1997, the Company
completed an initial public offering ("IPO") of 10,382,437 shares of its common
stock ("Common Stock") and became a non-diversified, closed end investment
company that has elected to be treated as a business development company ("BDC")
under the Investment Company Act of 1940, as amended ("1940 Act"). On October 1,
1997, the Company began operations so as to qualify to be taxed as a regulated
investment company (RIC) as defined in Subtitle A, Chapter 1, under Subchapter M
of the Internal Revenue Code of 1986 as amended (the "Code"). As contemplated by
these transactions, the Company materially changed its business plan and format
from structuring and arranging financing for buyout transactions on a fee for
services basis to primarily being a lender to and investor in small and medium
sized companies. The Company continues to provides financial advisory services
to businesses through ACS Capital Investments Corporation ("CIC"), a
wholly-owned subsidiary. The Company had 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 employee stock ownership plans ("ESOPs"). From its
formation in 1986 through the IPO, the Company arranged 29 financing
transactions aggregating over $400 million.
BUSINESS
The Company is a buyout and specialty finance company that is
principally engaged in providing senior debt, subordinated debt and equity to
companies in need of capital for employee buyouts, management buyouts, growth,
acquisitions, liquidity and restructuring. The Company invests up to $20 million
in each transaction and through its subsidiary, CIC, will arrange and secure
capital for larger transactions. The Company's primary business objectives are
to increase its net operating income and net asset value by investing its assets
in senior debt, subordinated debt with detachable warrants and equity of small
to medium sized businesses with attractive current yields and potential for
equity appreciation.
The Company's loans typically range from $1 million to $20 million,
mature in five to ten years, and require monthly or quarterly interest payments
at variable rates based on the prime rate plus a margin. The Company prices its
debt and equity investments based on its analysis of each transaction. As of
December 31, 1997 the weighted average effective interest on the Company's debt
investments was 14.5% and dividend rate on the Company's preferred stock
investment was 15% The Company also invests in common stock which may not
provide a current yield but would share in the appreciation of the investment.
At December 31, 1997, common stock investments represented 6.0% of the Company's
portfolio and common stock investments excluding CIC was 7.6% of the Company's
investment in non-publicly traded securities. The Company expects common stock
investments to represent the smallest percentage of its portfolio.
The Company's equity interests in small and medium sized businesses are
purchased with the goal of disposing of such interests and realizing a gain
within three to seven years. The opportunity to realize such gain may occur if
the business recapitalizes its equity, either through a sale to new owners or
makes a public offering of its equity. The Company generally does not have the
right to require that a business undergo an initial public offering by
registering securities under the Securities Act of 1933, but the Company
generally does have the right to sell its equity interests in a public offering
by the business to the extent permitted by underwriters.
1
<PAGE>
In most cases, the Company also receives the right to require the
business to purchase the warrants or stock held by the Company ("Put Rights")
under various circumstances including, typically, the repayment of the Company's
loans or debt securities. 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.
The Company makes available significant managerial assistance to its
portfolio companies. Such assistance typically involves closely monitoring the
operations of the company, participating in its board and management meetings,
being available for consultation with its officers and providing organizational
and financial guidance. Providing assistance to its borrowers serves as a
control for the Company as well as provides an opportunity for the Company to
assist in maximizing the operations of the borrower.
Prior to the IPO, the Company 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 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 while
contributions of stock are made to an ESOP. The resulting company is structured
so that the fair market value of stock contributed to the 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. The Company believes that its ESOP knowledge and experience
and its ability to fund transactions positions the Company favorably in the
market place.
2
<PAGE>
The Company continues providing financial advisory services and
structuring of transactions through its wholly-owned subsidiary CIC. The typical
advisory engagement includes a monthly retainer and a performance fee contingent
upon closing of the transaction or event which is the subject of the engagement.
Management believes that future growth of CIC 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.
The Company believes that, through the structuring and advisory
business, it has established an extensive referral network comprised of venture
capitalists, investment bankers, attorneys, commercial bankers and business and
financial brokers. CIC is continuing the relationships with the referral network
and the Company utilizes the referral network and CIC's client base as its
primary sources of investment opportunities.
LENDING AND INVESTMENT DECISION CRITERIA
The Company reviews certain criteria in order to make investment
decisions. The criteria listed below provide a general guide for the Company's
lending and investment decisions, although not all criteria are required to be
favorable in order for the Company to make an investment.
Operating History. The Company focuses on target companies that have
stable operating histories and are profitable or near profitable at existing
operating levels. The Company reviews the target companies ability to service
and repay debt based on its historical results of operations. The Company does
not expect to lend or invest in start-up or other early stage companies.
Growth. In addition to generating sufficient cash flow to service its
debt, a potential recipient of the Company's financing generally is required to
establish its ability to grow its cash flow. Anticipated growth will be a key
factor in determining the value ascribed to any warrants and equity interests
acquired by the Company.
Liquidation Value of Assets. Although the Company does not operate as an
asset-based lender, liquidation value of the assets collateralizing the
Company's loans is an important factor in each credit decision. Emphasis is
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 requires 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 requires that a potential recipient of the Company's financing have a
management team who have demonstrated the ability to execute the company's
objectives and implement its business plan.
3
<PAGE>
Exit Strategy. Prior to making an investment, the Company analyzes the
potential for the target company 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 company, or a purchase by the company or one
of its stockholders of the Company's equity position.
OPERATIONS
Marketing and Origination Process. The Company and CIC have thirteen
professionals responsible for originating loans and investments and providing
financial assistance to small and medium sized businesses and intends to hire an
additional five professionals by December 31, 1998. To originate financing
opportunities, these professionals use an extensive referral network comprised
of venture capitalists, investment bankers, unions, attorneys, accountants,
commercial bankers, unions, business brokers and prospective or existing ESOP
companies. The Company also has an extensive set of internet sites that it uses
to attract financing opportunities.
Approval Process. The Company's financial professionals review
informational packages in search of potential financing opportunities and
conduct a due diligence investigation of each applicant that passes an initial
screening process. This due diligence investigation generally includes 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 creates a profile summarizing the
target company's historical financial statements, industry and management team
and analyzing its conformity to the Company's general investment criteria. The
financial professional then presents this profile to the Company's Credit
Committee, which is comprised of David Gladstone, Malon Wilkus and Adam
Blumenthal, the Chairman, President and Executive Vice President, respectively,
of the Company. The Company's Credit Committee and the Company's Board of
Directors must approve each financing.
Support Services. A commercial bank provides certain loan accounting and
administrative services for the Company's investments and also acts as the
custodian of the Company's portfolio assets pursuant to and in accordance with
the 1940 Act.
COMPETITION
The Company's primary competitors include financial institutions and
venture capital firms and other nontraditional lenders. Many of these entities
have greater financial and managerial resources than the Company. Nevertheless,
the Company believes that it competes effectively with these entities through,
among other means, its responsiveness to the needs of its customers and its
flexibility in structuring transactions.
4
<PAGE>
EMPLOYEES
As of March 26, 1998, the Company had twenty-four employees, thirteen of
whom are professionals working on financings for small and medium sized
businesses. The Company believes that its relations with its employees are
excellent. The Company intends to continue maintaining a relatively low overhead
by outsourcing many functions not directly related to marketing or underwriting
its investments and the executive management of the Company.
THE COMPANY'S OPERATIONS AS A BDC AND RIC
As a BDC, the Company may not acquire any asset other than Qualifying
Assets unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of the Company's total assets. The principal
categories of Qualifying Assets relevant to the business of the Company are the
following:
(i) 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 as any issuer that (a) is organized 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 BDC and (c) does not have any class of
publicly-traded securities with respect to which a broker may
extend credit;
(ii) securities received in exchange for or distributed with respect
to securities described above, or pursuant to the exercise of
options, warrants or rights relating to such securities; and
(iii) cash, cash items, Government securities, or high quality debt
securities maturing in one year or less from the time of
investment.
The Company may not change the nature of its business so as to cease to
be, or withdraw its election as, a BDC unless authorized by vote of a majority,
as defined in the 1940 Act, of the Company's shares. Since the Company made its
BDC election, it has not made any substantial change in its structure or in the
nature of its business.
The Company operates so as to qualify as a RIC under the Internal
Revenue Code of 1986 as amended. Generally in order to qualify as a RIC, the
Company must distribute to shareholders in a timely manner, at least 90% of its
"investment company taxable income" and 98% of its capital gain net income as
defined by the code. The Company must derive at least 90% of its gross income
from dividends, interest, payments with respect to securities loans, gain from
the sale of stock or other securities, or other income derived with respect to
its business of investing in such stock or securities as defined by the code.
Additionally, the Company must 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.
5
<PAGE>
TEMPORARY INVESTMENTS
Pending investment in other types of Qualifying Assets, the Company has
invested its otherwise uninvested cash primarily in cash, cash items, government
securities, agency paper 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 at least seventy percent (70%) of its assets
are Qualifying Assets. Typically, the Company invests in U.S. Treasury bills.
Additionally, the Company may invest 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 requires 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.
LEVERAGE
For the purpose of making investments other than Temporary Investments
and to take advantage of favorable interest rates, the Company intends to issue
in the future senior debt securities, up to the maximum amount permitted by the
1940 Act, which currently permits the Company, as a BDC, 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. Although the Company has
no current intention to do so, it has retained the right to issue preferred
stock. As permitted by the 1940 Act, the Company may, in addition, borrow
amounts up to five percent (5%) of its total assets for temporary or emergency
purposes.
6
<PAGE>
ITEM 2. PROPERTIES
Neither the Company nor any of its subsidiaries owns any real estate or
other physical properties materially important to the operation of the Company
or any of its subsidiaries. The Company leases an aggregate of approximately
10,000 square feet of office space in four locations for terms ranging up to
seven years.
ITEM 3. LEGAL PROCEEDINGS
Although the Company may, from time to time, be involved in litigation
and claims arising out of its operations in the normal course of business, as of
December 31, 1997, the Company was not presently a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1997,
there were no matters submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise.
7
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Since the IPO, the Company has distributed and currently intends to
continue to distribute 90% of its net operating income and net realized
short-term capital gains, if any, on a quarterly basis to its shareholders. Net
realized long-term capital gains may be retained to supplement the Company's
equity capital and support growth in its portfolio, unless the Board of
Directors determines in certain cases to make a distribution. There is no
assurance that the Company will achieve investment results or maintain a tax
status that will permit any specified level of cash distributions or
year-to-year increases in cash distributions.
The Common Stock is quoted on the Nasdaq Stock Market under the symbol
ACAS. As of March 26, 1998, the Company had 49 stockholders of record and
approximately 1300 beneficial owners. The following table sets forth the range
of high and low bid prices of the Company's Common Stock as reported on the
Nasdaq Stock Market and the dividends declared by the Company for the period
from August 29, 1997, when public trading of the Common Stock commenced, through
March 25, 1998.
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<CAPTION>
BID PRICE
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DIVIDEND
HIGH LOW DECLARED
---- --- --------
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1997
Third Quarter (beginning August 29, 1997) . . $20.25 $18.50 $.00
Fourth Quarter. . . . . . . . . . . . . . . . 20.75 16.50 .21
1998
First Quarter (through March 26, 1998). . . . 22.25 17.25 .25
</TABLE>
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
AMERICAN CAPITAL STRATEGIES, LTD.
- --------------------------------------------------------------------------------
Selected Financial Data
The selected financial data should be read in conjunction with the Company's
financial statements and notes thereto. As discussed in Notes 1 and 2, the
Company completed an initial public offering of its common stock on August 29,
1997 and on October 1, 1997 began to operate so as to qualify to be taxed as a
RIC. As a result of the changes, the financial results of the Company for
periods prior to October 1, 1997 are not comparable to periods commencing
October 1, 1997 and are not expected to be representative of the financial
results of the Company in the future.
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<CAPTION>
Three Months| | Nine Months
Ended | | Ended Year Ended December 31,
December 31,| | September 30, -------------------------------------------
1997 | | 1997 1996 1995 1994 1993
---- | | ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total operating income ............ $ 2,796,667| | $ 2,900,801 $2,746,422 $2,705,632 $2,498,231 $1,882,158
Total operating expenses .......... 551,061| | 2,651,029 2,861,697 2,927,709 2,605,758 1,659,172
------------| | ------------ ---------- ---------- ---------- ----------
Operating income (loss) | |
before equity in earnings of | |
unconsolidated operating | |
subsidiary ..................... 2,245,606| | 249,772 (115,275) (222,077) (107,527) 222,986
Equity in earnings of | |
unconsolidated operating | |
subsidiary ..................... 24,213| | -- -- -- -- --
------------| | ------------ ---------- ---------- ---------- ----------
Net operating income (loss) ...... 2,269,819| | 249,772 (115,275) (222,077) (107,527) 222,986
Change in unrealized | |
appreciation on investments .... 167,573| | 5,321,421 483,665 370,696 956,294 (61,660)
Realized gain (loss) | |
on investments ................. --| | -- -- 66,148 (22,784) --
------------| | ------------ ---------- ---------- ---------- ----------
Income before income taxes ....... 2,437,392| | 5,571,193 368,390 214,767 825,983 161,326
Provision for income taxes ....... --| | 2,128,610 159,251 57,381 421,664 (2,458)
------------| | ------------ ---------- ---------- ---------- ----------
Net increase in shareholders' | |
equity resulting from | |
operations .................... 2,437,392| | 3,442,583 209,139 157,386 404,319 163,784
------------| | ------------ ---------- ---------- ---------- ----------
Per share data: | |
Net operating | |
income Basic ........ $ 0.21| |
Diluted ...... $ 0.20| |
Net increase in shareholders' | |
equity resulting from | |
operations Basic ........ $ 0.22| |
Diluted ...... $ 0.21| |
Cash dividends ................ $ 0.21| |
| |
Balance Sheet Data: | |
Total assets .................. $150,705,354| | $154,322,393 $5,432,265 $4,382,994 $3,930,365 $2,821,611
Total shareholders' equity .... 150,651,900| | 150,538,951 3,371,651 2,945,659 2,571,446 1,850,509
</TABLE>
9
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
AMERICAN CAPITAL STRATEGIES, LTD.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained herein that are not historical facts including, but not
limited to, statements regarding anticipated activity are forward looking in
nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially are the following: changes in the economic conditions in which the
Company operates negatively impacting the financial resources of the Company;
certain of the Company's competitors with substantially greater financial
resources than the Company reducing the number of suitable investment
opportunities offered to the Company or reducing the yield necessary to
consummate the investment; increased costs related to compliance with laws,
including environmental laws; general business and economic conditions and other
risk factors described in the Company's report filed from time to time with the
Securities and Exchange Commission. The Company cautions readers not to place
undue reliance on any such forward looking statements, which statements are made
pursuant to the Private Securities Litigation Reform Act 1995 and, as such,
speak only as of the date made.
The following analysis of the financial condition and results of operations of
the Company should be read in conjunction with the Company's financial
statements and the notes therein. As discussed in Notes 1 and 2, the Company
completed an initial public offering (IPO) of its common stock on August 29,
1997 and on October 1, 1997 began to operate so as to qualify to be taxed as a
regulated investment company (RIC). After the IPO, the Company changed its
primary business plan and format from structuring and arranging financing for
buyout transactions on a fee for services basis to being a lender to and
investor in small and medium sized businesses. As a result of the changes, the
Company's predominant source of operating income has changed from financial
performance and advisory fees to interest and dividends earned from investing
the Company's assets in debt and equity of businesses. Additionally, pursuant to
RIC accounting requirements, effective October 1, 1997, the Company's accounting
for its operating subsidiary, ACS Capital Investments Corp. (CIC), changed from
a consolidated basis to the equity method. The financial results of the Company
for the periods through September 30, 1997 are not comparable to periods
commencing October 1, 1997 and are not expected to be representative of the
financial results of the Company in the future. Accordingly, those periods are
discussed separately.
Results of Operations
The Company's financial performance as reflected in its Statements of Operations
is composed of four primary elements. The first element is "Net operating income
(loss)," which for periods prior to October 1, 1997 (Pre-RIC) is the difference
between the Company's revenue earned from arranging financing for small and
medium sized businesses and other financial advisory work and its total
operating expenses including ESOP contributions, depreciation and interest
expense. For periods prior to October 1, 1997, ESOP contributions 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. Net operating
income (loss) for periods commencing October 1, 1997 (Post-RIC) is primarily the
interest and dividends earned from investing in debt and equity securities and
the equity in earnings of its unconsolidated operating subsidiary less the
operating expenses of the Company. The second element is "Change in unrealized
appreciation 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. The
third element is "Realized gain on investments," which reflects the difference
between the proceeds from a sale or maturity of a portfolio investment and the
cost at which the investment was carried on the Company's balance sheet. The
fourth element is "Provision for income taxes," which reflects a statutory tax
rate applied to the Company's GAAP pretax income for pre-RIC periods. Actual
taxes paid have historically been lower than the provision primarily due to the
temporary difference of the unrealized appreciation of investments which has
resulted in a deferred tax liability on the Company's balance sheet. For
post-RIC periods, the Company intends to operate so as to qualify to be taxed as
a RIC. 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 provisions for income taxes for post-RIC periods are
expected to be minimal.
As discussed above, as a RIC, the Company is required to account for investments
in operating subsidiaries under the equity method, regardless of ownership
interest. Accordingly, the Company's investment in CIC, which prior to RIC
status was consolidated, is presented on the equity method effective October 1,
1997. Therefore, commencing on October 1, 1997, and consistent with the equity
method of accounting, the portfolio companies owned by CIC are not reported
separately by the Company.
10
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Three months ended December 31, 1997
Operating results for the three months ended December 31, 1997 (post-RIC) are
summarized as follows:
Three Months Ended
December 31, 1997
-----------------
Operating income ........................................... $2,796,667
Operating expenses ......................................... 551,061
Equity in earnings of unconsolidated
operating subsidiary ..................................... 24,213
----------
Net operating income ....................................... 2,269,819
Change in unrealized appreciation
of investments ........................................... 167,573
----------
Net increase in shareholders' equity
resulting from operations ................................ $2,437,392
==========
Total operating income consisted of approximately $700,000 in loan processing
fees and $200,000 in interest on non- publicly traded securities and $1.9
million in interest on government agency securities and overnight repurchase
agreements. The loan fees were earned as a result of closing three investments
in private companies totaling $20.5 million during the period.
Operating expenses for the period consisted of $243,000 in salaries and benefits
and $308,000 in general and administrative expenses.
Equity in earnings of unconsolidated operating subsidiary represents CIC's
results including the portfolio companies. For the three months ended December
31, 1997, CIC's results included $414,000 of operating income, $987,000 of
operating expenses, $605,000 of unrealized appreciation of investment and $8,000
in tax provisions.
The change in unrealized appreciation of investments as discussed in Note 2 to
the financial statements is determined by the Company's Board of Directors. The
change in unrealized appreciation of investments for the three month period is
$167,000 which consists of an increase of $52,000 in the valuation of the
government agency securities and an increase of $115,000 in the valuation of the
investments in private companies.
Nine months ended September 30, 1997 compared to nine months ended September 30,
1996
Nine Months Ended
September 30,
1997 1996
---- ----
Operating income .......................... $ 2,900,801 $ 1,757,972
Operating expenses ........................ 2,651,029 1,921,195
----------- -----------
Net operating income (loss) ............... 249,772 (163,223)
Change in unrealized
appreciation of investments ............. 5,321,421 441,081
Provision for income taxes ................ 2,128,610 109,223
----------- -----------
Net increase in shareholders'
equity resulting from
operations .............................. $ 3,442,583 $ 168,635
=========== ===========
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. 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 financial 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 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 nine
months ended September 30, 1997 was interest income earned on investment
securities and overnight repurchase agreements of $553,000.
11
<PAGE>
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.
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 $5.3 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. 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 Four S Baking Company, Inc., and depreciation of $138,000
associated with Martino's Bakery, Inc.
The following table sets forth the components of the change in unrealized
appreciation of investments for the nine months ended September 30, 1997 and
1996:
Nine Months Ended
September 30,
1997 1996
---- ----
Government Securities ...................... $ (26,720) --
Erie Forge and Steel, Inc. ................. -- $152,930
Four S Baking Company, Inc. ................ 355,675 (54,000)
Indiana Steel & Wire Corporation ........... -- 6,792
Martino's Bakery, Inc. ..................... (138,250) 143,459
Mobile Tool International, Inc. ............ 731,111 191,900
Biddeford Textile Corporation .............. 4,399,605 --
----------- --------
Change in Unrealized Appreciation
of Investments ........................... $ 5,321,421 $441,081
=========== ========
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) of investments 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) of investments. Actual income taxes paid may differ substantially
from the provision for income taxes. The Company accounted for this difference
by recognition of the deferred tax liability shown on the balance sheet.
Years ended December 31, 1996 and 1995
Year Ended
December 31,
1996 1995
---- ----
Operating income ............................. $2,746,422 $2,705,632
Operating expense excluding
ESOP contribution .......................... 2,645,814 2,710,882
ESOP contribution ............................ 215,883 216,827
---------- ----------
Total operating expense ...................... 2,861,697 2,927,709
---------- ----------
Net operating loss before
investment activity ........................ (115,275) (222,077)
Change in unrealized appreciation
of investments ............................. 483,665 370,696
Realized gain on investments ................. -- 66,148
Provision for income taxes ................... 159,251 57,381
---------- ----------
Net increase in shareholders' equity
resulting from operations .................. $ 209,139 $ 157,386
========== ==========
12
<PAGE>
Operating income 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. During each
of the years ended December 31, 1996 and 1995, the Company earned operating
income of $2.7 million. Other components of operating income consisted primarily
of expense reimbursements.
Total operating expenses at the Company were $2.862 million in 1996, a 2.3%
decrease from $2.928 million in 1995. Salaries and benefits, excluding ESOP
contributions, were $1.5 million in 1995 and declined 28.1% to $1.1 million in
1996. The reduction in salaries and benefits is the result of an increased use
of outside consultants in the Company's financial advisory work and the
reduction in bonuses in 1996. General and administrative and other expenses
increased 51% from $.9 million in 1995, to $1.3 million in 1996. The increased
use of consultants was the primary reason for the increase in general and
administrative expenses from 1995 to 1996.
The Company's interest expense was $33,000 in 1996 and $37,000 in 1995. 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 and $161,000 at December 31, 1995. In addition, the Company had a note
payable to its President in the amount of $74,000 at December 31, 1996 and
$66,000 at December 31, 1995. During 1995 and 1996, 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 was 4% above the prime
rate of interest.
The Company made ESOP contributions of $216,000 in 1996 and $217,000 in 1995.
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. 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.
When an investment is sold, disposed of, or liquidated, the difference between
the ultimate value realized on the investment and its cost 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.
For the years ended December 31, 1996 and 1995, the Company recorded net
increases in unrealized appreciation of investments of $484,000 and $371,000,
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 change in
unrealized appreciation of investments for the years ended December 31, 1996 and
1995:
Year Ended
December 31,
1996 1995
---- ----
Erie Forge and Steel, Inc. ................... $203,808 $(208,937)
Four S Baking Company, Inc. .................. (81,000) 499,250
Indiana Steel & Wire Corporation ............. 9,057 (5,719)
Martino's Bakery, Inc. ....................... 156,500 (18,250)
Mobile Tool International, Inc. .............. 195,300 170,500
The C.M. Kemp Manufacturing
Company(1) ................................. -- (66,148)
-------- ---------
Change in Unrealized Appreciation
of Investments ............................. $483,665 $ 370,696
======== =========
- ----------
(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.
13
<PAGE>
During 1996 and 1995, the Company was taxed as a C Corporation. Unrealized
appreciation (depreciation) of investments 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)
of investments. The Company accounted for this difference by recognition of
deferred tax provisions of $159,000 in 1996 and $57,000 in 1995.
Financial Condition, Liquidity, and Capital Resources
The Company received proceeds of $143.6 million in connection with its IPO which
was completed on August 29, 1997. At December 31, 1997, the Company had $8.9
million in cash and cash equivalents and $112.8 million in investments in
Federal agency securities. As a RIC, the Company is required to distribute
annually 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 IPO
have been fully invested in the debt and equity of small and medium sized
businesses. No assurance can be given that such liquidity will be obtainable, or
obtainable at interest rates favorable to the Company.
Impact of The Year 2000
The "Year 2000 Issue" is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruption of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company principally utilizes for its internal accounting and administrative
requirements software written by third parties for sale to the public and not
specifically written for the Company. Many of these software developers are
reviewing and updating their programs to address the Year 2000 issue. The
Company does not anticipate that it has significant exposure to the Year 2000
issue for its internal accounting and administrative software. The Company
utilizes a commercial bank for loan processing and loan accounting. The Company
will receive an assessment from the commercial bank of the potential for
exposure and develop a plan to minimize or eliminate potential exposure in the
loan processing and accounting area during 1998. The Company invests and will
continue to invest in small and medium sized businesses. The Company will review
the Year 2000 issue with the investee companies and make a determination of the
potential impact. The Company currently cannot assess its exposure or the
potential impact of the Year 2000 issue on its investees.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
Report of Independent Auditors
Board of Directors
American Capital Strategies, Ltd.
We have audited the accompanying balance sheets of American Capital Strategies,
Ltd., including the schedules of investments, as of December 31, 1997 and 1996,
the related statements of operations, shareholders' equity and cash flows for
the three months ended December 31, 1997, the nine months ended September 30,
1997, the years ended December 31, 1996 and 1995, and the financial highlights
for the three months ended December 31, 1997. These financial statements and the
financial highlights 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 aspects, the financial position of American Capital Strategies,
Ltd. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for the three months ended December 31, 1997, the nine months ended
September 30, 1997, the years ended December 31, 1996 and 1995, and the
financial highlights for the three months ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
February 12, 1998
15
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
- --------------------------------------------------------------------------------
Balance Sheets
<TABLE>
<CAPTION>
December 31, | | December 31,
1997 | | 1996
---- | | ----
<S> <C> <C>
Assets (Note 2) | |
Investments at fair value (cost or initial value of $133,274,408 and
$905,748, respectively) .................................................. $133,415,261 | | $3,980,421
Cash and cash equivalents .................................................. 8,862,416 | | 322,664
Investment in unconsolidated operating subsidiary .......................... 6,868,880 | | --
Due from unconsolidated operating subsidiary ............................... 861,028 | | --
Interest receivable ........................................................ 643,687 | | --
Accounts receivable (net of allowance for doubtful accounts of | |
$0 and $249,609, respectively) ........................................... -- | | 917,625
Income taxes receivable .................................................... -- | | 52,225
Property and equipment: | |
Computer equipment ....................................................... -- | | 154,182
Office furniture and equipment ........................................... -- | | 96,827
Less: accumulated depreciation ........................................... -- | | (130,495)
------------ | | ----------
-- | | 120,514
Other ...................................................................... 54,082 | | 38,816
------------ | | ----------
Total assets ............................................................... $150,705,354 | | $5,432,265
============ | | ==========
| |
Liabilities and Shareholders' Equity | |
Accounts payable and accrued liabilities ................................... $ 53,454 | | $ 322,252
Due to related parties ..................................................... -- | | 78,142
Deferred taxes ............................................................. -- | | 1,230,536
Notes payable .............................................................. -- | | 429,684
------------ | | ----------
Total liabilities .......................................................... 53,454 | | 2,060,614
Shareholders' equity: | |
Undesignated preferred stock, $0.01 par value, 90,000 and 5,000,000 shares | |
authorized, respectively, 0 issued and outstanding ..................... -- | | --
Class A preferred stock, $50 par value, 0 and 10,000 shares authorized, | |
respectively, and $0 and 6,857 issued and outstanding, respectively .... -- | | 1,419,399
Unearned ESOP shares ..................................................... -- | | (116,668)
Common stock, $.01 par value, 20,000,000 and 2,985,900 shares authorized, | |
and 11,068,767 and 481,058 issued and outstanding, respectively ........ 110,688 | | 4,811
Capital in excess of par value ........................................... 144,939,913 | | 10,407
Retained earnings ........................................................ -- | | 2,053,702
Undistributed net realized earnings ...................................... (54,624) | | --
Unrealized appreciation of investments ................................... 5,655,923 | | --
------------ | | ----------
Total shareholders' equity ................................................. 150,651,900 | | 3,371,651
------------ | | ----------
Total liabilities and shareholders' equity ................................. $150,705,354 | | $5,432,265
============ | | ==========
</TABLE>
See accompanying notes.
16
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
- --------------------------------------------------------------------------------
Schedule of Investments
December 31, 1997
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C> <C>
Senior Debt--4.07%
Four S Baking Company ...................................
Baking $ 1,825,477 $ 1,825,477
BIW Connector Systems, LLC .............................. Manufacturing 3,890,000 3,890,000
------------ ------------
Subtotal 5,715,477 5,715,477
Subordinated Debt--7.88%
Four S Baking Company ................................... Baking 1,491,797 1,491,797
BIW Connector Systems, LLC .............................. Manufacturing 6,350,260 6,350,260
Westwinds Group Holdings, Inc. .......................... Restaurant 3,205,662 3,205,662
------------ ------------
Subtotal ................................................ 11,047,719 11,047,719
Convertible Preferred Stock(2)--1.64%
Four S Baking Company 15% dividend convertible into
51,390 shares of common stock or 10.89% of Co. ........ Baking 2,302,500 2,302,500
Common Stock Warrants(1)(2)--1.13%
Four S Baking Company 15,390 shares 3.26% of Co. ........ Baking 461,700 577,125
BIW Connector Systems, LLC 8% of LLC .................... Manufacturing 652,000 652,000
Westwinds Group Holdings, Inc. 5% of Co. ................ Restaurant 350,000 350,000
------------ ------------
Subtotal ................................................ 1,463,700 1,579,125
Subtotal--non-publicly traded securities--14.72% ........ 20,529,396 20,644,821
Government Securities--80.38%
FHLB Discount Note due 2/4/98 ........................... 20,969,205 20,981,628
FHLB Discount Note due 3/6/98 ........................... 10,892,628 10,898,000
FHLB Discount Note due 4/1/98 ........................... 9,865,203 9,868,130
FNMA Discount Note due 4/24/98 .......................... 6,877,260 6,883,007
FFCB 5.90% due 6/2/98 ................................... 20,016,853 20,016,000
FHLB Discount Note due 6/8/98 ........................... 14,645,792 14,643,875
FHLB Discount Note due 8/20/98 .......................... 14,483,150 14,479,800
FNMA 5.71% due 9/9/98 ................................... 14,994,920 15,000,000
------------ ------------
Total Investments ....................................... 112,745,011 112,770,440
Investment in Unconsolidated Operating
Subsidiary--4.90% Investment
ACS Capital Investments Corporation(1)(2)--100% of Co. ... Banking 402,700 6,868,880
------------ ------------
Totals .................................................. $133,677,107 $140,284,141
============ ============
Schedule of Investments
December 31, 1996
Industry Cost Fair Value
-------- ---- ----------
Common Stock(1)
Erie Forge and Steel, Inc.... 120,773 Shares ............. Manufacturing $ 500,000 $ 2,736,418
Four S Baking Company........ 27,000 Shares ............. Baking 67,750 486,000
Indiana Steel & Wire
Corporation................ 7,547 Shares ............. Manufacturing 42,914 58,869
Martino's Bakery, Inc........ 50,000 Shares ............. Baking 120,750 259,000
Mobile Tool International,
Inc. ...................... 6,130 Shares ............. Manufacturing 74,334 440,134
------------ ------------
Totals .................................................. $ 905,748 $ 3,980,421
============ ============
</TABLE>
- ----------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
17
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
- --------------------------------------------------------------------------------
Statements of Operations
<TABLE>
<CAPTION>
Three Months | | Nine Months Year Ended
Ended | | Ended --------------------------
December 31, | | September 30, December 31, December 31,
1997 | | 1997 1996 1995
<S> <C> <C> <C> <C>
Operating Income (Note 2)
Financial advisory fees ................................. -- | | $1,122,357 $1,738,295 $1,148,752
Financial performance fees .............................. -- | | 797,600 649,030 1,288,797
Interest income ......................................... $2,122,876 | | 553,267 -- --
Loan processing fees .................................... 653,568 | | -- -- --
Other ................................................... 20,223 | | 427,577 359,097 268,083
---------- | | ---------- ---------- ----------
Total operating income .................................. 2,796,667 | | 2,900,801 2,746,422 2,705,632
| |
Operating Expenses | |
Salaries and benefits ................................... 243,142 | | 1,220,907 1,283,198 1,701,660
General, administrative and other ....................... 307,919 | | 1,514,122 1,282,195 851,314
Provision for (reversal of) doubtful accounts ........... -- | | (177,198) 224,329 302,283
Interest ................................................ -- | | 60,034 32,959 37,037
Depreciation and amortization ........................... -- | | 33,164 39,016 35,415
---------- | | ---------- ---------- ----------
Total operating expenses ................................ 551,061 | | 2,651,029 2,861,697 2,927,709
---------- | | ---------- ---------- ----------
Operating income (loss) before equity in earnings of | |
unconsolidated operating subsidiary ................... 2,245,606 | | 249,772 (115,275) (222,077)
Equity in earnings of unconsolidated operating | |
subsidiary ............................................ 24,213 | | -- -- --
---------- | | ---------- ---------- ----------
Net operating income (loss) ............................. 2,269,819 | | 249,772 (115,275) (222,077)
Realized gain on investments ............................ -- | | -- -- 66,148
Change in unrealized appreciation of investments ........ 167,573 | | 5,321,421 483,665 370,696
---------- | | ---------- ---------- ----------
Income before income taxes .............................. 2,437,392 | | 5,571,193 368,390 214,767
Provision for income taxes .............................. -- | | 2,128,610 159,251 57,381
---------- | | ---------- ---------- ----------
Net increase in shareholders' equity resulting | |
from operations ....................................... $2,437,392 | | $3,442,583 $ 209,139 $ 157,386
========== | | ========== ========== ==========
| |
Net operating income per share Basic ......... $ 0.21 | |
Diluted ....... $ 0.20 | |
| |
Net increase in shareholders' equity Basic ......... $ 0.22 | |
resulting from operations per share Diluted ....... $ 0.21 | |
| |
Weighted average shares of Basic ......... 11,068,767 | |
common stock outstanding Diluted ....... 11,405,385 | |
</TABLE>
See accompanying notes.
18
<PAGE>
AMERICAN CAPITAL STRATEGIES, INC.
- --------------------------------------------------------------------------------
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Unearned Common Stock Capital
Preferred ESOP ------------------ in Excess of Retained
Stock Shares Shares Amount Par Value Earnings
----- ------ ------ ------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 ........... $ 1,419,399 $(549,378) 480,312 $ 4,804 $ 9,444 $ 1,687,177
Net increase in share-
holders' equity result-
ing from operations ....... -- -- -- -- -- 157,386
ESOP shares earned .......... -- 216,827 -- -- -- --
----------- --------- --------- ------- ------------ -----------
Balance at
December 31, 1995 ........... $ 1,419,399 $(332,551) 480,312 $ 4,804 $ 9,444 $ 1,844,563
Net increase in share-
holders' equity result-
ing from operations ......... -- -- -- -- -- 209,139
Options exercised ............. -- -- 746 7 963 --
ESOP shares earned ............ -- 215,883 -- -- -- --
----------- --------- --------- ------- ------------ -----------
Balance at
December 31, 1996 ........... $ 1,419,399 $(116,668) 481,058 $ 4,811 $ 10,407 $ 2,053,702
----------- --------- --------- ------- ------------ -----------
Net increase in share-
holders' equity result-
ing from operations ....... -- -- -- -- -- 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 --
ESOP shares earned .......... -- 116,668 -- -- -- --
----------- --------- --------- ------- ------------ -----------
Balance at
September 30, 1997 .......... $ -- $ -- 11,068,767 $110,688 $144,939,913 $ 5,488,350
=========== ========= ========== ======== ============ ===========
============================================================================================================
Effect of reorganization as
a RIC (Note 2) ............ -- -- -- -- -- (5,488,350)
Net increase in share-
holders' equity result-
ing from operations ....... -- -- -- -- -- --
Distributions ............... -- -- -- -- -- --
----------- --------- --------- ------- ------------ -----------
Balance at
December 31, 1997 ........... $ -- $ -- 11,068,767 $110,688 $144,939,913 $ --
=========== ========= ========== ======== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Undistributed Unrealized Total
Net Realized Appreciation Shareholders'
Earnings of Investments Equity
-------- -------------- ------
<S> <C> <C> <C>
Balance at
December 31, 1994 ........... $ 2,571,446
Net increase in share-
holders' equity result-
ing from operations ......... 157,386
ESOP shares earned .......... 216,827
----------- ---------- ------------
Balance at
December 31, 1995 ........... $ 2,945,659
----------- ---------- ------------
Net increase in share-
holders' equity result-
ing from operations ......... 209,139
Options exercised ............. 970
ESOP shares earned ............ 215,883
----------- ---------- ------------
Balance at
December 31, 1996 ........... $ 3,371,651
----------- ---------- ------------
Net increase in share-
holders' equity result-
ing from operations ....... 3,442,583
Contribution of common
stock to ESOP ............. --
Conversion of preferred
stock to common
stock ..................... --
Issuance of common
stock ..................... 143,608,049
ESOP shares earned .......... 116,668
----------- ---------- ------------
Balance at
September 30, 1997 .......... $150,538,951
=========== ========== ============
=================================================================================
Effect of reorganization as
a RIC (Note 2) ............ $5,488,350
Net increase in share-
holders' equity result-
ing from operations ....... $ 2,269,819 167,573 2,437,392
Distributions ............... (2,324,443) -- (2,324,443)
----------- ---------- ------------
Balance at
December 31, 1997 ........... $ (54,624) $5,655,923 $150,651,900
=========== ========== ============
</TABLE>
See accompanying notes.
19
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
- --------------------------------------------------------------------------------
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months | | Nine Months Year Ended
Ended | | Ended -----------------------------
December 31, | | September 30, December 31, December 31,
1997 1997 1996 1995
---- | | ---- ---- ----
<S> <C> <C> <C> <C>
Operating activities (Note 2) | |
Net increase in shareholders' equity resulting | |
from operations .................................... $ 2,437,392 | | $ 3,442,583 $ 209,139 $ 157,386
Adjustments to reconcile net increase in | |
shareholders' equity resulting from | |
operations to net cash provided by | |
(used in) operating activities: | |
Depreciation and amortization .................. -- | | 32,332 39,016 35,415
Unrealized appreciation of investments ......... (167,537)| | (5,321,421) (483,665) (370,696)
Realized gain on investments ................... -- | | -- -- (66,148)
Net amortization of securities ................. (1,233,443)| | (337,159) -- --
Amortization of deferred finance costs ......... -- | | 3,357 11,088 7,332
Provision for deferred income taxes ............ -- | | 2,102,243 120,578 115,485
Loss on disposal of property | |
and equipment ................................ -- | | -- 629 91
ESOP contribution .............................. -- | | 116,668 215,883 216,827
Increase in interest receivable ................ (206,946)| | (122,074) -- --
Provision for doubtful accounts ................ -- | | (177,198) 224,329 302,283
Increase in due from unconsolidated | |
operating subsidiary ......................... (526,149)| | -- -- --
Increase in accounts receivable ................ -- | | 486,198 (865,311) (182,056)
(Increase) decrease in income taxes receivable.. -- | | 24,554 100,922 (32,822)
Decrease (increase) in other assets ............ 61,947 | | (112,483) 5,665 (3,554)
Increase (decrease) in accounts payable and | |
accrued liabilities .......................... (328,195)| | 128,419 227,930 29,538
Gain of unconsolidated operating subsidiary .... (24,213)| | -- -- --
------------ | | ------------- --------- ---------
Net cash provided by (used in) operating activities .... 12,856 | | 266,019 (193,797) 209,081
Investing activities | |
Proceeds from sale or maturity of investments ........ 35,000,000 | | 60,000 -- 66,148
Purchase of investments .............................. (20,529,396)| | (482,889) (74,640) (6,674)
Purchase of securities ............................... (16,592,667)| | (129,896,447) -- --
Purchases of property and equipment, | |
net of disposals ................................... -- | | (28,415) (39,669) (20,304)
------------ | | ------------- --------- ---------
Net cash provided by (used in) investing activities .... (2,122,063)| | (130,347,751) (114,309) 39,170
Financing activities | |
Proceeds from notes payable .......................... -- | | 589,625 429,684 --
Principal payments of notes payable .................. -- | | (1,019,309) (160,833) (77,500)
Increase in deferred finance costs ................... -- | | -- (4,000) (25,849)
Increase (decrease) in due to related parties ........ -- | | (78,142) 5,920 10,893
Issuance of common stock ............................. -- | | 143,608,049 -- --
Options exercised .................................... -- | | -- 970 --
Distributions ........................................ (2,324,443)| | -- -- --
------------ | | ------------- --------- ---------
Net cash provided by (used in) financing activities .... (2,324,443)| | 143,100,223 271,741 (92,456)
------------ | | ------------- --------- ---------
Net increase (decrease) in cash and cash equivalents ... (4,433,650)| | 13,018,491 (36,365) 155,795
Cash and cash equivalents at beginning of year ......... 13,296,066 | | 322,664 359,029 203,234
------------ | | ------------- --------- ---------
Cash and cash equivalents at end of year ............... $ 8,862,416 | | $ 13,341,155 $ 322,664 $ 359,029
============ | | ============= ========= =========
</TABLE>
See accompanying notes.
20
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
- --------------------------------------------------------------------------------
Financial Highlights
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1997
-----------------
<S> <C>
Per Share Data(1)
Net asset value at beginning of the period $ 13.60
Net operating income 0.21
Net realized and unrealized gains on investments 0.01
------------
Net increase in shareholders' equity from operations 0.22
Distribution of net investment income 0.21
------------
Net asset value at end of period $ 13.61
Per share market value at end of period $ 18.125
Shares outstanding at end of period 11,068,767
Ratio/Supplemental Data
Net assets at end of period $150,651,900
Ratio of operating expenses to average net assets(2) 1.46%
Ratio of net operating income to net assets(2) 6.03%
</TABLE>
- ----------
(1) Basic per share data
(2) Amounts were annualized since the results are for a three-month period.
See accompanying notes.
21
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
- --------------------------------------------------------------------------------
Notes to Financial Statements
Note 1. Organization
American Capital Strategies, Ltd. (the Company) is a Delaware corporation formed
in 1986 to provide merchant banking services to and invest in small and medium
sized businesses.
On August 29, 1997, the Company completed an initial public offering (IPO) of
10,382,437 shares of common stock, 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 began operations so as to qualify to be taxed as a
regulated investment company (RIC) as defined in Subtitle A, Chapter 1, under
Subchapter M of the Internal Revenue Code. As contemplated by these
transactions, the Company materially changed its business plan and format from
structuring and arranging financing for buyout transactions on a fee for
services basis primarily to being a lender to and investor in small and medium
sized companies. As a result of the changes, the Company is operating as a
holding company whose predominant source of operating income has changed from
financial performance and advisory fees to interest and dividends earned from
investing the Company's assets in debt and equity of businesses. The Company's
investment objectives are to achieve current income from the collection of
interest and dividends, as well as long-term growth in its shareholders' equity
through appreciation in value of the Company's equity interests. The Company
also provides financial advisory services to businesses through ACS Capital
Investments Corporation (CIC), a wholly-owned subsidiary. The Company is
headquartered in Bethesda, Maryland, and has offices in New York, Boston,
Pittsburgh, San Francisco, and Savannah.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and for periods commencing with the
Company's election to be treated as a RIC, in accordance with Article 6 of
Regulation S-X of the Code of Federal Regulations. For the nine months ended
September 30, 1997 and the years ended December 31, 1996 and 1995 the financial
statements are prepared on a consolidated basis with the accounts of the CIC,
the Company's wholly owned subsidiary. All intercompany transactions and
balances were eliminated. Effective October 1, 1997, pursuant to RIC accounting
requirements, CIC was deconsolidated, and, as a result, for the three months
ended December 31, 1997 the Company accounted for its investment in CIC under
the equity method. In connection with this change, the Company contributed the
following assets and liabilities to CIC:
Investment in Erie Forge and Steel ................................. $2,736,418
Other assets ....................................................... 791,228
Other liabilities .................................................. 68,996
Deferred tax liability ............................................. 3,332,771
As a result of these changes, the Company's financial statements for periods
through September 30, 1997 (pre-RIC periods) are not comparable with the
financial statements for periods commencing after October 1, 1997 (post-RIC
periods).
Valuation of Investments
Investments are carried at fair value, as determined by the Board of Directors.
Securities which are publicly traded are valued at the closing bid price on the
valuation date.
Debt and equity securities which are not publicly traded are valued at fair
value as determined in good faith by the Board of Directors. In making such
determination, the Board of Directors will value non-convertible debt securities
at cost plus amortized original issue discount, if any, unless adverse factors
lead to a determination of a lesser valuation. In valuing convertible debt,
equity or other securities, the Board of Directors determines the fair value
based on the collateral, the issuer's ability to make payments, the earnings of
the issuer, sales to third parties of similar securities, the comparison to
publicly traded securities and other pertinent factors. Due to the uncertainty
inherent in the valuation process, such estimates of fair value 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand, deposits and highly liquid
investments with original maturities of three months or less. Cash and cash
equivalents are carried at cost which approximates fair value.
Interest and Dividend Income Recognition
Interest income is recorded on the accrual basis to the extent that such amounts
are expected to be collected. Original issue discount is amortized into interest
income using the effective interest method. Dividend income is recognized on the
ex-dividend date.
22
<PAGE>
Financial Advisory and Performance Fee 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 for
structuring, financing, and executing transactions and are generally payable
only if the transaction closes and are recognized as earned when the transaction
is completed. Financial advisory and performance fees are for services provided
by CIC.
Loan Processing Fee Recognition
Loan processing fees are recorded as income on the closing date of the related
loan.
Realized Gain or Loss and Unrealized Appreciation
or Depreciation on Investments
Realized gain or loss is recorded at the disposition of an investment and is the
difference between the net proceeds from the sale and the cost basis of the
investment. Unrealized appreciation or depreciation reflects the difference
between the Board of Directors' valuation of the investments and the cost basis
of the investments.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Federal Income Taxes
The Company operates so as to qualify to be taxed as a RIC under the Internal
Revenue Code. Generally, a RIC is entitled to deduct dividends it pays to its
shareholders from its income to determine "taxable income." The Company has
distributed and currently intends to distribute sufficient dividends to
eliminate taxable income. Therefore, the statement of operations contains no
provision for income taxes for the three months ended December 31, 1997.
During the pre-RIC periods, the Company operated under Subchapter C of the
Internal Revenue Code and calculated its tax provision pursuant to Statement of
Financial Accounting Standards No. 109. Deferred income taxes were determined
based on the differences between financial reporting and tax basis of assets and
liabilities.
Use of Estimates in Preparation of
Financial Statements
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, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
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.
Management Fees
The Company is self-managed and therefore does not incur management fees payable
to third parties.
Reclassifications
Certain previously reported amounts have been reclassified to conform with the
current financial statement presentation.
Recent Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share," (SFAS 128). The Company adopted SFAS 128 for the
three months ended December 31, 1997. The Company has not restated the earnings
per share for prior periods since it is not meaningful due to the significant
change in the Company's capital structure as a result of the IPO, and its change
in operating activities to a RIC on October 1, 1997.
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) was issued and is effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains, losses) in a full set of general purpose financial statements.
SFAS 130 requires the disclosure of an amount that represents total
comprehensive income and the components of comprehensive income in a financial
statement. The adoption of SFAS 130 is not expected to have a material impact on
the financial statements of the Company.
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131) was issued
and is effective for fiscal years beginning after December 15, 1997. SFAS 131
establishes standards for determining an entity's operating segments and the
type and level of financial information to be disclosed in both annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 is not expected to have a material impact on the
financial statements of the Company.
23
<PAGE>
Note 3. Investments
Investments consists of securities issued by various agencies of the Federal
government valued at $112,770,440 with maturities of less than one year from the
date of purchase and securities issued by privately-held companies valued at
$20,644,821. The securities issued by privately-held companies consists of
senior loans, subordinated loans with equity warrants, convertible preferred
stock and common stock. The loans have effective interest rates ranging from
9.5% to 20% and are payable in installments with final maturities from 5 to 7
years and are collateralized by assets of the borrower. The Company's
investments in equity warrants and common stock are non-income producing. The
net unrealized appreciation in investments for Federal income tax purposes is
the same as for book purposes and none of the Company's investments are on
non-accrual status.
Note 4. Investment in Unconsolidated
Operating Subsidiary
As discussed in Note 2, CIC is an operating subsidiary of the Company and is
accounted for under the equity method effective October 1, 1997. The investment
in CIC is carried at fair value as determined by the Board of Directors.
Condensed financial information for CIC at December 31, 1997 and for the three
months then ended is as follows:
Assets
Investments in portfolio companies,
at fair value.................................. $10,360,904
Other assets, net................................ 990,926
-----------
Total assets................................... $11,351,830
===========
Liabilities and Shareholder's Equity
Deferred income taxes............................ $ 3,322,688
Due to parent.................................... 861,028
Other liabilities................................ 299,234
Shareholder's equity............................. 6,868,880
-----------
Total liabilities and shareholder's equity......... $11,351,830
===========
Total revenue...................................... $ 532,496
Operating expense.................................. 1,084,570
-----------
Net operating loss............................... (552,074)
Unrealized appreciation of investments............. 605,045
Other.............................................. (28,758)
-----------
Net income......................................... $ 24,213
===========
Note 5. Stock Option Plan
The Company applies APB 25 and related interpretations in accounting for its
stock-based compensation plan. In accordance with SFAS 123, "Accounting for
Stock-Based Compensation," the Company elected to continue to apply the
provisions of APB 25 and provide pro forma disclosure of the Company's net
operating income and net increase in shareholders' equity resulting from
operations calculated as if compensation costs were computed in accordance with
SFAS 123. The Company is providing this information for the post-RIC period as
discussed in Notes 1 and 2 and from the time the 1997 Stock Option plan was
established by the Company.
Three months ended
December 31, 1997
-----------------
Net operating income as reported ...... $2,269,819
pro forma ........ $2,029,525
Net increase in shareholders'
equity resulting from operations as reported ...... $2,437,392
pro forma ........ $2,197,098
The effects of applying SFAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported net operating income and
net increase in shareholders' equity resulting from operations for future years.
The Company estimated a fair value per option on the date of grant of $2.33
using a Black-Scholes option pricing model and the following assumptions;
dividend yield 6.5%, risk free interest rate 6.5%, expected volatility factor
.25, expected lives of the options of 7 years, and an annual forfeiture rate of
5%.
The Company established the 1997 Stock Option Plan (the 1997 Plan) which
provides for the granting of options to purchase common stock at a price of not
less than the fair market value of the common stock on the date of issuance to
employees of the Company. There are 1,328,252 shares available to be granted
under the 1997 Plan. Upon closing the IPO, the Company granted 1,302,703 fixed
options at $15.00 per share, the market value at the date of grant. During the
three months ended December 31, 1997, 6,000 options were forfeited. Accordingly,
at December 31, 1997, 1,296,703 of the granted options were outstanding.
On November 6, 1997, the Board of Directors authorized the establishment of a
stock option plan for the non- employee directors. The plan must receive
shareholder approval at the annual meeting to be held on May 14, 1998 and
approval from the Securities and Exchange Commission (SEC) before it becomes
effective. Upon shareholder and SEC approval, the Board of Directors has
authorized the Company to issue 15,000 options to each of the six non-employee
directors.
24
<PAGE>
Note 6. Related Parties
ACS Partners I, L.P., was formed with a wholly owned subsidiary of the Company
as sole general partner and several principals of the Company as limited
partners to allow the principals the opportunity to co-invest in a transaction
with the Company. Pursuant to the terms of the partnership agreement of ACS
Partners I, L.P. , the Company through its wholly owned subsidiary as sole
general partner has all discretion over the purchase, sale, restructuring and
disposition of the assets of ACS Partners I, L.P. As of December 31, 1997,
principals of the Company had invested $260,000 in ACS Partners I, L.P.
As of December 31, 1996, the Company had a note payable to its president for
approximately $74,000. The interest rate was based on prime plus 4%. The related
interest expense for the nine months ended September 30, 1997 and the years
ended December 31, 1996 and 1995 was approximately $6,000, $8,000 and $3,000,
respectively. In August 1997, the Company repaid the note in full.
The Company and CIC have entered into an expense sharing agreement whereby CIC
reimburses the Company for expenses paid by the Company on CIC's behalf.
Note 7. Notes Payable
At December 31, 1996, the Company had a line of credit with a term conversion
provision with a finance company. During the first two years of the agreement,
the Company had the ability to borrow up to $500,000 with interest payable
monthly. The balance outstanding after the initial two-year period was repayable
as a term loan in equal monthly installments of principal plus accrued interest
over three years. The interest rate was the finance company's base rate plus
1.5%. This arrangement was 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%. In July 1997, the
Company repaid the outstanding balance and closed the line of credit.
At December 31, 1996, the Company had a term loan commitment with a finance
company in the amount $750,000 which was subject to a two-year draw down period
ending in October 1997. 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, was due
in 2001, and the interest rate was 11.25%. 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 and the draw down period was extended until May 1999.
Interest only was 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 became fully due in May 2004. In August 1997, the Company
repaid the outstanding balance of $636,000 and extinguished the note.
During the nine months ended September 30, 1997 and the years ended December 31,
1996 and 1995, the cash paid for interest was approximately $88,000, $43,000 and
$36,000, respectively. The weighted average interest rates, including
amortization of deferred finance costs, for the years nine months ended
September 30, 1997 and the years ended December 31, 1996 and 1995 were 16.9%,
17.3% and 13.7%, respectively. There was no outstanding debt at December 31,
1997.
Note 8. Income Taxes
Significant components of the Company's deferred tax liabilities and assets were
as follows:
December 31,
1996
----
Deferred tax liabilities:
Investments ............................................. $1,303,911
Depreciation ............................................ 21,393
----------
1,325,304
Deferred tax assets:
Net operating loss carryforward ......................... 63,085
Alternative minimum tax ................................. 25,509
Other ................................................... 6,174
----------
94,768
----------
Net deferred tax liabilities ............................ $1,230,536
==========
The components of the income tax provision were as follows:
Year Ended
December 31,
1996 1995
---- ----
Current provision (benefit) ............................ $ 38,673 $(58,104)
Deferred provision ..................................... 120,578 115,485
-------- --------
$159,251 $ 57,381
======== ========
25
<PAGE>
The differences between taxes at the Federal statutory tax rate and the
effective tax rate were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate ................ $1,803,681 $125,253 $ 73,021
State taxes ................... 342,218 14,747 8,589
Change in valuation
allowance ................... -- (25,509) (19,130)
Other ......................... (17,289) 44,760 (5,099)
---------- -------- --------
Effective rate ................ $2,128,610 $159,251 $ 57,381
========== ======== ========
</TABLE>
During the nine months ended September 30, 1997 and years ended December 31,
1996 and 1995, cash paid for income taxes was approximately $2,000, $1,000 and
$45,000, respectively.
The aggregate gross and net unrealized appreciation over the cost for Federal
income tax purposes was $7,413,705, $3,399,423 and $2,915,758 as of December 31,
1997, 1996 and 1995, respectively. The aggregate cost of securities for Federal
income tax purposes were $132,870,434, $580,998 and $506,664 as of December 31,
1997, 1996 and 1995, respectively.
As discussed in Note 1, the Company has historically been taxed under subchapter
C and is currently operating so as to qualify and intends to file as a
subchapter M corporation for Federal income tax purposes. The tax consequences
of converting a corporation from taxation under subchapter C to subchapter M are
uncertain. The Company has requested a ruling from the IRS to clarify the
consequences of the conversion. The Company expects to receive a favorable
ruling but there are no assurances that it will receive a favorable ruling. If
the Company does not receive a timely favorable ruling, it intends to treat the
conversion as a deemed sale which will result in a tax payment of approximately
$3.1 million and will result in the Company declaring an additional dividend of
approximately $5.9 million. Additionally, if the Company does not receive a
timely favorable ruling it will reclassify the tax liability accrual on CIC's
books from deferred to current.
Note 9. Lease Commitments
The Company has non-cancelable operating leases for office space and office
equipment. The leases expire over the next seven years and contain provisions
for certain annual rental escalations.
Rent expense for operating leases for three months ended December 31, 1997, the
nine months ended September 30, 1997 and the years ended December 31, 1996 and
1995, was approximately $73,000, $97,000, $101,000 and $95,000, respectively.
Future minimum lease payments under non-cancelable operating leases at December
31, 1997 were as follows:
1998 ............................................................... $ 331,000
1999 ............................................................... 237,000
2000 ............................................................... 237,000
2001 ............................................................... 242,000
2002 and thereafter ................................................ 605,000
----------
Total .............................................................. $1,652,000
==========
Note 10. 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 the
lesser of $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.
Note 11. Capital Stock
In July, 1997, all unearned ESOP shares became earned and were allocated to the
ESOP accounts of employees. Pursuant to the Company's Class A preferred stock
declaration, the Class A 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 unallocated
preferred stock to 5,000,000 and 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.
26
<PAGE>
On August 29, the Company completed its IPO and sold 10,382,437 shares of its
common stock at a price of $15.00 per share. Pursuant to the terms of the
Company's agreement with the underwriter of the offering, the Company issued
442,751 common stock warrants (Warrants) to the underwriter. The Warrants have a
term of five years from the date of issuance and may be exercised at a price of
$15.00 per share.
The Company distributed $2,324,443 or $0.21 per share to its shareholders for
the three months ended December 31, 1997. For Federal income tax purposes, the
distribution was 100% from ordinary income.
Note 12. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended December 31, 1997. For all other periods,
earnings per share is not presented since it is not considered meaningful due to
the IPO and reorganization of the Company as a RIC.
Three Months Ended
December 31, 1997
-----------------
Numerator for basic and diluted
net increase in shareholders' equity
resulting from operations.............................. $ 2,437,392
Denominator for basic-weighted
average shares......................................... 11,068,767
Employee stock options................................... 251,232
Warrants................................................. 85,386
-----------
Dilutive potential common shares......................... 333,618
-----------
Denominator for diluted.................................. 11,405,385
===========
Basic earnings per share................................. $ 0.22
Diluted earnings per share............................... $ 0.21
27
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTINGS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference
to the information provided in the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held May 14, 1998 (the "1998 Proxy Statement")
under the heading "Directors and Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
to the information provided in the 1998 Proxy Statement under the heading
"Compensation of Directors and Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information in response to this Item is incorporated herein by reference
to the information provided in the 1998 Proxy Statement under the heading
"Security Ownership of Management and Certain Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference
to the information provided in the 1998 Proxy Statement under the heading
"Certain Transactions."
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) The following financial statements are filed herewith:
AMERICAN CAPITAL STRATEGIES, LTD.
Report of Independant Public Accountant
Balance Sheets as of December 31, 1997 and 1996
Schedule of Investments as of December 31, 1997 and 1996
Statement of Operations for the Three Months Ended Decemeber 31,
1997, the Nine Months September 30, 1997, and the Years Ended
December 31, 1996 and 1995.
Statement of Shareholders' Equity as of December 31, 1997,
September 30, 1997, December 31, 1996 and 1995.
Statement of Cash Flows for the Three Months Ended December 31,
1997, the Nine Months Ended September 30, 1997 and the Years
Ended December 31, 1996 and 1995
Financial Highlights for the Three Months Ended December 31, 1997
Notes to Financial Statements
(2) No financial statement schedules of the Company are filed herewith
because (i) such schedules are not required or (ii) the
information required has been presented in the aforementioned
financial statement
(3) The following exhibits are filed herewith or incorporated herein
by reference
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
3.1 American Capital Strategies, Ltd. Second Amended and Restated
Certificate of Incorporation. Incorporated herein by reference to
Exhibit a of the Pre-Effective Amendment Number 1 to the Registration
Statement on Form N-2 (File No. 333-29943) filed on August 12, 1997.
3.2 American Capital Strategies, Ltd. Second Amended and Restated Bylaws.
Incorporated herein by reference to Exhibit b of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
4.1 Instruments defining the rights of security holders: See Article IV
of the Company's Second Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit a of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997).
4.2 Instruments defining the rights of security holders: See Section I of
the Company's Second Amended and Restated Bylaws (incorporated herein
by reference to Exhibit b of the Pre-Effective Amendment Number 1 to
the Registration Statement on Form N-2 (File No. 333-29943) filed on
August 12, 1997).
4.3 Dividend Reinvestment Plan of the Company. Incorporated herein by
reference to Exhibit e of the Pre-Effective Amendment Number 2 to the
Registration Statement on Form N-2 (File No. 333-29943) filed on
August 29, 1997.
*10.1 Form of American Capital Strategies, Ltd., First Amended and Restated
Employee Stock Ownership Plan. Incorporated herein by reference to
Exhibit i.1 of the Pre-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333-29943) filed on
August 12, 1997.
*10.2 Form of American Capital Strategies, Ltd. 1997 Stock Option Plan.
Incorporated herein by reference to Exhibit i.2 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.3 Form of Employment Agreement between the Company and David Gladstone.
Incorporated herein by reference to Exhibit i.3 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
<PAGE>
*10.4 Form of Employment Agreement between the Company and Malon Wilkus.
Incorporated herein by reference to Exhibit i.4 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.5 Form of Employment Agreement between the Company and Adam Blumenthal.
Incorporated herein by reference to Exhibit i.5 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.6 Form of Employment Agreement between the Company and Stephen L.
Hester. Incorporated herein by reference to Exhibit i.6 of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997.
*10.7 Form of Employment Agreement between the Company and Roland Cline.
Incorporated herein by reference to Exhibit i.7 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.8 Form of Employment Agreement between the Company and John Erickson.
10.9 Form of Loan Accounting Agreement between the Company and Riggs Bank,
N.A. Incorporated herein by reference to Exhibit j.1 of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997.
10.10 Custodial Agreement between the Company and Riggs Bank, N.A.
Incorporated herein by reference to Exhibit j.2 of the Pre-Effective
Amendment Number 2 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 29, 1997.
10.11 Form of Referral Agreement between the Company and Riggs Bank, N.A.
Incorporated herein by reference to Exhibit k.1 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
10.12 Form of Referral Agreement between the Company and NCB Development
Corporation. Incorporated herein by reference to Exhibit k.2 of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997.
21 Subsidiaries of the Company.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- -----------
* Management Contract or Compensatory Plan or Arrangement
(b) Reports on Form 8-K
NONE
(c) Exhibits. See the exhibits filed herewith
(d) Additional financial statement schedules
NONE
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ John R. Erickson
--------------------------
John R. Erickson
Vice President and
Chief Financial Officer
Date: March 31, 1998
31
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ David J. Gladstone Chairman and Director March 31, 1998
- ----------------------
David J. Gladstone
/s/ Malon Wilkus President and Director March 31, 1998
- ----------------
Malon Wilkus
* Executive Vice President March 31, 1998
- ------------------- and Director
Adam Blumenthal
/s/ John R. Erickson Vice President and Chief March 31, 1998
- ----------------- Financial Officer
John R. Erickson (Principal Financial and
Accounting Officer)
/s/ Stephen L. Hester Vice President and General March 31, 1998
- --------------------- Counsel
Stephen L. Hester
Director March __, 1998
- ------------------------
Robert L. Allbritton
* Director March 31, 1998
- ------------------
Landon Butler
* Director March 31, 1998
- ----------------
Neil M. Hahl
* Director March 31, 1998
- ---------------------
Phillip R. Harper
* Director March 31, 1998
- ----------------
Stan Lundine
Director March __, 1998
- --------------------
Stephen P. Walko
</TABLE>
- ------------
* Executed by John R. Erickson on behalf of the indicated person pursuant to a
power of attorney.
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
3.1 American Capital Strategies, Ltd. Second Amended and Restated
Certificate of Incorporation. Incorporated herein by reference to
Exhibit a of the Pre-Effective Amendment Number 1 to the Registration
Statement on Form N-2 (File No. 333-29943) filed on August 12, 1997.
3.2 American Capital Strategies, Ltd. Second Amended and Restated Bylaws.
Incorporated herein by reference to Exhibit b of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
4.1 Instruments defining the rights of security holders: See Article IV
of the Company's Second Amended and Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit a of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997).
4.2 Instruments defining the rights of security holders: See Section I of
the Company's Second Amended and Restated Bylaws (incorporated herein
by reference to Exhibit b of the Pre-Effective Amendment Number 1 to
the Registration Statement on Form N-2 (File No. 333-29943) filed on
August 12, 1997).
4.3 Dividend Reinvestment Plan of the Company. Incorporated herein by
reference to Exhibit e of the Pre-Effective Amendment Number 2 to the
Registration Statement on Form N-2 (File No. 333-29943) filed on
August 29, 1997.
*10.1 Form of American Capital Strategies, Ltd., First Amended and Restated
Employee Stock Ownership Plan. Incorporated herein by reference to
Exhibit i.1 of the Pre-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333-29943) filed on
August 12, 1997.
*10.2 Form of American Capital Strategies, Ltd. 1997 Stock Option Plan.
Incorporated herein by reference to Exhibit i.2 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.3 Form of Employment Agreement between the Company and David Gladstone.
Incorporated herein by reference to Exhibit i.3 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
33
<PAGE>
*10.4 Form of Employment Agreement between the Company and Malon Wilkus.
Incorporated herein by reference to Exhibit i.4 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.5 Form of Employment Agreement between the Company and Adam Blumenthal.
Incorporated herein by reference to Exhibit i.5 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.6 Form of Employment Agreement between the Company and Stephen L.
Hester. Incorporated herein by reference to Exhibit i.6 of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997.
*10.7 Form of Employment Agreement between the Company and Roland Cline.
Incorporated herein by reference to Exhibit i.7 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
*10.8 Form of Employment Agreement between the Company and John Erickson.
10.9 Form of Loan Accounting Agreement between the Company and Riggs Bank,
N.A. Incorporated herein by reference to Exhibit j.1 of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997.
10.10 Custodial Agreement between the Company and Riggs Bank, N.A.
Incorporated herein by reference to Exhibit j.2 of the Pre-Effective
Amendment Number 2 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 29, 1997.
10.11 Form of Referral Agreement between the Company and Riggs Bank, N.A.
Incorporated herein by reference to Exhibit k.1 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed on August 12, 1997.
10.12 Form of Referral Agreement between the Company and NCB Development
Corporation. Incorporated herein by reference to Exhibit k.2 of the
Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333-29943) filed on August 12, 1997.
21 Subsidiaries of the Company.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- ----------
* Management Contract or Compensatory Plan or Arrangement
34
Exhibit 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of
__________, 1997 (the "Effective Date") by and between AMERICAN CAPITAL
STRATEGIES, LTD., a Delaware corporation (the "Company"), and John R. Erickson
(the "Employee").
W I T N E S S E T H:
WHEREAS, upon executing this Agreement Employee will become the chief
financial officer ("CFO") of the Company; and
WHEREAS, it is in the interests of the Company that Employee's service
continue to be available to the Company.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
Definitions and Interpretations
1.1. Definitions
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires, the following terms shall have the
following respective meanings:
"Base Salary" shall have the meaning specified in Section 3.1.
"Board of Directors" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Compensation Committee" shall mean the compensation committee of the
Board of Directors.
"Confidential Information" shall have the meaning specified in Section
5.1(a).
"Disability" shall mean a physical or mental condition of Employee
that, in the good faith judgment of not less than a majority of the Executive
Committee, prevents Employee from being able to perform the services required
under this Agreement and which results in the Employee becoming eligible for
long-term disability benefits (if such benefits are provided by the Company). If
any dispute arises as to whether a Disability has occurred, or whether a
Disability has ceased and the Employee is able to resume duties, then such
dispute shall be referred to a licensed physician appointed by the president of
the Medical Society or similar organization in Washington, D.C., at the request
of either party. The Employee shall submit to such examinations and provide
information as such physician may request and the determination of such
physician as to the Employee's physical or mental condition shall be binding and
conclusive on the parties. The Company shall pay the cost of any such physician
and examination.
"Dispute" shall have the meaning specified in Article VI.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
<PAGE>
"Executive Committee" shall mean the Executive Committee of the Board
of Directors or such other entity as may be designated for a particular function
by the Board of Directors.
"Expiration Date" shall have the meaning specified in Section 2.2.
"ISO Plan" shall have the meaning specified in Section 3.2.
"Misconduct" shall mean one or more of the following:
(i) the willful and continued failure by Employee to perform
substantially Employee's duties described in Section 2.3 (other than
any such failure resulting from Employee's incapacity due to physical
or mental illness) after two (2) written notices of such failure have
been given to Employee by the Company and Employee has had a reasonable
period (not to exceed 15 days from the second notice) to correct such
failure;
(ii) the commission by Employee of acts that are dishonest
and demonstrably injurious to the Company (monetarily or otherwise)
in any material respect; or
(iii) a material breach or violation by Employee of (a) any
material provision of this Agreement or (b) any material Company
employment policy, including its Stock Trading Policies and Procedures
which the Company will publish from time to time, which, if capable of
being remedied, remains unremedied for more than 15 days after written
notice thereof is given to Employee by the Company.
For purposes of this definition, no act or failure to act on Employee's
part shall be considered "Misconduct" if done or omitted to be done by Employee
in good faith and in the reasonable belief that such act or failure to act was
in the best interest the Company or in furtherance of Employee's duties and
responsibilities described in Section 2.3.
"Notice of Termination" shall mean a notice purporting to terminate
Employee's employment in accordance with Section 4.1 or 4.2. Such notice shall
specify the effective date of such termination, which date shall not be less
than 30 (one (1) day in the case of a termination by the Company for Misconduct)
or more than 60 days after the date such notice is given. If such termination is
by the Company for Disability or Misconduct, such notice shall set forth in
reasonable detail the reason for such termination and the facts and
circumstances claimed to provide a basis therefor.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust and an unincorporated organization.
"Principal Bonus Plan" shall have the meaning specified in Section 3.2.
"Term" shall have the meaning specified in Section 2.2.
"Termination Date" shall mean the termination date specified in a
Notice of Termination delivered in accordance with this Agreement.
2
<PAGE>
1.2. Interpretations
(a) In this Agreement, unless a clear contrary intention
appears, (i) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision, (ii) reference to any Article or Section,
means such Article or Section hereof, (iii) the words "including" (and with
correlative meaning "include") means including, without limiting the generality
of any description preceding such term, and (iv) where any provision of this
Agreement refers to action to be taken by either party, or which such party is
prohibited from taking, such provision shall be applicable whether such action
is taken directly or indirectly by such party.
(b) The Article and Section headings herein are for convenience
only and shall not affect the construction hereof.
ARTICLE II
Employment: Term, Positions and Duties, Etc.
2.1. Employment
The Company agrees to employ Employee and Employee agrees to accept
employment with the Company, in each case on the terms and conditions set forth
in this Agreement.
2.2. Term of Employment
Unless sooner terminated pursuant to Article IV, the term of
Employee's employment under this Agreement (the "Term") shall commence on the
Effective Date and shall continue until the first anniversary of the Effective
Date (the "Expiration Date"); provided, however, that on each date during the
Term, the Expiration Date shall be reset to the date one year after the date
thereof, except that either party may terminate this Agreement by giving written
notice that such daily extensions of the Term shall be discontinued in which
case the Expiration Date shall be the date one year after the delivery of such
notice.
2.3. Positions and Duties
(a) While employed hereunder, Employee shall serve as the CFO of
the Company and the Company shall use its best efforts to
cause the Board of Directors to appoint the Employee to the
position of Treasurer of the Company. As CFO and Treasurer of
the Company Employee shall directly supervise the Controller
of the Company and shall be responsible for developing
management policy for financial control and treasury
functions; analyzing and interpreting financial information
pertaining to the Company's performance, making
recommendations concerning business policy, resource
allocation and business operations to improve Company
financial performance; alerting the President and other
managers to trends in the financial performance of the
business that may require management action, determining
Company requirements for financial analysis, planning,
control and reporting systems that adequately monitor and
provide financial insight into the operation of Company
3
<PAGE>
business and developing appropriate systems to do so;
forecasting capital requirements, identifying and analyzing
capital sources, developing financial alternatives and
determining the most advantageous financing methods,
developing and maintaining working relationships with banks,
financial institutions, investment firms, developing policies
and specific plans for conducting Company relations with
outside financial firms, maintaining financing contracts and
arrangements; managing investor relations effort including
quarterly and annual reports, maintaining relationships with
stock analysts and assuming the role of chief financial
spokesperson for the Company; managing all secondary debt and
equity offerings; preparing or supervising the preparation of
SEC filings (10-Q, 10-K, 8-K and other non recurring
financial filings), monthly internal balance sheet, statement
of operations, statement of cash flows, and statement of
stockholder's equity; preparing monthly and quarterly
financial analysis for the President and BOD; the annual
budgeting process; the maintenance of financial systems; the
dispersal of benefits and payroll; the development of benefit
and payroll policies; the coordination of audits, tax and
other services; the controls and review of corporate level
disbursements; and other projects requested by the President
(b) While employed hereunder, Employee shall (i) report directly
to the President of the Company and (ii) observe and comply
with all lawful policies, directions and instructions of the
President which are consistent with the foregoing provisions
of this paragraph (a).
(b) While employed hereunder, Employee shall (i) devote
substantially all of Employee's business time, attention, skill and efforts to
the faithful and efficient performance of Employee's duties hereunder and (ii)
not accept employment with any Person other than with the Company.
Notwithstanding the foregoing, Employee may engage in the following activities
so long as they do not interfere in any material respect with the performance of
Employee's duties and responsibilities hereunder: (i) serve on corporate, civic,
religious, educational or charitable boards or committees and (ii) manage
Employee's personal investments.
(c) While employed hereunder, Employee shall not knowingly
prejudice, in any material respect, the reputation of the Company in the fields
of business in which it is engaged or with the investment community or the
public at large.
ARTICLE III
Compensation and Benefits
3.1. Base Salary
(a) For services rendered by Employee under this Agreement, the
Company shall pay to Employee an annual base salary ("Base Salary") of $125,000
evenly paid twice a month. Subject to paragraph (b) below, the President may
adjust the amount of the Base Salary at any time as he may deem appropriate in
his sole discretion.
4
<PAGE>
(b) The amount of the Base Salary may not be decreased without
the prior written approval of the Employee except that if the President
increases the Base Salary as provided in the last sentence of paragraph (a)
above, the President may thereafter decrease the Base Salary by an amount not to
exceed the amount of such increase.
3.2 Principal Bonus Plan
During the Term, the Company shall maintain and the Employee shall be
entitled to participate in an annual incentive bonus plan open to Principals and
the CFO and certain other employees of the Company (the "Principal Bonus Plan"),
which will provide for the payment of cash bonuses to participants within 90
days of the end of each fiscal year based on the Company's financial performance
for that year and other appropriate factors. Under the Principal Bonus Plan,
Employee shall be eligible to earn a target bonus (the "Target Bonus") each year
of up to 125% of Employee's Base Salary for such year based on criteria
established by the Compensation Committee, and the performance of the Company
against such criteria. The establishment of such criteria and of the necessary
performance targets for partial or full earning of the Target Bonus shall be at
the sole discretion of the Compensation Committee.
3.3 Long-term Incentive Compensation
The Company has established a long-term incentive compensation plan,
which provides key employees of the Company with ownership interests in the
Company, as substantially set forth in Attachment A hereto (the "ISO Plan").
Under the ISO Plan, the Company shall use its best efforts to cause the Board of
Directors to grant Employee options to purchase 25,000 shares of common stock of
the Company, of which 5,000 options would be awarded immediately and the
remaining 20,000 options would be subject to shareholders approval. One-third of
such options will vest and become exercisable on each of the first three
anniversaries of the grant of the options. To the extent permissible, such
options shall be characterized as Incentive Stock Options as defined in Section
422 of the Code. Failing Board of Director or shareholder approval, the Company
shall in good faith attempt to develop mutually agreeable alternative
compensation.
3.4. Vacation
While employed hereunder, Employee shall be entitled to vacation
benefits in accordance with the vacation policy adopted by the Company from time
to time for Principals. Unless changed by the President in a manner generally
applicable to Principals of the Company, the Employee shall be entitled to three
weeks of vacation in each of the first two years of employment with the Company,
three weeks of vacation in each of the third and fourth years of employment with
the Company and four weeks per year in the fifth and subsequent years of
employment. Employee shall not be entitled to accumulate and carryover unused
vacation time from year to year.
3.5. Other Benefits
Employee shall be entitled to receive all employee benefits, fringe
benefits and other perquisites that may be offered by the Company to its
Principals as a group, including, without limitation, participation by Employee
and, where applicable, Employee's dependents, in the various employee benefit
plans or programs (including, without limitation, pension plans,
5
<PAGE>
profit sharing plans, stock plans, health plans, life insurance, parking and
disability insurance) generally provided to Principals of the Company, subject
to meeting the eligibility requirements with respect to each of such benefit
plans or programs. However, nothing in this Section 3.5 shall be deemed to
prohibit the Company from making any changes in any of the plans, programs or
benefits described herein, provided such changes apply to all similarly situated
Principals.
ARTICLE IV
Termination of Employment
4.1. Termination by Employee
Employee may, at any time prior to the Expiration Date, terminate
Employee's employment hereunder for any reason by delivering a Notice of
Termination to the President. Upon such termination, Employee shall be entitled
only to those rights and payments payable under Section 4.3. All options of the
Employee under the ISO Plan (or similar plan) which have not vested as of
employee's Termination Date shall lapse and shall not be exercisable. All
previously vested options shall remain exercisable for the shorter of 90 days
following the Termination Date and their original term. All loans to the
Employee in connection with the prior exercise of any options under the ISO Plan
(or similar plan) shall be due the earlier of 90 days following the Employee's
death and their original term.
4.2. Termination by the Company
The President may, at any time prior to the Expiration Date, terminate
Employee's employment hereunder for any reason by delivering a Notice of
Termination to Employee. If such termination occurs during the first six months
of employment by the Company for any reason other than Misconduct, the Employee
shall be entitled to a severance amount of $60,000 and such rights and
privileges as are set forth in section 4.3 and to no other rights and privileges
which may be available hereunder upon a termination of employment.
4.3. Payment of Accrued Base Salary, Vacation Pay, etc.
(a) Promptly upon the termination of Employee's employment for
any reason (including death), the Company shall pay to Employee (or Employee's
estate) a lump sum amount for (i) any unpaid Base Salary earned hereunder prior
to the Termination Date, (ii) all unused vacation time accrued by Employee as of
the Termination Date in accordance with Section 3.4, and (iii) all unpaid
benefits earned or vested, as the case may be, by Employee as of the Termination
Date under any and all incentive or deferred compensation plans or programs of
the Company.
(b) A termination of Employee's employment in accordance with
this Agreement shall not alter or impair any of Employee's accrued rights or
benefits as of the Termination Date under any employee benefit plan or program
maintained by the Company, in each case except as provided therein or in any
written agreement entered into between the Company and Employee pursuant
thereto.
6
<PAGE>
4.4. Additional Rights in Connection With Disability
In the event that the Company terminates Employee by delivering
a Notice of Termination to Employee stating that such Termination is by reason
of a Disability, the Employee shall be entitled to the benefits and payments set
forth in this Section 4.4:
(a) Base Salary and Target Bonus. The Company shall continue to
pay to Employee the Base Salary in effect as of the date on which the Notice of
Termination was delivered for one (1) year following the Termination Date (such
period being the "Continuation Period") which amount shall be reduced by any
amount payable to Employee under any disability plan maintained by the Company
for the benefit of Employee. In addition, the Employee shall be entitled to
continue to participate in the Annual Bonus Plan for one (1) year following the
Termination Date with the first anniversary of the Termination Date being the
Expiration Date for purposes of Section 3.2.
(b) Insurance Benefits, etc. The Company shall at all times
during the Continuation Period, without charge to Employee or Employee's
dependents, cause Employee and Employee's eligible dependents to be covered by
and to participate in, to the fullest extent allowable under the terms thereof,
all life, accidental death and dismemberment and health insurance plans and
programs that may be offered to the Principals of the Company so that Employee
will receive, at all times during the Continuation Period, the same benefits
under such plans and programs as Employee would have been entitled to receive
had Employee remained a Principal of the Company. In no event shall Employee's
continuation period for purposes of Part 6 of Title I of the Employee Retirement
Income Security Act of 1974, as amended ("COBRA"), begin prior to the end of
Employee's coverage under the Company's group health plan as provided in this
paragraph (b).
(c) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of Employee's Termination Date and which
would vest within one year of Employee's Termination Date shall vest and shall
become immediately exercisable and shall remain exercisable by the Employee for
the shorter of 18 months following the Employee's Termination Date and their
original term. All other options shall expire. All loans to the Employee in
connection with the prior exercise of any options under the ISO Plan (or similar
plan) shall be due the earlier of 18 months following the Employee's Termination
Date and their original term.
Should the Employee's Disability end during the pendency of the Term,
the Company may discontinue the payments contemplated by this Section 4.4 if it
offers to reemploy Employee under the terms of this Agreement, but no such offer
shall affect the terms of Section 4.4(c) above.
4.5. Additional Rights in Connection With Termination by the Company
for Other than Misconduct or Disability
In the event that the President terminates Employee's employment
with the Company pursuant to Section 4.2 for other than Misconduct or a
Disability, the Employee shall be entitled to the payments and benefits set
forth in this Section 4.5:
(a) Severance Payment. The Company shall pay to the Employee a
severance payment equal to $60,000. In addition, the Employee shall be entitled
to receive any Target Bonus for the year in which the Employee is entitled for
the year in which the Termination occurs prorated through the
7
<PAGE>
Employee's Termination Date. The amount payable to Employee under this paragraph
(a) is in lieu of, and not in addition to, any severance payment due to or
become due to Employee under any separate agreement or contract between Employee
and the Company or pursuant to any severance payment plan, program or policy of
the Company.
(b) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of Employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's termination and their original term.
(c) Release. Notwithstanding anything in this Section 4.5 to the
contrary, as a condition to the receipt of any benefit under this Section 4.5,
Employee must first execute and deliver to the Company a release as set out in
exhibit 4.5(d) hereto, releasing the Company, its officers, Board of Directors,
employees and agents from any and all claims and from any and all causes of
action of any kind or character that Employee may have arising out of Employee's
employment with the Company or the termination of such employment, but excluding
any claims and causes of action that Employee may have arising under or based
upon this Agreement.
4.6. Additional Rights in the Event of Death
In the event that the Employee's employment is terminated as a result
of Employee's death, the Employee's estate or beneficiaries shall be entitled to
the payments and benefits set forth in this Section 4.6:
(a) Target Bonus. The Employee's estate shall be entitled to
receive the Target Bonus that the deceased employee would have been entitled to
have received in the year in which the death occurred.
(b) Insurance Benefits, etc. The Company shall pay the cost for
dependents of the Employee for insurance coverage that they are entitled to
obtain from the Company following the Employee's death pursuant to COBRA for a
period equal to two months multiplied by the number of full years (not to exceed
nine) during which the Employee was employed by the Company.
(c) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of Employee's death and which would vest
within one year thereof shall vest immediately upon the Employee's death and
shall remain exercisable by the Employee's estate for the shorter of 18 months
following the Employee's death and their original term. All loans to the
Employee in connection with the prior exercise of any options under the ISO Plan
(or similar plan) shall be due the earlier of 18 months following the Employee's
death and their original term.
4.7. Rights in the Event of Termination for Employee's Misconduct
In the event that the Company terminates Employee's employment with the
Company pursuant to Section 4.2 for Employee's Misconduct, Employee shall be
entitled to the rights set forth in this Section 4.7
8
<PAGE>
(a) Options. All options of the Employee under the ISO Plan (or
similar plan) which have not vested as of employee's Termination Date shall
lapse and shall not be exercisable. All previously vested options shall remain
exercisable for the shorter of 90 days following the Termination Date and their
original term. All loans to the Employee in connection with the prior exercise
of any options under the ISO Plan (or similar plan) shall be due the earlier of
90 days following the Employee's death and their original term.
(c) Release. Notwithstanding anything in this Section 4.7 to the
contrary, as a condition to the receipt of any benefit under this Section 4.7,
Employee must first execute and deliver to the Company a release as set out in
exhibit 4.5(d) hereto, releasing the Company, its officers, Board of Directors,
employees and agents from any and all claims and from any and all causes of
action of any kind or character that Employee may have arising out of Employee's
employment with the Company or the termination of such employment, but excluding
any claims and causes of action that Employee may have arising under or based
upon this Agreement.
ARTICLE V
Confidential Information and Non-Competition
5.1. Confidential Information
(a) Employee recognizes that the services to be performed by
Employee hereunder are special, unique, and extraordinary and that, by reason of
such employment with the Company, Employee may acquire Confidential Information
concerning the operation of the Company, the use or disclosure of which would
cause the Company substantial loss and damages which could not be readily
calculated and for which no remedy at law would be adequate. Accordingly,
Employee agrees that Employee will not (directly or indirectly) at any time,
whether during or after Employee's employment hereunder, (i) knowingly use for
an improper personal benefit any Confidential Information that Employee may
learn or has learned by reason of Employee's employment with the Company or (ii)
disclose any such Confidential Information to any Person except (A) in the
performance of Employee's obligations to the Company hereunder, (B) as required
by applicable law, (C) in connection with the enforcement of Employee's rights
under this Agreement, (D) in connection with any disagreement, dispute or
litigation (pending or threatened) between Employee and the Company or (E) with
the prior written consent of the Board of Directors. As used herein,
"Confidential Information" includes information with respect to the Company's
products, facilities and methods, research and development, trade secrets and
other intellectual property, systems, patents and patent applications,
procedures, manuals, confidential reports, product price lists, customer lists,
financial information, business plans, prospects or opportunities; provided,
however, that such term, shall not include any information that (x) is or
becomes generally known or available other than as a result of a disclosure by
Employee or (y) is or becomes known or available to Employee on a
nonconfidential basis from a source (other than the Company) which, to
Employee's knowledge, is not prohibited from disclosing such information to
Employee by a legal, contractual, fiduciary or other obligation to the Company.
(b) Employee confirms that all Confidential Information is the
exclusive property of the Company. All business records, papers and documents
kept or made by Employee while employed by the Company relating to
9
<PAGE>
the business of the Company shall be and remain the property of the Company at
all times. Upon the request of the Company at any time, Employee shall promptly
deliver to the Company, and shall retain no copies of, any written materials,
records and documents made by Employee or coming into Employee's possession
while employed by the Company concerning the business or affairs of the Company
other than personal materials, records and documents (including notes and
correspondence) of Employee not containing proprietary information relating to
such business or affairs. Notwithstanding the foregoing, Employee shall be
permitted to retain copies of, or have access to, all such materials, records
and documents relating to any disagreement, dispute or litigation (pending or
threatened) between Employee and the Company.
5.2. Non-Competition
(a) While employed hereunder and for the (i) a period of one (1)
year thereafter or (ii) the period of two (2) years after the Termination Date,
if this Agreement is terminated and the Employee is entitled to receive
compensation and benefits under either Section 4.5 or Section 4.7 (the
"Restricted Period"), Employee shall not, unless Employee receives the prior
written consent of the Board of Directors, own a material interest in, manage,
operate, join, control, lend money or render financial or other assistance to or
participate in or be connected with, as an officer, employee, partner,
stockholder, consultant or otherwise, (A) any Person (x) which competes with the
Company in investing or consulting with small and medium sized businesses in the
United States with regard to change of control transactions in which the
transaction utilizes employee stock ownership plans, or (y) which provides or
proposes to provide services to any Person which is a client of the Company as
of the Termination Date or to which the Company has outstanding loans or in
which the Company then has investments (including warrants or options), or (B)
any potential client of the Company with which the Company has discussed a
client, loan or investment relationship within 12 months prior to, as
applicable, the end of Employee's employment or the Termination Date. It being
understood that investments in mutual funds and Employee's current financial
interest in Storage USA, Inc. is not prohibited by this section.
(b) Employee has carefully read and considered the provisions of
this Section 5.2 and, having done so, agrees that the restrictions set forth in
this Section 5.2 (including the Restricted Period, scope of activity to be
restrained and the geographical scope) are fair and reasonable and are
reasonably required for the protection of the interests of the Company, its
officers, directors, employees, creditors and shareholders. Employee understands
that the restrictions contained in this Section 5.2 may limit Employee's ability
to engage in a business similar to the Company's business, but acknowledges that
Employee will receive sufficiently high remuneration and other benefits from the
Company hereunder to justify such restrictions.
(c) During the Restricted Period, Employee shall not, whether
for Employee's own account or for the account of any other Person (excluding the
Company), intentionally (i) solicit, endeavor to entice or induce any employee
of the Company to terminate Employee's employment with the Company or accept
employment with anyone else or (ii) interfere in a similar manner with the
business of the Company.
(d) In the event that any provision of this Section 5.2 relating
to the Restricted Period or the areas of restriction shall be
10
<PAGE>
declared by a court of competent jurisdiction to exceed the maximum time period
or areas such court deems reasonable and enforceable, the Restricted Period or
areas of restriction deemed reasonable and enforceable by the court shall become
and thereafter be the maximum time period and/or areas.
5.3. Injunctive Relief
Employee acknowledges that a breach of any of the covenants contained
in this Article V may result in material irreparable injury to the Company for
which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of such a
breach, any payments remaining under the terms of this Agreement shall cease and
the Company shall be entitled to obtain a temporary restraining order or a
preliminary or permanent injunction restraining Employee from engaging in
activities prohibited by this Article V or such other relief as may be required
to specifically enforce any of the covenants contained in this Article V.
Employee agrees to and hereby does submit to in personam jurisdiction before
each and every such court for that purpose.
ARTICLE VI
Dispute Resolution
In the event a dispute shall arise between the parties as to whether
the provisions of this Agreement have been complied with (a "Dispute"), the
parties agree to resolve such Dispute in accordance with the following
procedure:
(a) A meeting shall be held promptly between the Parties,
attended by (in the case of the Company) by one or more individuals with
decision-making authority regarding the Dispute, to attempt in good faith to
negotiate a resolution of the Dispute.
(b) If, within 10 days after such meeting, the parties have not
succeeded in negotiating a resolution of the Dispute, the parties agree to
submit the Dispute to mediation in accordance with the Commercial Mediation
Rules of the American Arbitration Association except that Disputes with regard
to the existence of a Disability shall be resolved in accordance with the
definition of the term "Disability" above.
(c) The parties will jointly appoint a mutually acceptable
mediator, seeking assistance in such regard from the American Arbitration
Association if they have been unable to agree upon such appointment within 10
days following the 10-day period referred to in clause (b) above.
(d) Upon appointment of the mediator, the parties agree to
participate in good faith in the mediation and negotiations relating thereto for
15 days.
(e) If the parties are not successful in resolving the Dispute
through mediation within such 15-day period, the parties agree that the Dispute
shall be settled by arbitration in accordance with the Expedited Procedures of
the Commercial Arbitration Rules of the American Arbitration Association.
(f) The fees and expenses of the mediator/arbitrators shall be
borne solely by the non-prevailing party or, in the event there is no clear
prevailing party, as the mediator/arbitrators deem appropriate.
11
<PAGE>
(g) Except as provided above, each party shall pay its own costs
and expenses (including, without limitation, attorneys' fees) relating to any
mediation/arbitration proceeding conducted under this Article VI.
(h) All mediation/arbitration conferences and hearings will
be held in the greater Washington, D.C. area.
(i) In the event there is any disputed question of law involved
in any arbitration proceeding, such as the proper legal interpretation of any
provision of this Agreement, the arbitrators shall make separate and distinct
findings of all facts material to the disputed question of law to be decided
and, on the basis of the facts so found, express their conclusion of the
question of law. The facts so found shall be conclusive and binding on the
parties, but any legal conclusion reached by the arbitrators from such facts may
be submitted by either party to a court of law for final determination by
initiation of a civil action in the manner provided by law. Such action, to be
valid, must be commenced within 20 days after receipt of the arbitrators'
decision. If no such civil action is commenced within such 20-day period, the
legal conclusion reached by the arbitrators shall be conclusive and binding on
the parties. Any such civil action shall be submitted, heard and determined
solely on the basis of the facts found by the arbitrators. Neither of the
parties shall, or shall be entitled to, submit any additional or different facts
for consideration by the court. In the event any civil action is commenced under
this paragraph (b), the party who prevails or substantially prevails (as
determined by the court) in such civil action shall be entitled to recover from
the other party all costs, expenses and reasonable attorneys' fees incurred by
the prevailing party in connection with such action and on appeal.
(j) Except as limited by paragraph (b) above, the parties agree
that judgment upon the award rendered by the arbitrators may be entered in any
court of competent jurisdiction. In the event legal proceedings are commenced to
enforce the rights awarded in an arbitration proceeding, the party who prevails
or substantially prevails in such legal proceeding shall be entitled to recover
from the other party all costs, expenses and reasonable attorneys' fees incurred
by the prevailing party in connection with such legal proceeding and on appeal.
(k) Except as provided above, (i) no legal action may be brought
by either party with respect to any Dispute and (ii) all Disputes shall be
determined only in accordance with the procedures set forth above.
ARTICLE VII
Miscellaneous
7.1. No Mitigation or Offset
The provisions of this Agreement are not intended to, nor shall they be
construed to, require that Employee mitigate the amount of any payment provided
for in this Agreement by seeking or accepting other employment, nor shall the
amount of any payment provided for in this Agreement be reduced by any
compensation earned by Employee as the result of employment by another employer
or otherwise. Without limitation of the foregoing, the Company's obligations to
make the payments to Employee required under this Agreement and otherwise to
perform its obligations hereunder shall not be affected by any set off,
12
<PAGE>
counterclaim, recoupment, defense or other claim, right or action that the
Company may have against Employee, except that the Company may deduct from any
amount required to be reimbursed to the Company by Employee under Section 4.10
or Article VI(a) the amount of any payment which the Company is then required to
make to Employee hereunder.
7.2. Assignability
The obligations of Employee hereunder are personal and may not be
assigned or delegated by Employee or transferred in any manner whatsoever, nor
are such obligations subject to involuntary alienation, assignment or transfer.
The Company shall have the right to assign this Agreement and to delegate all
rights, duties and obligations hereunder as provided in Section 7.5.
7.3. Notices
All notices and all other communications provided for in the Agreement
shall be in writing and addressed (i) if to the Company, at its principal office
address or such other address as it may have designated by written notice to
Employee for purposes hereof, directed to the attention of the President with a
copy to the Secretary of the Company and (ii) if to Employee, at Employee's
residence address on the records of the Company or to such other address as
Employee may have designated to the Company in writing for purposes hereof. Each
such notice or other communication shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, except that any notice of change of address shall be effective
only upon receipt.
7.4. Severability
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
7.5. Successors: Binding Agreement
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonable acceptable to Employee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used herein, the
term "Company" shall include any successor to its business and/or assets as
aforesaid which executes and delivers the Agreement provided for in this Section
7.5 or which otherwise becomes bound by all terms and provisions of this
Agreement by operation of law.
(b) This Agreement and all rights of Employee hereunder shall
inure to the benefit of and be enforceable by Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributes,
devisees and legatees. If Employee should die while any amounts would be payable
to Employee hereunder if Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance
13
<PAGE>
with the terms of this Agreement to Employee's devisee, legatee, or other
designee or, if there be no such designee, to Employee's estate.
7.6. Tax Matters. The Company shall withhold from all payments
hereunder all applicable taxes (federal, state or other) which it is required to
withhold therefrom unless Employee has otherwise paid (or made other
arrangements satisfactory) to the Company the amount of such taxes.
7.7 Amendments and Waivers
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by Employee and the President. No waiver by either party hereto at any time of
any breach by the other party hereto of, or in compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time.
7.8. Entire Agreement, Termination of Other Agreements
This Agreement is an integration of the parties' agreement and no
agreement or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement.
7.9. Governing Law
THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MARYLAND WITHOUT
REGARD TO ITS CONFLICT OF LAWS PROVISION.
7.10. Counterparts
This Agreement may be executed in or more counterparts, each of which
shall be deemed to be an original, but all of which together will constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
AMERICAN CAPITAL STRATEGIES, LTD.
By:_______________________________
Malon Wilkus, President
EMPLOYEE:
_________________________________
John R. Erickson
Exhibit 21
Subsidiaries of American Capital Strategies, Ltd.
1. ACS Capital Investments Corporation, a Delaware corporation
2. American Capital Strategies Labor Research, Inc., a Delaware corporation
3. ACS Genpar, Inc., a Delaware corporation
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of American Capital Strategies, Ltd., a corporation organized under the
laws of the state of Delaware (the "Company"), hereby constitutes and appoints
David J. Gladstone, Malon Wilkus, Adam Blumenthal, John Erickson and Samuel A.
Flax, and each of them (with full power to each of them to act alone), his or
her true and lawful attorneys-in-fact and agents for him and her on his or her
behalf and in his or her name, place and stead, in all cases with full power of
substitution and resubstitution, in any hand and all capacities, to sign,
execute and affix his or her seal to and file with the Securities and Exchange
Commission (or any other governmental or regulatory authority) the Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 or any other
appropriate form and all amendments or supplements (including post-effective
amendments) thereto with all exhibits and any and all documents required to be
filed with respect thereto, relating to the filing of the Annual Report of the
Company, and grants to each of them full power and authority to do and to
perform each and every act and thing requisite and necessary to be done in and
about the premises in order to effectuate the same as fully and to all intents
and purposes as he himself or she herself might or could do if personally
present, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned director and or officer has hereunto
set his or her hand and seal, as of the date specified.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
- -------------------------- Director March 23, 1998
Robert L. Allbritton
/s/ Adam Blumenthal Executive Vice President, March 23, 1998
- -------------------------- Director and Secretary
Adam Blumenthal
/s/ Landon Butler Director March 23, 1998
- --------------------------
Landon Butler
/s/ John R. Erickson Chief Financial Officer March 23, 1998
- -------------------------- (Principal Accounting and
John R. Erickson Financial Officer)
/s/ David J. Gladstone Chairman of the Board of March 23, 1998
- -------------------------- Directors
David J. Gladstone
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Neil M. Hahl Director March 23, 1998
- --------------------------
Neil M. Hahl
/s/ Philip R. Harper Director March 23, 1998
- --------------------------
Philip R. Harper
/s/ Stephen L. Hester Vice President and General March 23, 1998
- -------------------------- Counsel
Stephen L. Hester
/s/ Stan Lundine Director March 23, 1998
- --------------------------
Stan Lundine
- -------------------------- Director March 23, 1998
Stephen P. Walko
/s/ Malon Wilkus President and Director March 23, 1998
- --------------------------
Malon Wilkus
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains financial information extracted fromt the
consolidated financial statement of American Capital Strategies, Ltd. for
the year ended December 31, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000817473
<NAME> American Capital Strategies, Ltd.
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
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<INVESTMENTS-AT-COST> 133,677,107
<INVESTMENTS-AT-VALUE> 140,284,141
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