================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursunt to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998.
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: ____________
AMERICAN CAPITAL STRATEGIES, LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-145-1377
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Bethesda Metro Center
Bethesda, Maryland 20814
---------------------------------------
(Address of principal executive office)
(301) 951-6122
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X|. No |_|.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of the
issuer's Common Stock, $.01 par value, outstanding as of May 12, 1998 was
11,068,767.
================================================================================
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of
March 31, 1998 (Unaudited) and December 31, 1997............ 1
Schedules of Investments as of
March 31, 1998 (Unaudited) and December 31, 1997............ 2
Statements of Operations (Unaudited)
for the three months ended March 31, 1998 and 1997.......... 4
Statement of Shareholders' Equity for the three months
ended March 31, 1998........................................ 5
Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1998 and 1997.......... 6
Notes to Unaudited Financial Statements............................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
Introduction....................................................... 9
Results of Operations.............................................. 9
Financial Condition, Liquidity and Capital Resources............... 10
Part II. Other Information........................................... 11
Item 1. Legal Proceedings........................................... 11
Item 2. Changes in Securities....................................... 11
Item 3. Defaults upon Senior Securities............................. 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Item 5. Other Information........................................... 11
Item 6. Exhibits and Reports on Form 10-Q........................... 12
Signature.................................................................. 13
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(In thousands except per share data)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Assets
Investments at fair value (cost or initial value of $131,543 and $133,274,
respectively) ............................................................ $131,712 $133,415
Cash and cash equivalents .................................................. 10,460 8,862
Investment in unconsolidated operating subsidiary .......................... 6,970 6,869
Due from unconsolidated operating subsidiary ............................... 712 861
Interest receivable ........................................................ 1,046 644
Other ...................................................................... 131 54
-------- --------
Total assets ............................................................... $151,031 $150,705
======== ========
Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities ................................... $ 169 $ 53
-------- --------
Total liabilities .......................................................... 169 53
Shareholders' equity:
Undesignated preferred stock, $0.01 par value, 5,000 shares
authorized, 0 issued and outstanding ................................... -- --
Common stock, $.01 par value, 20,000 shares authorized,
and 11,069 issued and outstanding ...................................... 111 111
Capital in excess of par value ........................................... 144,940 144,940
Undistributed net realized earnings ...................................... 127 (55)
Unrealized appreciation of investments ................................... 5,684 5,656
-------- --------
Total shareholders' equity ................................................. 150,862 150,652
-------- --------
Total liabilities and shareholders' equity ................................. $151,031 $150,705
======== ========
</TABLE>
See accompanying notes.
1
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
(Unaudited)
(In thousands except per share data)
March 31, 1998
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Senior Debt--5.9%
- -----------------
Four-S Baking Company ...................................................... Baking $ 1,685 $ 1,685
BIW Connector Systems, LLC ................................................. Manufacturing 3,728 3,728
Chance Coach, Inc. ......................................................... Bus Manufacturer 1,500 1,500
JAG Acquisition, Inc. ...................................................... Manufacturing 1,200 1,200
-------- --------
Subtotal.................................................................... 8,113 8,113
Subordinated Debt--20.6%
- ------------------------
Four-S Baking Company ...................................................... Baking 1,498 1,498
BIW Connector Systems, LLC ................................................. Manufacturing 6,374 6,374
Westwind Group Holdings, Inc. .............................................. Restaurant 3,165 3,165
JAG Acquisition, Inc. ...................................................... Manufacturing 2,309 2,309
Specialty Transportation Services, Inc. .................................... Waste Hauler 7,316 7,316
Chance Coach, Inc .......................................................... Bus Manufacturer 7,959 7,959
-------- --------
Subtotal ................................................................... 28,621 28,621
Convertible Preferred Stock--3.2%
- ---------------------------------
Four-S Baking Company 15% dividend convertible into 51 shares of
common stock or 10.89% of Co. ............................................ Baking 2,389 2,389
Chance Coach, Inc 12% dividend convertible into 20% of Co. ................. Bus Manufacturer 2,000 2,000
-------- --------
Subtotal ................................................................... 4,389 4,389
Common Stock Warrants(1)--4.9%
- ------------------------------
Four-S Baking Company 15 shares 3.26% of Co. ............................... Baking 462 602
BIW Connector Systems, LLC 8% of LLC ....................................... Manufacturing 652 652
Westwind Group Holdings, Inc. 5% of Co. .................................... Restaurant 350 350
JAG Acquisition, Inc. 75% of Co. ........................................... Manufacturing 505 505
Specialty Transportation Services, Inc. 9.1% of Co. ........................ Waste Hauler 694 694
Chance Coach, Inc 43.7% of Co. ............................................. Bus Manufacturer 4,041 4,041
-------- --------
Subtotal ................................................................... 6,704 6,844
Common Stock(1)--1.6%
- ---------------------
Four-S Baking Company (2) .................................................. Baking 966 966
Specialty Transportation Services, Inc. 9.1% of Co. ........................ Waste Hauler 500 500
Chance Coach, Inc 18.3% of Co. ............................................. Bus Manufacturer 750 750
-------- --------
Subtotal ................................................................... 2,216 2,216
-------- --------
Subtotal--non-publicly traded securities--36.2% ............................. 50,043 50,183
Government Securities--58.8%
- ----------------------------
FHLB Discount Note due 4/1/98 .............................................. 9,999 9,999
FNMA Discount Note due 4/24/98 ............................................. 6,971 6,975
FFCB 5.90% due 6/2/98 ...................................................... 20,007 20,013
FHLB Discount Note due 6/8/98 .............................................. 14,845 14,843
FHLB Discount Note due 8/20/98 ............................................. 14,682 14,684
FNMA 5.71% due 9/9/98 ...................................................... 14,996 15,015
-------- -------
Total Investments .......................................................... 81,500 81,529
Investment in Unconsolidated Operating Subsidiary--5.0%
- ------------------------------------------------------- Investment
ACS Capital Investments Corporation(1)(2)--100% of Co. ..................... Banking 403 6,970
-------- --------
Totals ..................................................................... $131,946 $138,682
======== ========
</TABLE>
- ----------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
2
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
(In thousands except per share data)
December 31, 1997
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Senior Debt--4.1%
- -----------------
Four-S Baking Company ...................................................... Baking $ 1,825 $ 1,825
BIW Connector Systems, LLC ................................................. Manufacturing 3,890 3,890
-------- --------
Subtotal ................................................................... 5,715 5,715
Subordinated Debt--7.9%
- -----------------------
Four-S Baking Company ...................................................... Baking 1,492 1,492
BIW Connector Systems, LLC ................................................. Manufacturing 6,350 6,350
Westwind Group Holdings, Inc. .............................................. Restaurant 3,206 3,206
-------- --------
Subtotal ................................................................... 11,048 11,048
Convertible Preferred Stock--1.6%
- ------------------------------------
Four-S Baking Company 15% dividend convertible into 51 shares of
common stock or 10.89% of Co. ............................................ Baking 2,303 2,303
Common Stock Warrants(1)--1.1%
- ---------------------------------
Four-S Baking Company 15 shares 3.26% of Co. (2) ........................... Baking 461 577
BIW Connector Systems, LLC 8% of LLC ....................................... Manufacturing 652 652
Westwinds Group Holdings, Inc. 5% of Co. ................................... Restaurant 350 350
-------- --------
Subtotal ................................................................... 1,463 1,579
-------- --------
Subtotal--non-publicly traded securities--14.7% ............................ 20,529 20,645
Government Securities--80.4%
- ----------------------------
FHLB Discount Note due 2/4/98 .............................................. 20,969 20,982
FHLB Discount Note due 3/6/98 .............................................. 10,893 10,898
FHLB Discount Note due 4/1/98 .............................................. 9,865 9,868
FNMA Discount Note due 4/24/98 ............................................. 6,877 6,883
FFCB 5.90% due 6/2/98 ...................................................... 20,017 20,016
FHLB Discount Note due 6/8/98 .............................................. 14,646 14,644
FHLB Discount Note due 8/20/98 ............................................. 14,483 14,479
FNMA 5.71% due 9/9/98 ...................................................... 14,995 15,000
-------- -------
Total Investments .......................................................... 112,745 112,770
Investment in Unconsolidated Operating Subsidiary--4.9%
- ------------------------------------------------------- Investment
ACS Capital Investments Corporation(1)(2)--100% of Co. ..................... Banking 403 6,869
-------- --------
Totals ..................................................................... $133,677 $140,284
======== ========
</TABLE>
- ----------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months | | Three Months
Ended | | Ended
March 31, | | March 31,
1998 | | 1997
------------- | | ------------
(Note 4) | |
<S> <C> <C>
Operating Income | |
Interest income ......................................... $ 2,680 | | --
Loan fees ............................................... 612 | | --
Financial advisory fees ................................. -- | | $514
Financial performance fees .............................. -- | | 63
Other ................................................... -- | | 98
---------- | | ----
Total operating income .................................. 3,292 | | 675
| |
Operating Expenses | |
Salaries and benefits ................................... 170 | | 254
General, administrative and other ....................... 274 | | 333
---------- | | ----
Total operating expenses ................................ 444 | | 587
---------- | | ----
Operating income before equity in earnings of | |
unconsolidated operating subsidiary .................. 2,848 | | 88
Equity in earnings of unconsolidated operating | |
subsidiary ............................................ 101 | | --
---------- | | ----
Net operating income .................................... 2,949 | | 88
Change in unrealized appreciation of investments ........ 28 | | 212
---------- | | ----
Income before income taxes .............................. 2,977 | | 300
Provision for income taxes .............................. -- | | 116
---------- | | ----
Net increase in shareholders' equity resulting from | |
operations ............................................ $ 2,977 | | $184
========== | | ====
| |
Net operating income per share Basic ......... $ 0.27 | |
Diluted ....... $ 0.26 | |
| |
Net increase in shareholders' equity Basic ......... $ 0.27 | |
resulting from operations per share Diluted ....... $ 0.26 | |
| |
Weighted average shares of common Basic ......... 11,069 | |
stock outstanding Diluted ....... 11,480 | |
</TABLE>
See accompanying notes.
4
<PAGE>
AMERICAN CAPITAL STRATEGIES, INC.
STATEMENT OF SHAREHOLDERS' EQUITY(1)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Capital Undistributed Unrealized Total
------------------- in Excess of Net Realized Appreciation Shareholders'
Shares Amount Par Value Earnings of Investments Equity
------ ------ --------- -------- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997.... 11,069 $111 $ 144,940 $ (55) $ 5,656 $150,652
Net increase in shareholders'
equity resulting from
operations.................... 2,949 28 2,977
Distributions................... (2,767) (2,767)
------- ---- --------- --------- -------- --------
Balance at March 31, 1998....... 11,069 $111 $ 144,940 $ 127 $ 5,684 $150,862
======= ==== ========= ========= ======== ========
</TABLE>
- ----------
(1) There are no adjustments to net increase in shareholders' equity resulting
from operations to determine comprehensive income for the three months
ended March 31, 1998.
5
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months | | Three Months
Ended | | Ended
March 31, | | March 31,
1998 | | 1997
---- | | ----
<S> <C> <C>
Operating activities | |
Net increase in shareholders' equity resulting | |
from operations .................................... $ 2,977 | | $ 184
Adjustments to reconcile net increase in | |
shareholders' equity resulting from | |
operations to net cash provided by | |
(used in) operating activities: | |
Depreciation and amortization .................. -- | | 9
Change in unrealized appreciation of investments (28) | | (212)
Net amortization of securities ................. (845) | | --
Amortization of loan discounts ................. (89) | | --
Amortization of deferred finance costs ......... -- | | 1
Provision for deferred income taxes ............ -- | | 110
ESOP contribution .............................. -- | | 43
Increase in interest receivable ................ (402) | | --
Provision for doubtful accounts ................ -- | | 43
Increase in due from unconsolidated | |
operating subsidiary ......................... 149 | | --
Increase in accounts receivable ................ -- | | (300)
Decrease in other assets ....................... (80) | | (2)
Increase in accounts payable and accrued | |
liabilities .................................. 116 | | 20
Equity in earnings of unconsolidated operating | |
subsidiary ................................... (101) | | --
-------- | | -----
Net cash provided by (used in) operating activities .... 1,697 | | (104)
Investing activities | |
Proceeds from sale or maturity of investments ........ 32,080 | | --
Principal repayments ................................. 303 | |
Purchase of investments .............................. (29,715) | | --
-------- | | -----
Net cash provided by investing activities .............. 2,668 | | --
Financing activities | |
Principal payments of notes payable .................. -- | | (19)
Decrease in due to related parties ................... -- | | (4)
Distributions ........................................ (2,767) | | --
-------- | | -----
Net cash used in financing activities .................. (2,767) | | (23)
-------- | | -----
Net increase (decrease) in cash and cash equivalents ... 1,598 | | (127)
Cash and cash equivalents at beginning of period ....... 8,862 | | 359
-------- | | -----
Cash and cash equivalents at end of period ............. $ 10,460 | | $ 232
======== | | =====
</TABLE>
See accompanying notes.
6
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
Note 1. Unaudited Interim Financial Statements
Interim financial statements of American Capital Strategies, Ltd. (the Company)
are prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and pursuant to the requirements for
reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain
disclosures accompanying annual financial statements prepared in accordance with
GAAP are omitted. In the opinion of management, all adjustments, consisting
solely of normal recurring accruals, necessary for the fair presentation of
financial statements for the interim periods have been included. The current
period's results of operations are not necessarily indicative of results that
ultimately may be achieved for the year. The interim financial statements and
notes thereto should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K/A, as filed with the
Securities and Exchange Commission.
Note 2. Organization
American Capital Strategies, Ltd. 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 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 3. Investment in Unconsolidated Operating Subsidiary
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 March 31, 1998 and for the three
months then ended was as follows:
Assets
Investments in portfolio companies,
at fair value.................................. $10,264
Other assets, net................................ 1,599
-------
Total assets................................... $11,863
=======
Liabilities and Shareholder's Equity
Deferred income taxes............................ $ 3,288
Due to parent.................................... 712
Other liabilities................................ 893
Shareholder's equity............................. 6,970
-------
Total liabilities and shareholder's equity......... $11,863
=======
Total revenue...................................... $ 1,779
Operating expense.................................. 1,546
-------
Net operating income............................. 233
Unrealized depreciation of investments............. (96)
Income taxes....................................... 36
-------
Net income......................................... $ 101
=======
7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(In thousands except per share data)
Note 4. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31, 1998. 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
March 31, 1998
------------------
Numerator for basic and diluted
Net increase in shareholders' equity
resulting from operations.............................. $ 2,977
=======
Denominator for basic-weighted
average shares......................................... 11,069
Employee stock options................................... 307
Warrants................................................. 104
-------
Dilutive potential common shares......................... 411
-------
Denominator for diluted.................................. 11,480
=======
Basic earnings per share................................. $ 0.27
Diluted earnings per share............................... $ 0.26
Note 5. New Accounting Pronouncement
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards Number 130, "Reporting Comprehensive Income" (SFAS 130). SFAS
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net increase in shareholders' equity resulting from operations or
shareholders' equity.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
AMERICAN CAPITAL STRATEGIES, LTD.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(In thousands except per share data)
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. 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, only the post-RIC period is discussed.
Results of Operations
The Company's financial performance as reflected in its Statements of
Operations is composed of three primary elements. The first element is "Net
operating income," 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 for periods commencing October 1, 1997 (Post-RIC) is primarily the
interest and dividends earned from investing in debt and equity securities, loan
fees 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 "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.
9
<PAGE>
Operating results for the three months ended March 31, 1998 are
summarized as follows:
Three Months Ended
March 31, 1998
------------------
Operating income ........................................... $3,292
Operating expenses ......................................... 444
Equity in earnings of unconsolidated
operating subsidiary ..................................... 101
------
Net operating income ....................................... 2,949
Change in unrealized appreciation
of investments ........................................... 28
------
Net increase in shareholders' equity
resulting from operations ................................ $2,977
======
Total operating income consisted of approximately $612 in loan fees
and $1,207 in interest and dividends on non-publicly traded securities and
$1,473 in interest on government agency securities, bank deposits and repurchase
agreements. The loan fees were earned as a result of closing four investments in
private companies totaling $29.7 million during the period.
Operating expenses for the period consisted of $170 in salaries and
benefits and $274 in general and administrative expenses.
Equity in earnings of unconsolidated operating subsidiary represents
CIC's results. For the three months ended March 31, 1998, CIC's results included
$1,779 of operating income, $1,546 of operating expenses, $96 of unrealized
depreciation of investments and $36 in tax provisions.
The change in unrealized appreciation of investments is determined by
the Company's Board of Directors. The change in unrealized appreciation of
investments for the three month period is $28 which consists of an increase of
$4 in the valuation of the government agency securities and an increase of $24
in the valuation of the investments in private companies.
Financial Condition, Liquidity, and Capital Resources
The Company received proceeds of $143,600 in connection with its IPO
which was completed on August 29, 1997. At March 31, 1998, the Company had
$10,460 in cash and cash equivalents and $81,500 in investments in Federal
agency securities. The Company continues to review potential investments in the
debt and equity securities of small and medium sized businesses and the Company
intends to liquidate its Federal agency securities to fund its investments. 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.
10
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company, nor any of the Company's subsidiaries, is currently subject
to any material litigation nor, to the Company's knowledge, is any material
litigation threatened against the Company or any subsidiary, other than routine
litigation and administrative proceedings arising in the ordinary course of
business. Such proceedings are not expected to have a material adverse effect on
the business, financial conditions, or results of operation of the Company or
any subsidiary.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
3.1 Articles of Incorporation, incorporated herein by reference to
Exhibit 2.a of the Amendment No. 1 to Form N-2 filed by
American Capita Strategies, Ltd. dated August 12, 1997
(Commission File No. 333-29943).
3.2 By-Laws, incorporated herein by reference to Exhibit 2.b of the
Amendment No. 1 to Form N-2 filed by American Capital
Strategies, Ltd. dated August 12, 1997 (Commission File
No. 333-29943).
4 Instruments defining rights of security holders, including
indentures, incorporated herein by reference to Exhibits 2.d.1
and 2.d.2 of the Amendment No. 1 to Form N-2 filed by American
Capital Strategies, Ltd. on August 12, 1997 (Commission File No.
333-29943).
27 Financial Data Schedule.
b. The registrant has not filed any reports on a Current Report on Form 8-K
during the quarter for which this report 10-Q is filed.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN CAPITAL STRATEGIES, LTD.
May __, 1998 By: John R. Erickson
-------------------------
John R. Erickson
Vice President and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains financial information extracted from the financial
statement of American Capital Strategies, Ltd. for the three months ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000817473
<NAME> American Capital Strategies, Ltd.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 131,946
<INVESTMENTS-AT-VALUE> 138,682
<RECEIVABLES> 11,172
<ASSETS-OTHER> 131
<OTHER-ITEMS-ASSETS> 10,460
<TOTAL-ASSETS> 151,031
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 169
<TOTAL-LIABILITIES> 169
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 145,051
<SHARES-COMMON-STOCK> 11,069
<SHARES-COMMON-PRIOR> 11,069
<ACCUMULATED-NII-CURRENT> 127
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,684
<NET-ASSETS> 151,031
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,680
<OTHER-INCOME> 612
<EXPENSES-NET> 444
<NET-INVESTMENT-INCOME> 2,949
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 28
<NET-CHANGE-FROM-OPS> 2,977
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,977
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 444
<AVERAGE-NET-ASSETS> 150,757
<PER-SHARE-NAV-BEGIN> 13.61
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .25
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.63
<EXPENSE-RATIO> 0.003
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
