AMERICAN CAPITAL STRATEGIES LTD, POS AM, 1999-08-06

AMERICAN CAPITAL STRATEGIES LTD
POS AM, 1999-08-06

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

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON August 5, 1999

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

1933 Act
File No. 333-79377

FORM N-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. | |
Post-Effective Amendment No. 1 |X|

AMERICAN CAPITAL STRATEGIES, LTD.
-------------------------------------------------
(Exact name of Registrant as specified in charter)

3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
---------------------------------------
(Address of principal executive offices)

Registrant's telephone number, including area code: (301) 951-6122

Malon Wilkus
3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
---------------------------------------
(Name and address of agent for service)

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

COPIES TO:

Robert B. Ott
Samuel A. Flax
Arnold & Porter
555 Twelfth Street, N.W.
Washington, DC 20004-1206
(202) 942-5000

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: From time to time
after the effective date of this Registration Statement.

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

If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. /x/

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8 (A), MAY DETERMINE.

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
==========================================================================================================
Proposed
Maximum Amount of
Title of Securities Amount Being Aggregate Registration
Being Registered Registered Offering Price Fee
---------------- ---------- -------------- ------------
<S> <C> <C> <C>
Common Stock, $0.01 par value per share;
Preferred Stock, $0.01 par value per share;
and Debt Securities... $250,000,000 $250,000,000 $69,500
==========================================================================================================
</TABLE>

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
Cross Reference Sheet Showing Location in Prospectus of Information
Required by Parts A and B of Form N-2 Registration Statement

<TABLE>
<CAPTION>
Item Number Registration Statement Item and Heading Caption or Location in Prospectus
----------- --------------------------------------- ---------------------------------
<S> <C> <C>
1 Outside Front Cover............................. Outside Front Cover Page
2 Inside Front and Outside Back Cover Page........ Inside Front and Outside Back Cover Page
3 Fee Table and Synopsis.......................... Prospectus Summary; Fees and Expenses;
Additional Information
4 Financial Highlights............................ Selected Consolidated Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations
5 Plan of Distribution............................ Outside Front Cover; Plan of Distribution
6 Selling Shareholders............................ Not Applicable
7 Use of Proceeds................................. Use of Proceeds
8 General Description of Registrant............... Outside Front Cover;
Prospectus Summary; Risk Factors;
Business; Investment Policies; Portfolio Companies
9 Management...................................... Management; Safekeeping, Transfer and Dividend
Paying Agent and Registrar; Principal Stockholders
10 Capital Stock, Long-Term Debt and Other
Securities...................................... Description of the Securities; Price Range of
Common Stock and Distributions;
Dividend Reinvestment Plan; Investment
Policies; Regulation; Principal Stockholders
11 Defaults and Arrears on Senior Securities....... Not Applicable
12 Legal Proceedings............................... Legal Proceedings
13 Table of Contents of the Statement of
Additional Information.......................... Inside Front Cover Page; Outside Back Cover Page
14 Cover Page...................................... Outside Front Cover Page of Statement of
Additional Information
15 Table of Contents............................... Outside Front Cover Page of Statement of
Additional Information
16 General Information and History................. General Information and History
17 Investment Objectives and Policies.............. Investment Policies
18 Management...................................... Management
19 Control Persons and Principal Holders of
Securities...................................... Principal Stockholders
20 Investment Advisory and Other Services.......... Safekeeping Transfer and Dividend Paying Agent and Registrar
21 Brokerage Allocation and Other Practices........ Brokerage Allocation and Other Practices
22 Tax Status...................................... Business - The Company's Operatons as a BDC and RIC
23 Financial Statements............................ Financial Statements in Prospectus
</TABLE>

* Pursuant to General Instruction on Form N-2, all items required to be set
forth in Part C are set forth in Part C.

<PAGE>

PROSPECTUS

[LOGO]

$250,000,000

COMMON STOCK
PREFERRED STOCK
DEBT SECURITIES

We may offer, from time to time, up to $250 million aggregate initial
offering price of our common stock, $0.01 par value per share (the 'Common
Stock'), preferred stock, or debt securities (collectively, the 'Securities') in
one or more offerings. The Securities may be offered at prices and on terms to
be set forth in one or more supplements to this Prospectus (each a 'Prospectus
Supplement'). In the case of our Common Stock, the offering price per share less
any underwriting commissions or discounts will not be less than the net asset
value per share of our Common Stock at the time we make the offering. You should
read this Prospectus and the applicable Prospectus Supplement carefully before
you invest in our Securities.

Our Securities may be offered directly to one or more purchasers, through
agents designated from time to time by us, or to or through underwriters or
dealers. The Prospectus Supplement relating to the offering will identify any
agents or underwriters involved in the sale of our Securities, and will set
forth any applicable purchase price, fee, commission or discount arrangement
between us and our agents or underwriters or among our underwriters or the basis
upon which such amount may be calculated. See 'Plan of Distribution.' We may not
sell any of our Securities through agents, underwriters or dealers without
delivery of a Prospectus Supplement describing the method and terms of the
offering of our Securities. Our Common Stock is traded on the Nasdaq National
Market under the symbol 'ACAS.'

We are a buyout and specialty finance company. We are principally engaged in
buying senior and subordinated debt from, and making equity investments in,
middle market companies. These companies are in a variety of industries and in
diverse geographic locations, primarily in the United States. We also provide
financial advisory services to businesses through ACS Capital Investments
Corporation ('CIC'), our wholly-owned subsidiary. We are a non-diversified,
closed end investment company that has elected to be regulated as a business
development company ('BDC') under the Investment Company Act of 1940, as amended
('1940 Act'). We also operate 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'). During the
period from August 1997 through March 31, 1999, we invested $197 million in debt
and equity securities of middle market companies. Prior to August 1997, we
advised companies in connection with their obtaining financing from third
parties and arranged 29 financing transactions aggregating over $400 million and
invested in the equity securities of eight of those companies.

This Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep it
for future reference. Additional information about us, including information
contained in our Statement of Additional Information ('SAI'), dated as of the
same date as this Prospectus, has been filed with the U.S. Securities and
Exchange Commission (the 'Commission'). You may obtain a copy of our SAI by
writing us at our principal office, which is located at 3 Bethesda Metro Center,
Suite 860, Bethesda, MD 20814, Attention: Shareholder Relations. You may also
obtain a copy of our SAI by calling 1-800-543-1976. You will not be charged by
us for this document. The Commission maintains a Web site (http://www.sec.gov)
that contains the SAI and other information regarding us. The SAI is
incorporated in its entirety in this Prospectus by reference and its table of
contents appears on page SAI-1 of the Prospectus. See 'Additional Information.'

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

An investment in our securities involves certain risks, including, among
other things, risks relating to investments in securities of small, private and
developing businesses. We describe some of these risks in the section entitled
'Risk Factors' which begins on page 7. You should carefully consider these risks
together with all of the other information contained in this prospectus and any
prospectus supplement before making a decision to purchase our securities.

The securities we are offering have not been approved or disapproved by the
commission or any state securities commission nor has the commission or any
state securities commission passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal offense.

This prospectus may not be used to consummate sales of securities unless
accompanied by a prospectus supplement.

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

THE DATE OF THIS PROSPECTUS IS JULY 9, 1999.

<PAGE>
PROSPECTUS SUMMARY

The following summary contains basic information about this offering. It
likely does not contain all the information that is important to an investor.
For a more complete understanding of this offering, we encourage you to read
this entire document and the documents to which we have referred.

Information contained or incorporated by reference in this Prospectus or
Prospectus Summary may contain 'forward-looking statements' within the meaning
of the Private Securities Litigation Reform Act of 1995, which can be identified
by the use of forward-looking terminology such as 'may,' 'will,' 'expect,'
'intend,' 'plans,' 'anticipate,' 'estimate' or 'continue' or the negative
thereof or other variations thereon or comparable terminology. The matters
described in 'Risk Factors' and certain other factors noted throughout this
Prospectus and in any exhibits to the Registration Statement of which this
Prospectus is a part, constitute cautionary statements identifying important
factors with respect to any such forward-looking statements, including certain
risks and uncertainties, that could cause actual results to differ materially
from those in such forward-looking statements.

AMERICAN CAPITAL STRATEGIES, LTD.

We are a buyout and specialty finance company principally engaged in buying
senior and subordinated debt from, and making equity investments in, middle
market companies in need of capital for management buyouts including employee
stock ownership plan ('ESOP') buyouts, leveraged buyouts, growth, acquisitions,
liquidity and restructuring, or recapitalization of corporations, subsidiaries,
divisions and product lines. Our ability to fund the entire capital structure is
an advantage in completing middle market transactions. The companies in which we
invest are in a variety of industries and in diverse geographic locations,
primarily in the United States. We also provide financial advisory services to
businesses through ACS Capital Investments Corporation ('CIC'), our wholly-owned
subsidiary. We are 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'). Since October 1, 1997,
we have operated 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 Code and
anticipate continuing to operate in such manner. Qualifying as a RIC generally
allows us to avoid paying corporate level federal income tax on income we
distribute to our stockholders. See 'Business.'

We typically invest between $3 million and $20 million in each transaction
and through our subsidiary, CIC, we will arrange and secure capital for larger
transactions. We do not concentrate our investments in any particular industry
or group of industries. Our primary business objectives are to increase our net
operating income and net asset value by investing our assets in senior debt,
subordinated debt with detachable warrants and capital stock of middle market
companies with attractive current yields and potential for equity appreciation.
Our loans typically mature in five to ten years and require monthly or quarterly
interest payments at fixed rates or variable rates based on the prime rate, plus
a margin. We price our debt and equity investments based on our analysis of each
transaction. As of March 31, 1999, the weighted average effective yield on our
investments was 13.1%. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.'

We generally acquire equity interests in the companies from which we have
purchased debt securities with the goal of enhancing our overall return. As of
March 31, 1999 we had a weighted average ownership interest of 26.7% in our
portfolio companies. We are prepared to be a long-term partner to our portfolio
companies thereby positioning us to participate in their future financing needs.
The opportunity to liquidate our investment and realize a gain may occur if the
business recapitalizes its equity, either through a sale to new owners or a
public offering of its equity or if we exercise our rights to require the
business to purchase the warrants and stock held by us ('Put Rights'). We
generally do not have the right to require that a business undergo an initial
public offering by registering securities under the Securities Act of 1933, but
we generally do have the right to sell our equity interests in a public offering
by the business to the extent permitted by the underwriters. See 'Portfolio
Companies.'

We make available significant managerial assistance to our portfolio
companies. We assist management in developing the business plan of the company,
hiring additional senior management when necessary, managing the capital
structure of the company and participating on its board of directors.

1
<PAGE>
Prior to August 1997, when we restructured our business activities, we had
established ourselves as a leading firm in structuring and obtaining third party
funding for management and employee buyouts of subsidiaries, divisions and
product lines being divested by larger corporations through the use of an ESOP.
The companies for whom we helped raise financing included companies who
purchased businesses from 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 us, the
employees agreed 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 was structured so that the fair market value of stock
contributed to the ESOP could 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. We are a leading
firm in structuring and implementing ESOP employee buyouts. We believe that our
ESOP knowledge and experience and our ability to fund transactions positions us
favorably in the market place. See 'Business.'

THE OFFERING

We may offer, from time to time, up to $250 million of our Securities, on
terms to be determined at the time of the offering. Our Securities may be
offered at prices and on terms to be set forth in one or more Prospectus
Supplements. In the case of the offering of our Common Stock, the offering price
per share less any underwriting commissions or discounts will not be less than
the net asset value per share of our Common Stock.

Set forth below is additional information regarding the offering of our
Securities:

<TABLE>
<S> <C>
Nasdaq National Market Symbol............. ACAS
Use of Proceeds........................... Unless otherwise specified in a Prospectus Supplement, we intend to
use the net proceeds from the sale of our Securities for general
corporate purposes, which may include investment in middle market
companies in accordance with our investment objectives, repayment of
indebtedness, acquisitions and other general corporate purposes. See
'Use of Proceeds.'
Distributions............................. We have paid quarterly dividends to the holders of our Common Stock
and generally intend to continue to do so. The amount of the
quarterly dividends is determined by the Board of Directors and is
based on our estimate of taxable ordinary income and net short-term
capital gains. See 'Price Range of Common Stock and Distributions.'
Certain additional amounts may be deemed as distributed to
stockholders for income tax purposes. Other types of Securities will
likely pay distributions in accordance with their terms.
Principal Risk Factors.................... Investment in our Securities involves certain risks relating to our
structure and investment objectives that should be considered by the
prospective purchasers of the Securities. We have a limited operating
history upon which you can evaluate our business. In addition, as a
BDC, our portfolio includes securities primarily issued by privately
held companies. These investments may involve a high
</TABLE>

2
<PAGE>

<TABLE>
<S> <C>
degree of business and financial risk, and are generally less liquid
than public securities. A large number of entities compete for the
same kind of investment opportunities as we do. We borrow funds to
make investments in and loans to middle market businesses. As a
result, we are exposed to the risks of leverage, which may be
considered a speculative investment technique. In addition, the
failure to qualify as a RIC eligible for pass-through tax treatment
under Subchapter M of the Code on income distributed to stockholders
could have a materially adverse effect on the total return, if any,
obtainable from an investment in our Securities. See 'Risk Factors'
for a discussion of these risks.
Certain Anti-Takeover Provisions.......... Our certificate of incorporation and bylaws, as well as certain
statutory and regulatory requirements, contain certain provisions
that may have the effect of discouraging a third party from making an
acquisition proposal for us and thereby inhibit a change in control
of us in circumstances that could give the holders of our Common
Stock the opportunity to realize a premium over the then prevailing
market price for our Common Stock. See 'Risk Factors-- Provisions Of
Our Certificate of Incorporation and Bylaws Could Deter Takeover
Attempts' and 'Certain Provisions of the Second Amended and Restated
Certificate of Incorporation and the Second Amended and Restated
Bylaws.'
Dividend Reinvestment Plan................ Cash distributions to holders of our Common Stock may be reinvested
under our Dividend Reinvestment Plan (the 'Reinvestment Plan') in
additional whole and fractional shares of Common Stock if you or your
representative elects to enroll in the Reinvestment Plan. See
'Dividend Reinvestment Plan' and 'Business--The Company's Operations
as a BDC and RIC.'
</TABLE>

FEES AND EXPENSES

The following table will assist you in understanding the various costs and
expenses that an investor in our Securities will bear directly or indirectly.

<TABLE>
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)(1)..................................................... 5.75%
Dividend reinvestment plan fees(2).................................................................... --
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES)(3)
Management fees....................................................................................... --
Interest payments on borrowed funds(4)................................................................ 0.04%
Other expenses(5)..................................................................................... 1.08%
------
Total annual expenses (estimated)(6)............................................................... 1.12%
</TABLE>

- ------------------
(1) In the event that the Securities to which this Prospectus relates are sold
to or through underwriters, a corresponding Prospectus Supplement will
disclose the applicable sales load.

(2) The expenses of the reinvestment plan are included in stock record expenses,
a component of 'Total Operating Expenses.' We have no cash purchase plan.
The participants in the reinvestment plan will bear a pro rata share of
brokerage commissions incurred with respect to open market purchases, if
any. See "Dividend Reinvestment Plan."

(3) Net assets attributable to common shares equal net assets (i.e., total
assets less total liabilities) at December 31, 1998.

(4) The interest payments on borrowed funds percentage is based on interest
payments for the year ended December 31, 1998 divided by net assets
attributable to our Common Stock. We had outstanding borrowings

3
<PAGE>

of $105.9 million at December 31, 1998. See 'Risk Factors--We may incur debt
which could increase our investment risks.'

(5) Other expenses are based on amounts for the year ended December 31, 1998 and
represent all expenses of the Company (except fees and expenses reported in
other items of this table) that are deducted from the Company's assets and
will be reflected as expenses in the Company's statement of operations.

(6) Total annual expenses as a percentage is based on amounts for the year ended
December 31, 1998. Total annual expenses as a percentage of net assets
attributable to Common Stock are higher than the total annual expenses
percentage would be for a company that is not leveraged. The Company borrows
money to leverage its net assets and increase its total assets. The total
annual expenses percentage is required by the Commission to be calculated as
a percentage of net assets, rather than the total assets, including assets
that have been funded with borrowed monies. If the total annual expenses
percentage were calculated instead as a percentage of total assets, total
annual expenses for the Company would be 0.63% of total assets.

The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in our Securities. These amounts are based upon
payment by an investor of an assumed 7% sales load and payment by us of
operating expenses at the levels set forth in the table above which, as
indicated above, does not include leverage or related expenses.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return............................................................ $81 $ 104 $ 130 $207
</TABLE>

This example should not be considered a representation of our future
expenses, and actual expenses may be greater or less than those shown. Moreover,
while the example assumes (as required by the Commission) a 5% annual return,
our performance will vary and may result in a return greater or less than 5%. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Reinvestment Plan may
receive shares of Common Stock purchased by the Reinvestment Plan Administrator
at the market price in effect at the time, which may be at, above or below net
asset value. See 'Dividend Reinvestment Plan.'

4
<PAGE>

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following summary of our financial information should be read in
conjunction with our Financial Statements and Notes thereto presented elsewhere
in this Prospectus. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' on page 18 for more information.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1998 1998 1997 1997 1996
------------ ------------ ------------ ------------ ------------- ------------
STATEMENT OF OPERATIONS
DATA:

Total operating income..... $ 6,520 $ 3,292 $ 16,979 $ 2,797 $ 2,901 $2,746
Total operating expenses... 1,398 444 1,709 551 2,651 2,862
------------ ------------ ------------ ------------ ------------- -----
Operating income (loss)
before equity in (loss)
earnings of unconsolidated
operating subsidiary...... 5,122 2,848 15,270 2,246 250 (116)
Equity in (loss) earnings
of unconsolidated
operating subsidiary...... (395) 101 (482) 24 -- --
------------ ------------ ------------ ------------ ------------- -----
Net operating income
(loss).................... 4,727 2,949 14,788 2,270 250 (116)
Increase in unrealized
appreciation on
investments............... 1,981 28 2,127 167 5,321 484
Realized gain (loss) on
investments............... 316 -- -- -- -- --
------------ ------------ ------------ ------------ ------------- -----
Income before income
taxes..................... 7,024 2,977 16,915 2,437 5,571 368
Provision for income
taxes..................... -- -- -- -- 2,128 159
------------ ------------ ------------ ------------ ------------- -----
Net increase in
shareholders' equity
resulting from
operations................ $ 7,024 $ 2,977 $ 16,915 $ 2,437 $ 3,443 $ 209
------------ ------------ ------------ ------------ ------------- -----
------------ ------------ ------------ ------------ ------------- -----
Per share data:
Net operating income:
Basic................... $ 0.43 $ 0.27 $ 1.34 $ 0.21
Diluted................. $ 0.42 $ 0.26 $ 1.29 $ 0.20
Net increase in
shareholders' equity
resulting from
operations:
Basic................... $ 0.63 $ 0.27 $ 1.53 $ 0.22
Diluted................. $ 0.62 $ 0.26 $ 1.48 $ 0.21
Weighted average shares of
Common Stock
outstanding:
Basic................... $ 11,070 $ 11,069 $ 11,068 $ 11,069
Diluted................. $ 11,279 $ 11,480 $ 11,424 $ 11,405
Cash dividends............ $ 0.41 $ 0.25 $ 1.34 $ 0.21
BALANCE SHEET DATA:
Total assets.............. $263,551 $151,031 $270,019 $150,705 $ 154,322 $5,432
Total shareholders'
equity.................. $155,546 $150,862 $152,723 $150,652 $ 150,539 $3,372
OTHER DATA:
Number of portfolio
companies at period
end..................... 17 6 15 3
Principal amount of loan
originations............ $ 24,328 $ 20,215 $118,390 $ 16,817
Investments in equity
securities.............. $ 3,684 $ 9,456 $ 24,475 $ 3,805
Principal amount of loan
repayments.............. $ 6,860 $ 303 $ 1,719 $ 93
Return on equity(1)(2).... 18.2% 7.9% 11.2% 6.5%
Weighted average yield on
investments to date..... 13.1% 12.3% 13.0% 12.2%

<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
STATEMENT OF OPERATIONS
DATA:
Total operating income..... $2,706 $2,498
Total operating expenses... 2,928 2,606
----- -----
Operating income (loss)
before equity in (loss)
earnings of unconsolidated
operating subsidiary...... (222) (108)
Equity in (loss) earnings
of unconsolidated
operating subsidiary...... -- --
----- -----
Net operating income
(loss).................... (222) (108)
Increase in unrealized
appreciation on
investments............... 371 956
Realized gain (loss) on
investments............... 66 (23)
----- -----
Income before income
taxes..................... 215 825
Provision for income
taxes..................... 57 422
----- -----
Net increase in
shareholders' equity
resulting from
operations................ $ 158 $ 403
----- -----
----- -----
Per share data:
Net operating income:
Basic...................
Diluted.................
Net increase in
shareholders' equity
resulting from
operations:
Basic...................
Diluted.................
Weighted average shares of
Common Stock
outstanding:
Basic...................
Diluted.................
Cash dividends............
BALANCE SHEET DATA:
Total assets.............. $4,382 $3,930
Total shareholders'
equity.................. $2,946 $2,571
OTHER DATA:
Number of portfolio
companies at period
end.....................
Principal amount of loan
originations............
Investments in equity
securities..............
Principal amount of loan
repayments..............
Return on equity(1)(2)....
Weighted average yield on
investments to date.....
</TABLE>

- ------------------
(1) Amounts are annualized for the three months ended March 31, 1999, March 31,
1998, and December 31, 1997.
(2) Return represents net increase in shareholders' equity resulting from
operations divided by the average shareholders' equity for the period.

5
<PAGE>
ADDITIONAL INFORMATION

We have filed with the Commission a Registration Statement on Form N-2
(together with all amendments and exhibits, the 'Registration Statement') under
the Securities Act of 1933, as amended (the 'Securities Act'), with respect to
the Securities offered by this Prospectus. The Prospectus, which is a part of
the Registration Statement, does not contain all of the information set forth in
the Registration Statement or the exhibits and schedules thereto. For further
information with respect to our business and our Securities, reference is made
to the Registration Statement, including the exhibits and schedules thereto and
the SAI, contained in the Registration Statement.

We also file reports, proxy statements and other information with the
Commission under the Securities Exchange Act of 1934, as amended. Such reports,
proxy statements and other information, as well as the Registration Statement
and the exhibits and schedules thereto, can be inspected at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices, located at
Seven World Trade Center, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Information about the operation of the
public reference facilities may be obtained by calling the Commission at
1-800-SEC-0330. The Commission maintains a web site that contains reports, proxy
statements and other information regarding registrants, including the Company,
that file such information electronically with the Commission. The address of
the Commission's web site is (http://www.sec.gov). Copies of such material may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Our Common
Stock is listed on the Nasdaq National Market, and such reports, proxy
statements and other information can also be inspected at the offices of the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.

We also furnish to our stockholders annual and quarterly reports, which
will include annual financial information that has been examined and reported
on, with an opinion expressed, by independent public accountants, and quarterly
unaudited financial information. See 'Experts.'

6
<PAGE>
RISK FACTORS

You should carefully consider the risks described below together with all
of the other information provided and incorporated by reference in this
Prospectus (or any Prospectus Supplement) before making a decision to purchase
our Securities. The risks and uncertainties described below are not the only
ones facing our Company. Additional risks and uncertainties not presently known
to us, or not presently deemed material by us, may also impair our operations
and performance.

If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. If
that happens, the trading price of our Common Stock could decline, and you may
lose all or part of your investment.

This Prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in or incorporated
by reference in this Prospectus (or any Prospectus Supplement).

WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR BUSINESS

Although we commenced operations in 1986, we materially changed our
business plan and format in October 1997 from structuring and arranging
financing for buyout transactions on a fee for services basis to primarily being
a lender to and investor in middle market companies. Therefore, we have only a
limited history of operations as a lender to and investor in middle market
companies upon which you can evaluate our business. While we have been
profitable since October 1997, there can be no assurance that we will remain
profitable in future periods, nor can we offer investors any assurance that we
will successfully implement our growth strategy. In addition, we have no
operating results under our new business plan which would demonstrate the effect
of a general economic recession on our business.

WE MAKE LOANS TO AND INVESTMENTS IN MIDDLE MARKET BORROWERS WHO MAY DEFAULT ON
THEIR LOANS OR PROVIDE NO RETURN ON OUR INVESTMENTS

We invest in and lend to middle market privately-owned businesses. There is
generally no publicly available information about these businesses. Therefore we
rely on our principals and consultants to investigate these businesses. The
portfolio companies in which we invest may have significant variations in
operating results, may from time to time be parties to litigation, may be
engaged in rapidly changing businesses with products subject to a substantial
risk of obsolescence, may require substantial additional capital to support
their operations, to finance expansion or to maintain their competitive
position, may otherwise have a weak financial position or may be adversely
effected by changes in the business cycle. Our portfolio companies may not meet
net income, cash flow and other coverage tests typically imposed by senior
lenders. Numerous factors may affect a portfolio company's ability to repay its
loan, including the failure to meet its business plan, a downturn in its
industry or negative economic conditions. A deterioration in a portfolio
company's financial condition and prospects may be accompanied by deterioration
in the collateral for the loan. We also make unsecured, subordinated loans and
invest in equity securities, which involve a higher degree of risk than senior
loans.

Middle market businesses typically have narrower product lines and smaller
market shares than large businesses. They tend to be more vulnerable to
competitors' actions and market conditions, as well as general economic
downturns. In addition, portfolio companies may face intense competition,
including competition from companies with greater financial resources, more
extensive development, manufacturing, marketing, and other capabilities, and a
larger number of qualified managerial and technical personnel.

These businesses may also experience substantial variations in operating
results. Typically, the success of a middle market business also depends on the
management talents and efforts of one or two persons or a small group of
persons. The death, disability or resignation of one or more of these persons
could have a material adverse impact on us. In addition, middle market
businesses often need substantial additional capital to expand or compete and
will have borrowed money from other lenders.

Our senior loans generally are secured by the assets of our borrowers. Our
subordinated loans are often secured by the assets of the borrower but our
rights to payment and our security interest are usually subordinated to the
payment rights and security interests of the senior lender. Therefore, we may be
limited in our ability to enforce our rights to collect our loans and to recover
any of the loan balance through a foreclosure of collateral.

7
<PAGE>

Often, a deterioration in a borrower's financial condition and prospects is
accompanied by a deterioration in the value of the collateral securing its loan.
In certain cases, our involvement in the management of our portfolio companies
may subject us to additional defenses and claims from borrowers and third
parties. These conditions may make it difficult for us to obtain repayment of
our loans.

THERE IS UNCERTAINTY REGARDING THE VALUE OF OUR PRIVATELY HELD SECURITIES

A majority of our portfolio securities are not publicly traded. We value
these securities based on a determination of their fair value made in good faith
by our Board of Directors. Due to the uncertainty inherent in valuing
securities, as set forth in our financial statements, that are not publicly
traded, our determinations of fair value may differ materially from the values
that would exist if a ready market for these securities existed. Our net asset
value could be materially effected if our determinations regarding the fair
value of our investments are materially different from the values that would
exist if a ready market existed for these securities.

WE MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENTS

When we make a loan, we generally receive warrants to acquire stock issued
by the borrower, and we may make direct equity investments. Our goal is to
ultimately dispose of these equity interests and realize gains. These equity
interests may not appreciate in value and, in fact, may depreciate in value.
Accordingly, we may not be able to realize gains from our equity interests.

THE LACK OF LIQUIDITY OF OUR PRIVATELY HELD SECURITIES MAY ADVERSELY AFFECT OUR
BUSINESS

Most of our investments consist of securities acquired directly from their
issuers in private transactions. Some of these securities are subject to
restrictions on resale (including in some instances legal restrictions) or
otherwise are less liquid than public securities. The illiquidity of our
investments may make it difficult for us to obtain cash equal to the value at
which we record our investments if the need arises.

WE HAVE INVESTED IN A LIMITED NUMBER OF PORTFOLIO COMPANIES

A consequence of a limited number of investments is that the aggregate
returns realized by us may be substantially adversely affected by the
unfavorable performance of a small number of such investments or a substantial
writedown of any one investment. Beyond our regulatory and income tax
guidelines, we do not have fixed guidelines for industry diversification, and
investments could potentially be concentrated in relatively few industries.

WE HAVE LIMITED INFORMATION REGARDING THE COMPANIES IN WHICH WE INVEST

Consistent with our operation as a business development company, our
portfolio consists primarily of securities issued by privately held companies.
There is generally little or no publicly available information about such
companies, and we must rely on the diligence of our employees and the
consultants we hire to obtain the information necessary for our decision to
invest in them. There can be no assurance that our diligence efforts will
uncover all material information about the privately held business necessary to
make a fully informed investment decision.

OUR PORTFOLIO COMPANIES MAY BE HIGHLY LEVERAGED

Leverage may have important adverse consequences to these companies and to
us as an investor. These companies may be subject to restrictive financial and
operating covenants. The leverage may impair these companies' ability to finance
their future operations and capital needs. As a result, these companies'
flexibility to respond to changing business and economic conditions and to
business opportunities may be limited. A leveraged company's income and net
assets will tend to increase or decrease at a greater rate than if borrowed
money were not used.

OUR BUSINESS IS DEPENDENT ON EXTERNAL FINANCING

Our business requires a substantial amount of cash to operate. We
historically have obtained the cash required for operations through the issuance
of debt, sale of receivables to the CP Conduit Facility and the issuance of
equity.

8
<PAGE>

Senior Securities. We have issued, and intend to continue to issue, debt
securities and other evidences of indebtedness, up to the maximum amount
permitted by the 1940 Act, which currently permits us, as a BDC, to issue debt
securities and preferred stock (collectively, 'Senior Securities') in amounts
such that our asset coverage, as defined in the 1940 Act, is at least 200% after
each issuance of Senior Securities. As a result, we are exposed to the risks of
leverage. We have also retained the right to issue preferred stock. As permitted
by the 1940 Act, we may, in addition, borrow amounts up to five percent (5%) of
our total assets for temporary purposes.

CP Conduit Securitization. We depend in part on the CP Conduit Facility to
generate cash for funding our investments. As of June 30, 1999, we have one CP
Conduit Facility with an aggregate commitment of $125 million. A failure to
renew our existing CP Conduit Facility or substitute senior financing
facilities, to increase our capacity under our existing CP Conduit Facility or
to add a new CP Conduit Facility could have a material adverse effect on our
business, financial condition and results of operations. See the description of
our CP Conduit Facility under 'Management's Discussion and Analysis of Financial
Condition And Results of Operations--Financial Condition, Liquidity and Capital
Resources.'

Common Stock. Because we are constrained in our ability to issue debt for
the reasons given above, we are dependent on the issuance of equity as a
financing source. If additional funds are raised through the issuance of Common
Stock or debt securities convertible into or exchangeable for Common Stock, the
percentage ownership of our stockholders at the time would decrease and they may
experience additional dilution. In addition, any convertible or exchangeable
securities may have rights, preferences and privileges more favorable than those
of the Common Stock.

The following table is designed to illustrate the effect on return to a
holder of the Company's Common Stock of the leverage created by the Company's
use of borrowing, at the rate of 6.7% and assuming hypothetical annual returns
on the Company's portfolio of minus 15 to plus 15 percent. As can be seen,
leverage generally increases the return to shareholders when portfolio return is
positive and decreases return when the portfolio return is negative. Actual
returns may be greater or less than those appearing in the table.

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses)(1)............................... -15.0% -10.0% -5.0% -- 5.0% 10.0% 15.0%
Corresponding Return to Common Stockholders(2)....... -30.1% -21.6% -13.1% -4.6% 3.8% 12.3% 20.8%
</TABLE>

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

(1) The Assumed Portfolio Return is required by regulation of the Commission and
is not a prediction of, and does not represent, the projected or actual
performance of the Company.

(2) In order to compute the 'Corresponding Return to Common Stockholders,' the
'Assumed Return on Portfolio' is multiplied by the total value of the
Company's assets at the beginning of the Company's fiscal year to obtain an
assumed return to the Company. From this amount, all interest accrued during
the year is subtracted to determine the return available to stockholders.
The return available to stockholders is then divided by the total value of
the Company's net assets as of the beginning of the fiscal year to determine
the 'Corresponding Return to Common Stockholders.'

WE MAY INCUR ADDITIONAL DEBT THAT COULD INCREASE YOUR INVESTMENT RISKS

We borrow money or issue debt securities to provide us with additional
funds to invest. Our lenders have fixed dollar claims on our assets that are
senior to the claims of our stockholders and, thus, our lenders have preference
over our stockholders with respect to our assets. In particular, the assets
which we have pledged to our lenders under our commercial paper conduit
securitization facility (the 'CP Conduit Facility') were sold to a separate
business trust prior to such pledge. While we own a beneficial interest in this
trust, these assets are property of the trust, available to satisfy the debts of
the trust, and would only become available for distribution to our stockholders
to the extent specifically permitted under the agreements governing the CP
Conduit Facility. See 'Risk Factors--Our CP Conduit Facility imposes certain
limitations on us.'

Although borrowing money for investment increases the potential for gain,
it also increases the risk of a loss. A decrease in the value of our investments
will have a sharper impact on the value of our Common Stock if we borrow money
to make investments. Our ability to pay dividends could also be adversely
impacted. In addition, our ability to pay dividends or incur additional
indebtedness would be restricted if asset coverage is not

9
<PAGE>

equal to at least twice our indebtedness. If the value of our assets decline, we
might be unable to satisfy that test. If this happens, we may be required to
sell some of our investments and repay a portion of our indebtedness at a time
when a sale may be disadvantageous. See 'Assumed Return on the Company's
Portfolio.'

A CHANGE IN INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY

A portion of our income will depend upon the difference between the rate at
which we borrow funds and the rate at which we loan these funds. We anticipate
using a combination of equity and long-term and short-term borrowings to finance
our lending activities. Certain of our borrowings may be at fixed rates and
others at variable rates. As of June 1, 1999, none of our borrowings were at
fixed rates of interest and $43 million were at variable rates of interest
determined on the basis of a benchmark LIBOR rate. In addition, $113 million of
the loans in our portfolio were at fixed rates and $65 million were at variable
rates determined on the basis of a benchmark prime rate. We typically undertake
to hedge against the risk of adverse movement in interest rates in our CP
Conduit Facility and other short-term and long-term borrowings as against our
portfolio of assets. Hedging activities may limit our ability to participate in
the benefits of lower interest rates with respect to the hedged portfolio.
Adverse developments resulting from changes in interest rates or hedging
transactions could have a material adverse effect on our business, financial
condition and results of operations. See 'Business--The Company's Operations as
a BDC and RIC.'

AN ECONOMIC DOWNTURN COULD AFFECT OUR OPERATING RESULTS

An economic downturn may adversely affect middle market businesses, which
are our primary market for investments. Such a downturn could also adversely
effect our ability to obtain capital to invest in such companies. These results
could have a material adverse effect on our business, financial condition and
results of operations.

OUR CP CONDUIT FACILITY IMPOSES CERTAIN LIMITATIONS ON US

In March 1999, we established a line of credit pursuant to a CP Conduit
Facility administered by First Union Capital Markets Corp. This facility, which
has an aggregate commitment of $125 million, is not available for further draws
after March 31, 2001, and is subject to annual renewals thereafter with the
consent of our lenders. Our CP Conduit Facility contains customary default
provisions, as well as the following default provisions: a cross-default on our
debt of $1 million or more, a minimum net worth requirement of $100 million plus
seventy-five percent (75%) of any new equity or subordinated debt, a default
triggered by change in control and a default arising from the termination of any
two of Malon Wilkus, Adam Blumenthal and John Erickson as our executive
officers. In addition, if we fail to deliver to our lenders a formal credit and
collection policy and loan grading system by September 30, 1999, the lenders
will have the right to terminate the facility.

THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER OUR CP CONDUIT FACILITY COULD LEAD
TO TERMINATION OF THAT FACILITY

Our CP Conduit Facility contains certain default provisions, some of which
are described in the immediately preceding paragraph. An event of default under
our CP Conduit Facility could result, among other things, in termination of
further funds availability under that facility, an accelerated maturity date for
all amounts outstanding under that facility and the disruption of all or a
portion of the business financed by that facility. This could reduce our
revenues and, by delaying any cash payment allowed to us under facility until
the lender has been paid in full, reduce our liquidity and cash flow.

WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS

We could experience fluctuations in our quarterly operating results due to
a number of factors including, among others, variations in and the timing of the
recognition of realized and unrealized gains or losses, the degree to which we
encounter competition in our markets and general economic conditions. As a
result of these factors, results for any period should not be relied upon as
being indicative of performance in future periods. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations.'

10
<PAGE>

WE MAY FAIL TO CONTINUE TO QUALIFY FOR OUR PASS-THROUGH TAX TREATMENT

We have operated since October 1, 1997 so as to qualify to be taxed as a
RIC under Subchapter M of the Code and, provided we meet certain requirements
under the Code, we can generally avoid corporate level federal income taxes on
income distributed to you and other stockholders as dividends. We would cease to
qualify for this favorable pass-through tax treatment if we are unable to comply
with the source of income, diversification or distribution requirements
contained in Subchapter M of the Code, or if we cease to operate so as to
qualify as a BDC under the 1940 Act. If we fail to qualify to be taxed as a RIC
or to distribute our income to stockholders on a current basis, we would be
subject to corporate level taxes which would significantly reduce the amount of
income available for distribution to stockholders. The loss of our current tax
treatment could have a material adverse effect on the total return, if any,
obtainable from your investment in the Securities. See 'Business--The Company's
Operations as a BDC and RIC.'

THERE IS A RISK THAT YOU MAY NOT RECEIVE DIVIDENDS

Since our initial public offering, we have distributed more than 98% of our
net operating income and 98% of our net realized short-term capital gains, if
any, on a quarterly basis to our stockholders. Our current intention is to
continue these distributions to our stockholders. Net realized long-term capital
gains may be retained to supplement our equity capital and support growth in our
portfolio, unless our Board of Directors determines in certain cases to make a
distribution. We cannot assure you that we will achieve investment results or
maintain a tax status that will allow any specified level of cash distributions
or year-to-year increases in cash distributions.

OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL DEPEND ON OUR ABILITY TO
MANAGE EFFECTIVELY ANY FUTURE GROWTH

We have grown significantly since we restructured our operations in October
1997. Our ability to sustain continued growth depends on our ability to
identify, evaluate, finance and invest in suitable companies that meet our
investment criteria. Accomplishing such a result on a cost-effective basis is
largely a function of our marketing capabilities, our management of the
investment process, our ability to provide competent, attentive and efficient
services, our access to financing sources on acceptable terms and the
capabilities of our technology platform. As we grow, we will also be required to
hire, train, supervise and manage new employees. Failure to manage effectively
any future growth could have a material adverse effect on our business,
financial condition and results of operations.

WE ARE DEPENDENT UPON OUR KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS

We are dependent for the final selection, structuring, closing and
monitoring of our investments on the diligence and skill of our senior
management and other management members. Our future success depends to a
significant extent on the continued service and coordination of our senior
management team, particularly Malon Wilkus, our President and Chief Executive
Officer, Adam Blumenthal, our Executive Vice President and Chief Operating
Officer and John Erickson, our Vice President and Chief Financial Officer. The
departure of any of our executive officers or key employees could materially
adversely affect our ability to implement our business strategy, and the
departure of any two of Malon Wilkus, Adam Blumenthal and John Erickson would be
a default of the servicing provisions under our CP Conduit Facility. We do not
maintain key man life insurance on any of our officers or employees.

WE OPERATE IN A HIGHLY COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES

A large number of entities compete with us and make the types of
investments that we make in middle market privately-owned businesses. We compete
with a large number of private equity funds and venture capital companies,
investment banks and other equity and non-equity based investment funds, and
other sources of financing, including traditional financial services companies
such as commercial banks. Many of our competitors are substantially larger and
have considerably greater financial, technical and marketing resources than we
do. For example, some competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, certain of our
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships and build their market shares. We cannot assure you that the
competitive pressures we face will not have a material adverse effect on our
business, financial condition and results of operations. Also, as a result of
this

11
<PAGE>

competition, we may not be able to take advantage of attractive investment
opportunities from time to time and there can be no assurance that we will be
able to identify and make investments that satisfy our investment objectives or
that we will be able to fully invest our available capital.

PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD DETER TAKEOVER
ATTEMPTS

Our certificate of incorporation and bylaws and the Delaware General
Corporation Law contain provisions that may have the effect of discouraging,
delaying or making more difficult a change in control and preventing the removal
of incumbent directors. The existence of these provisions may negatively impact
on the price of our Common Stock and may discourage third-party bids. These
provisions may reduce any premiums paid to you for shares of your Common Stock.
Furthermore, we are subject to Section 203 of the Delaware General Corporation
Law. Section 203 governs business combinations with interested stockholders, and
also could have the effect of delaying or preventing a change in control.

CHANGES IN LAWS OR REGULATIONS GOVERNING OUR OPERATIONS MAY ADVERSELY AFFECT OUR
BUSINESS

We and our portfolio companies are subject to regulation by laws at the
local, state and federal level. These laws and regulations, as well as their
interpretation, may be changed from time to time. Accordingly, any change in
these laws or regulations could have a material adverse impact on our business.
See 'Regulation.'

RISKS RELATED TO POTENTIAL YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR BUSINESS

The Year 2000 issue is the result of computer programs and embedded
hardware systems having been developed using two digits rather than four to
define the applicable year. These computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using '00' as the
Year 1900 rather than the Year 2000. This could result in system failures or
miscalculations causing disruptions or failure of our operations, including
among other things, a temporary inability to transact new business or
communicate with our customers online.

We depend on our computer software programs and operating systems in
operating our business. We also depend on the proper functioning of computer
systems of third parties, such as portfolio companies, vendors and suppliers.
The failure of any of these systems to appropriately interpret the upcoming
calendar Year 2000 could have a material adverse effect on our business and
financial condition. We are currently identifying our own systems that are not
Year 2000 compliant and taking steps to determine whether third parties are
doing the same. In addition, we are implementing a plan to prepare our most
critical computer systems to be Year 2000 compliant in 1999.

Throughout 1999, we will continue to address any issues of Year 2000
non-compliance and further develop our contingency plan to ensure business
operations in the event of systems failure in the Year 2000. We are utilizing
both internal and external resources to reprogram or replace, test, and
implement the software and other systems for Year 2000 modifications. We
estimate that the cost of our Year 2000 project will be less than $125,000. This
amount includes the cost of additional software, reviewing the portfolio
companies' readiness, and outside systems professionals working on our Year 2000
compliance. We cannot assure you that our Year 2000 compliance program will be
effective or that our estimates about the cost of completing our program will be
accurate.

We may experience degradation in the performance of our systems or complete
systems failure if our assessment is erroneous or if we encounter unforeseen
difficulties. Any of these events, whether occurring in our systems, the systems
of participants in our strategic marketing alliances or the systems of others,
including our portfolio companies, could have a material adverse effect on our
business, financial conditions and results of operations. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Impact of the Year 2000' for information on our state of readiness, potential
risks and costs regarding Year 2000 compliance.

12
<PAGE>

WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS STRATEGY IF USE OF THE INTERNET AS
REQUIRED BY OUR STRATEGY DOES NOT DEVELOP

We have begun to implement a business strategy that will use the Internet
as a financial portal for middle market companies, to auction securities to
institutional investors, and a retail site for certain of our portfolio
companies. There can be no assurance that the implementation of this strategy
will be successful.

WE COULD FACE LOSSES AND POTENTIAL LIABILITY IF INTRUSIONS, VIRUSES OR SIMILAR
DISRUPTIONS TO OUR INTERNET TECHNOLOGY JEOPARDIZE OUR CONFIDENTIAL INFORMATION
OR THAT OF USERS OF OUR WEB SITE

Although we have implemented, and will continue to implement, security
measures, our Internet technology platform is and will continue to be vulnerable
to intrusion, computer viruses or similar disruptive problems caused by
transmission from Internet users. The misappropriation of proprietary
information could expose us to a risk of loss or litigation. Furthermore, until
more comprehensive security technologies are developed, the security and privacy
concerns of existing and Internet users may inhibit the growth of the Internet
commerce, which would adversely affect our business strategy.

FAILURE TO DEPLOY NEW CAPITAL MAY REDUCE OUR RETURN ON EQUITY

If we fail to invest our new capital effectively our return on equity may
be negatively impacted, which could reduce the price of your Common Stock.

THE MARKET PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY

The market price and marketability of shares of our common stock may from
time to time be significantly affected by numerous factors, including many over
which we have no control and that may not be directly related to us. These
factors include the following:

o price and volume fluctuations in the stock market from time to time,
which are often unrelated to the operating performance of particular
companies;

o significant volatility in the market price and trading volume of
securities of RICs, BDCs or other companies in our sector, which is not
necessarily related to the operating performance of these companies;

o changes in regulatory policies or tax guidelines, particularly with
respect to RICs or BDCs;

o changes in earnings or variations in operating results;

o any shortfall in revenue of net income or any increase in losses from
levels expected by securities analysts;

o general economic trends and other external factors; and

o loss of a major funding source.

Fluctuations in the trading price of our common stock may adversely affect
the liquidity of the trading market for our common stock and, in the event that
we seek to raise capital through future equity financings, our ability to raise
such equity capital.

FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE

The market price of our Common Stock could decline as a result of sales of
a large number of shares of our Common Stock in the market, or the perception
that such sales could occur. These sales also might make it more difficult for
us to sell additional equity securities in the future at a time and at a price
that we deem appropriate.

OUR COMMON STOCK MAY BE DIFFICULT TO RESELL

Investors may not be able to resell shares of Common Stock at or above
their purchase prices due to a number of factors, including:

o actual or anticipated fluctuation in our operating results;

o changes in expectations as to our future financial performance or changes
in financial estimates of securities analysts;

o departures of key personnel; and

o the operating and stock price performance of other comparable companies.

13
<PAGE>

USE OF PROCEEDS

Unless otherwise specified in the Prospectus Supplement accompanying this
Prospectus, the Company intends to use the net proceeds from the sale of the
Securities for general corporate purposes, which may include investment in
middle market privately-owned companies in accordance with the Company's
investment objectives, repayment of the Company's indebtedness outstanding from
time to time, acquisitions and other general corporate purposes.

The Company anticipates that substantially all of the net proceeds of any
offering of Securities will be utilized in the manner described above within six
months, and in any event within two years. Pending such utilization, the Company
intends to invest the net proceeds of any offering of Securities in time
deposits, income-producing securities with maturities of three months or less
that are issued or guaranteed by the federal government or an agency thereof and
high quality debt securities maturing in one year or less from the time of
investment.

14
<PAGE>

PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Since the Company became a RIC, it has distributed, and currently intends
to continue to distribute in the form of dividends, a minimum of 98% of its net
operating income and 98% of its net realized short-term capital gains, if any,
on a quarterly basis to its stockholders. 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. At the option of
a holder of Common Stock, all cash distributions can be reinvested automatically
under the Company's Reinvestment Plan in additional whole and fractional shares.
A stockholder whose shares are held in the name of a broker or other nominee
should contact the broker or nominee regarding participation in the Reinvestment
Plan on the stockholder's behalf. See 'Risk factors--We May Lose Our
Pass-Through Tax Treatment;' 'Reinvestment Plan;' and 'Business--The Company's
Operations as a BDC and RIC.' The Common Stock of the Company historically
trades at prices both above and below its net asset value. There can be no
assurance, however, that such premium or discount, as applicable, to net asset
value will be maintained.

The Company's Common Stock is quoted on the Nasdaq Stock Market under the
symbol ACAS. As of May 17, 1999, the Company had 208 stockholders of record and
approximately 4,500 beneficial owners. The following table sets forth the range
of high and low sales 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 pursuant
to the IPO, through June 30, 1999.

BID PRICE

<TABLE>
<CAPTION>
PREMIUM PREMIUM
(DISCOUNT) (DISCOUNT)
OF LOW OF HIGH
NET ASSET SALES SALES PRICE
VALUE PER DIVIDEND PRICE TO NET TO NET
SHARE(1) HIGH LOW DECLARED ASSET VALUE ASSET VALUE
--------- ------ ------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
1997
Third Quarter (beginning August 29,
1997)....................................... $ 13.60 $20.25 $18.50 $ 0.00 36.03% 48.90%
Fourth Quarter................................ $ 13.61 $20.75 $16.50 $ 0.21 21.23% 52.46%

1998
First Quarter................................. $ 13.63 $22.50 $17.25 $ 0.25 26.56% 65.08%
Second Quarter................................ $ 13.65 $24.63 $21.25 $ 0.29 55.68% 80.44%
Third Quarter................................. $ 13.77 $24.25 $10.13 $ 0.32 (26.43)% 76.11%
Fourth Quarter................................ $ 13.80 $18.44 $ 9.19 $ 0.48 (33.42)% 33.62%

1999
First Quarter................................. $ 14.02 $18.56 $14.75 $ 0.41 5.21% 32.38%
Second Quarter................................ -- $19.88 $16.50 $ 0.43 -- --
</TABLE>

- ------------------
(1) Net Asset Value per share is determined as of the last day in the relevant
quarter and therefore may not reflect the net asset value per share on the
date of the high and low sale price. Historically, the Company's net assets
have been highest at the end of the quarter. The net asset values shown are
based on outstanding shares at the end of each period.

15
<PAGE>

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE 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 as a BDC 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.

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

(1) Amounts are annualized for the three months ended March 31, 1999, March 31,
1998, and December 31, 1997.

(2) Return represents net increase in shareholders' equity resulting from
operations divided by the average shareholders' equity for the period.

16
<PAGE>

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 an 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 reports filed from time to time with the
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 of 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 thereto. 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
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 middle market companies. 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, 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.

PORTFOLIO COMPOSITION

The Company's primary business is investing in and lending to
privately-owned businesses through investments in senior debt, subordinated debt
with detachable common stock warrants, preferred stock and common stock. The
total portfolio value of investments in non-publicly traded securities was
$182,498, $165,035 and $20,645 at March 31, 1999, December 31, 1998, and
December 31, 1997, respectively. During the three months ended March 31, 1999
(the 'First Quarter 1999'), the year ended December 31, 1998, and the three
months ended December 31, 1997, the Company made investments totaling $26,212
and advanced $1,800 previously committed under working capital facilities,
$150,249, including $7,384 in funds committed but undrawn under credit
facilities, and $20,622 respectively. The weighted average effective interest
rate on the investment portfolio was 13.1%, 13.0% and 12.2%, respectively, at
March 31, 1999, December 31, 1998, and December 31, 1997. A summary of the
composition of the Company's portfolio of non-publicly traded securities at
March 31, 1999, December 31, 1998, and December 31, 1997 is shown in the
following table:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
MARCH 31, 1999 1998 1997
-------------- ------ ------
<S> <C> <C> <C>
Senior debt........................................................... 15.4% 15.0% 27.7%
Subordinated debt..................................................... 66.1% 65.5% 53.5%
Convertible preferred stock........................................... 1.6% 3.3% 11.2%
Common Stock warrants................................................. 15.1% 13.5% 7.6%
Common Stock.......................................................... 1.8% 2.7% --
</TABLE>

The Company expects its portfolio composition for the remainder of 1999 to
be similar to its portfolio composition at March 31, 1999 and at December 31,
1998. The Company will continue to weight its portfolio composition heavily
toward investments in subordinated debt with detachable warrants.

17
<PAGE>
The following table shows the portfolio composition by industry grouping:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
MARCH 31, 1999 1998 1997
-------------- ------ ------
<S> <C> <C> <C>
Manufacturing............................................... 63.2% 66.1% 52.8%
Health Care................................................. 9.6% -- --
Media....................................................... 8.5% 9.1% --
Construction................................................ 9.1% 10.0% --
Wholesale & Retail.......................................... 2.7% 7.4% 30.0%
Transportation.............................................. 4.9% 5.4% --
Service..................................................... 2.0% 2.0% 17.2%
</TABLE>

Management expects that the largest percentage of its investments will
continue to be in manufacturing companies; however, the Company intends to
continue to diversify its portfolio and will explore new investment
opportunities in a variety of industries.

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 middle market companies 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 estimated fair value of the Company's portfolio assets at the end
of the period compared with their estimated 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
pretax income, under generally accepted accounting principles in the United
States consistently applied ('GAAP'), 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 pre-RIC balance sheet of CIC. 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 federal income 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.

18
<PAGE>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Operating income................................................................ $6,520 $3,292
Operating expenses.............................................................. 1,398 444
Equity in (loss) earnings of unconsolidated operating subsidiary................ (395) 101
------- -------
Net operating income............................................................ 4,727 2,949
Realized gain on investments.................................................... 316 --
Increase in unrealized appreciation of investments.............................. 1,981 28
------- -------
Net increase in shareholders' equity resulting from operations.................. $7,024 $2,977
------- -------
------- -------
</TABLE>

Total operating income for the First Quarter 1999 increased $3,228, or 98%,
compared to the three months ended March 31, 1998 (the 'First Quarter 1998').
The increase in operating income is a result of the Company closing 15
investments in private companies totaling $141 million between March 31, 1998
and March 31, 1999. For the First Quarter 1999, operating income consisted of
$666 in loan fees, $5,813 in interest and dividends on non-publicly traded
securities and $41 in interest on government agency securities, bank deposits
and repurchase agreements; for the First Quarter 1998, operating income
consisted of $612 in loan fees, $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 First Quarter 1999 loan fees include
$288 in prepayment fees collected as a result of the repayment of $5,000 in
subordinated debt and the sale of senior and subordinated debt of $2,667. As the
Company increases its investment portfolio of non- publicly traded securities,
the interest and dividends the Company realizes on these securities will also
increase.

Operating expenses for the First Quarter 1999 increased $954, or 215%, over
the same period in 1998. The increase is primarily due to interest expense of
$794 in the First Quarter 1999, which resulted from the Company's $41,070
weighted average borrowings under credit facilities and notes payable. The
weighted average interest rates on borrowings at March 31, 1999 was 7.7%.
Operating expenses also increased due to the increase in salaries and benefits
from $170 the three months ended March 31, 1998 to $310 for the same period in
1999. The Company had 32 and 21 employees at March 31, 1999 and 1998,
respectively. The increase in salary and benefit expense is directly
attributable to the increase in the number of employees. The Company intends to
continue to hire new professionals in 1999 to support anticipated portfolio
growth.

Equity in (loss) earnings of unconsolidated operating subsidiary, which
represents CIC's results, decreased from a gain of $101 for First Quarter 1998
to a loss of $(395) for First Quarter 1999. For the three months ended March 31,
1999, CIC's results included $1,435 of operating income, $2,044 of operating
expenses, $925 of realized gains on investments, $954 of unrealized depreciation
of investments, and $243 in other income. The realized gain was a result of the
sale of CIC's common stock investment in Four S Baking Company and the
unrealized depreciation was due to the reversal of previously recorded
unrealized appreciation of CIC's Four S Baking Company investment. 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 of other expenses. The decrease in CIC's earnings was primarily attributable
to the $556 increase in salary and benefits expense caused by the increase in
the number of employees noted above.

During the First Quarter 1999, the Company recorded a net realized gain of
$316 on the sale of its investment of Four S Baking Company. Total proceeds from
the sale of securities, which included senior debt, subordinated debt, preferred
stock, common stock warrants, and common stock, were $7,163. The net realized
gain is comprised of the realization of the unamortized loan discounts.

The increase in unrealized appreciation of investments is based on
portfolio asset valuations determined by the Company's Board of Directors. The
unrealized appreciation of investments for the First Quarter 1999 increased
$1,953 over the First Quarter 1998. The increase for the First Quarter 1999 was
comprised of valuation increases of $2,468 at four portfolio companies and
valuation decreases of $487 at six portfolio companies.

19
<PAGE>
YEAR ENDED DECEMBER 31, 1998.

The operating results for the year ended December 31, 1998 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Operating income........................................................... $16,979
Operating expenses......................................................... 1,709
Equity in loss of unconsolidated operating subsidiary...................... (482)
-----------------
Net operating income....................................................... 14,788
Increase in unrealized appreciation of investments......................... 2,127
-----------------
Net increase in shareholders' equity resulting from operations............. $16,915
-----------------
-----------------
</TABLE>

Total operating income consisted of $2,549 in loan processing fees and
$11,020 in interest and dividends on non-publicly traded securities and $3,410
in interest on government agency securities, bank deposits and repurchase
agreements. The loan fees were earned as result of closing fourteen investments
in private companies totaling $150 million during the year.

Operating expenses for the year consisted of $843 in salaries and benefits,
$809 in general and administrative expenses and $57 in interest expense.

Equity in loss of unconsolidated operating subsidiary represents CIC's
results. For the year ended December 31, 1998, CIC's results included $5,227 of
operating income, $6,451 of operating expenses, $481 of unrealized appreciation
of investments, and $202 in other income.

The increase in unrealized appreciation of investments as discussed in Note
2 to the financial statements is based on portfolio asset valuations determined
by the Company's Board of Directors. The increase in unrealized appreciation of
investments for the year ended December 31, 1998 is $2,127, which consists of
valuation increases of $2,324 at nine portfolio companies and valuation
decreases of $197 at three portfolio companies.

THREE MONTHS ENDED DECEMBER 31, 1997.

The Post-RIC operating results for the three months ended December 31, 1997
are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Operating income........................................................... $ 2,797
Operating expenses......................................................... 551
Equity in earnings of unconsolidated operating subsidiary.................. 24
-------
Net operating income....................................................... 2,270
Increase in unrealized appreciation of investments......................... 167
-------
Net increase in shareholders' equity resulting from operations............. $ 2,437
-------
-------
</TABLE>

Total operating income consisted of approximately $700 in loan processing
fees and $200 in interest on non-publicly traded securities and $1,900 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 $21 million during the period.

Operating expenses for the period consisted of $243 in salaries and
benefits and $308 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 of operating income, $987 of operating
expenses, $605 of unrealized appreciation of investment and $8 in tax
provisions.

The increase 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

20
<PAGE>
three month period is $167 which consists of an increase of $52 in the valuation
of the government agency securities and an increase of $115 in the valuation of
the investments in private companies.

NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.

The operating results for the nine months ended September 30, 1997 compared
to nine months ended September 30, 1996.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Operating income................................................................. $ 2,901 $ 1,758
Operating expenses............................................................... 2,651 1,921
------- -------
Net operating income............................................................. 250 (163)
Increase in unrealized appreciation of investments............................... 5,321 441
Provision for income taxes....................................................... 2,128 109
------- -------
Net increase in shareholders' equity resulting from operations................... $ 3,443 $ 169
------- -------
------- -------
</TABLE>

Total operating income was $2,901 for the nine months ended September 30,
1997, compared to $1,758 for the nine months ended September 30, 1996, a 65.0%
increase. Financial advisory fees were $1,122 and $1,300 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 and $241 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 and $265 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.

Total operating expenses for the nine months ended September 30, 1997 and
1996, were $2,651 and $1,921, respectively, an increase of 38.0%. Salaries and
benefits for the nine months ended September 30, 1997 and 1996, were $1,221 and
$935, 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 $1,514 and $772, 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 and $21, respectively. The increase in
interest expense relates to the Company's increased levels of working capital
for the period in 1997 prior to the IPO.

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. During the nine months ended
September 30, 1996, the Company had accrued $164 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 $5,321 and $441, respectively. Included in unrealized appreciation
of investments during the first nine months of 1997 was $4,400 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 associated with the Company's investment in
Mobile Tool International, Inc., appreciation of $356 associated with Four S
Baking Company, Inc., and depreciation of $138 associated with Martino's Bakery,
Inc.

21
<PAGE>
The following table sets forth the components of the increase in unrealized
appreciation of investments for the nine months ended September 30, 1997 and
1996:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Government Securities.................................................. $ (27) $ --
Erie Forge and Steel, Inc.............................................. -- 153
Four S Baking Company.................................................. 355 (54)
Indiana Steel & Wire Corporation....................................... -- 7
Martino's Bakery, Inc.................................................. (138) 143
Mobile Tool International, Inc......................................... 731 192
Biddeford Textile Corporation.......................................... 4,400 --
------- -------
Increase in unrealized appreciation of investments..................... $ 5,321 $ 441
------- -------
------- -------
</TABLE>

The Company recorded provisions for income taxes for the nine months ended
September 30, 1997 and 1996, of $2,129 and $109, 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 a deferred tax liability in the Pre-RIC balance sheet of CIC.

YEAR ENDED DECEMBER 31, 1996.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Operating income........................................................... $ 2,746
Operating expenses excluding ESOP contribution............................. 2,645
ESOP contribution.......................................................... 216
-------
Total operation expenses................................................... 2,861
-------
Net operating loss before investment activity.............................. (115)
Increase in unrealized appreciation of investments......................... 483
Provision for income taxes................................................. 159
-------
Net increase in shareholders' equity resulting from operations............. $ 209
-------
-------
</TABLE>

Operating income consists predominantly of financial advisory fees and
financial performance fees. During 1996, financial advisory fees and financial
performance fees constituted 86.9% of total revenue.

Total operating expenses at the Company were $2,861 in 1996. Salaries and
benefits, excluding ESOP contributions, were $1,067 in 1996. General and
administrative and other expenses were $1,282 in 1996.

The Company's interest expense was $33 in 1996. Interest expense is
primarily associated with credit facilities used by the Company to support its
working capital requirements and to finance a portion of its investments in
middle market companies. The Company's total borrowings under these facilities
were approximately $430 at December 31, 1996. In addition, the Company had a
note payable to its President in the amount of $74 at December 31, 1996. During
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 in 1996. 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 and the Company's obligation to make
further contributions to the ESOP was limited to that amount.

22
<PAGE>
For the year ended December 31, 1996, the Company recorded net increases in
unrealized appreciation of investments of $483 as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Erie Forge and Steel....................................................... $ 204
Four S Baking Company...................................................... (81)
Indiana Steel & Wire Corporation........................................... 9
Martino's Bakery, Inc...................................................... 156
Mobile Tool International, Inc............................................. 195
-------
Increase in unrealized appreciation of investments......................... $ 483
-------
-------
</TABLE>

During 1996, 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 a
deferred tax provision of $159 in 1996.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

As of March 31, 1999, the Company had $1,231 in cash and cash equivalents
and $68,991 in investments in Federal agency securities. In addition, the
Company had outstanding debt secured by assets of the Company of $30,000 in
borrowings under credit facilities and $77,091 in short term notes payable.
During 1998, the Company's primary source of funding was the proceeds received
in connection with its IPO. The Company completed investing the proceeds of its
IPO during 1998 and began funding its investments with proceeds from a line of
credit and short term borrowings.

Description of CP Conduit Facility. As of March 31, 1999, the Company
closed its maximum $100,000 CP Conduit Facility (the maximum commitment amount
under the facility has since been increased to $125,000). In connection with
the closing, the Company established ACS Funding Trust I (the 'Trust'), an
affiliated business trust and contributed or sold to the Trust approximately
$157,000 in loans. Subject to certain conditions, the Company will remain
servicer of the loans. Simultaneously with the initial contribution, the Trust
entered into a loan agreement with First Union Capital Markets Corp., as deal
agent, and certain other parties providing for loans in an amount up to 50% of
the eligible loan balance subject to certain concentration limits. The committed
term of this CP Conduit Facility is two years and interest on borrowings will be
charged at LIBOR plus 2.50%. The full amount of principal is payable over two
years beginning at the end of the term and interest is payable monthly. The
Company will use borrowings under this facility to repay existing debt and to
continue making investments in the debt and equity securities of middle market
companies. In order to manage interest rate risk associated with the floating
rate borrowings, the Company or ACAS Funding will enter into hedging agreements.
The Company intends to use derivative instruments for non-trading and
non-speculative purposes only. This CP Conduit Facility contains certain default
provisions as described under 'Risk Factors-- Our CP Conduit Facility Imposes
Certain Limitations On Us.'

In order to maintain its RIC status, the Company is required to distribute
annually 90% or more of its net operating income and net realized short-term
capital gains to stockholders. The Company anticipates having to issue debt or
equity securities in addition to the above borrowings to expand its investments
in middle market companies. The terms of the future debt and equity issuances
can not be determined and there can be no assurances that the debt or equity
markets will be available to the Company on terms it deems favorable.

PORTFOLIO CREDIT QUALITY

The Company has implemented a system under which it grades all loans on a
scale of 1 to 4. This system is intended to reflect the performance of the
borrower's business, the collateral coverage of the loans and other factors
considered relevant. Under this system, management believes that loans with a
grade of 4 involve the least amount of risk in the Company's portfolio. The
borrower is performing above expectations and the trends and risk factors are
generally favorable. Management believes that loans graded 3 involve an
acceptable level of risk

23
<PAGE>
that is similar to the risk at the time of origination. The borrower is
performing as expected and the risk factors are neutral to favorable. All new
loans are initially graded 3.

Loans graded 2 involve a borrower performing below expectations and the
loan risk has increased since origination. The borrower may be out of compliance
with debt covenants, however, loan payments are not more than 120 days past due.
For loans graded 2, the Company's management will increase procedures to monitor
the borrower and will write down the fair value of the loan if it is deemed to
be impaired. A loan grade of 1 indicates that the borrower is performing
materially below expectations and the loan risk has substantially increased
since origination. Some or all of the debt covenants are out of compliance and
payments are delinquent. Loans graded 1 are not anticipated to be repaid in full
and the Company will reduce the fair market value of the loan to the amount it
anticipates will be recovered.

To monitor and manage the investment portfolio risk, management tracks the
weighted average portfolio grade. The weighted average portfolio grade was 3.0
and 3.2 at March 31, 1999 and December 31, 1998, respectively. In addition, all
of the Company's outstanding loans are performing and paying as agreed as of
March 31, 1999. At March 31, 1999, the Company's portfolio was graded as
follows:

<TABLE>
<CAPTION>
INVESTMENTS AT PERCENTAGE OF TOTAL
GRADE VALUE PORTFOLIO
- ----- ------------------- -------------------
<S> <C> <C>
4 $ 30,709 16.8%
3 142,938 78.3%
2 8,851 4.9%
1 -- --
------------------- ------
$ 182,498 100.0%
------------------- ------
------------------- ------
</TABLE>

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. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips 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 created a Year 2000 Compliance Committee to address the
Year 2000 compliance of the Company's information technology and non-information
technology systems, the systems of third parties, and the systems of the
portfolio companies. The Company has also engaged outside technology consultants
to assist with its Year 2000 project.

All of the software used by the Company in its information technology
systems is provided by outside vendors. The Company has taken an inventory of
all of its information technology systems and is in the process of obtaining
Year 2000 compliance designations from its vendors and internally conducting
compliance testing. Based on its assessment of its information technology
systems, management has identified the general ledger software package as the
significant system that is Year 2000 non-compliant. As such, the Company will
replace its accounting software with a new, Year 2000 compliant software
package. The new accounting software and all necessary modifications to other
information technology systems will be completed by August, 1999.

The Company is also evaluating the Year 2000 compliance of its
non-information technology systems, which includes the Company's office
equipment other than its computers and communications equipment. The Company has
contacted its office equipment vendors to obtain Year 2000 compliance
designations. The Company believes it will complete the remediation, testing and
implementation of these non-information technology systems by July, 1999.

The Company has contacted third parties that do not share information
systems with the Company ('external agents'). These third parties include the
Company's banks, landlords, utility companies, telecommunication providers and
other vendors. To date, the Company is not aware of any external agent Year 2000
issue that would have a material adverse effect on the Company's results of
operations, liquidity, or capital resources. However, the Company has no means
of ensuring that external agents will be Year 2000 compliant by

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the end of this year. The inability of external agents to complete their Year
2000 compliance process in a timely fashion could have a material adverse effect
on the Company. The effect of non-compliance by external agents is not
determinable.

The Company is also evaluating the Year 2000 readiness of its portfolio
companies. Beginning in the summer of 1998, the Company has required that each
portfolio company expressly warrant in its loan agreement that it is or will be
Year 2000 compliant prior to December 31, 1999. The Company has also submitted
questionnaires to all of its portfolio companies to determine their exposure to
the Year 2000 problem and the adequacy of their plans to address the issues.
Over 90% of the portfolio companies have responded to the questionnaire. Based
on the correspondence received from the portfolio companies, management believes
that over 80% of its portfolio companies have either no material exposure to the
Year 2000 issue or are adequately carrying out their plans to address their
exposure. The Company has either not received complete questionnaires from the
remaining 20% of the portfolio companies or has requested that the portfolio
companies improve the scope and detail of their responses. The Company intends
to follow up with the portfolio companies to ensure
that they have executed their compliance plan by June 30, 1999.

Throughout 1999, the Company will continue to address any issues of Year
2000 non-compliance and further develop its contingency plan to ensure business
operations in the event of systems failure in the Year 2000. The Company is
utilizing both internal and external resources to reprogram or replace, test,
and implement the software and other systems for Year 2000 modifications. The
Company estimates that the cost of its Year 2000 project will be less than $125.
This amount includes the cost of additional software, reviewing the portfolio
companies' readiness, and outside systems professionals working on the Company's
Year 2000 compliance.

The Company's plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
estimates on the status of completion and the total expected costs. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific issues that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties. Significant
systems failures at the Company, a third party, or the portfolio companies could
have a materially adverse effect on the Company's business. While the Company
believes that its portfolio companies are adequately addressing the Year 2000
issue, no assurance can be given that some of its portfolio companies will not
suffer material adverse effects from Year 2000 issues. Management believes that
the most likely worst case Year 2000 scenario is a material decrease in interest
income and an impairment in the valuation of the Company's investment portfolio.
The magnitude of these material adverse effects on the portfolio companies and
the operating results and financials of the Company cannot be determined at this
time.

IMPACT OF INFLATION

Management believes that inflation can influence the value of the Company's
investments through the impact it may have on the capital markets, the
valuations of business enterprises and the relationship of the valuations to
underlying earnings.

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BUSINESS

The Company was incorporated in 1986 to provide financial advisory services
to and invest in middle market companies. On August 29, 1997, the Company
completed an IPO of 10,382,437 shares of its Common Stock and became a
non-diversified, closed end investment company that has elected to be treated as
a BDC under the 1940 Act. On October 1, 1997, the Company began operations so as
to qualify to be taxed as a 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
middle market companies. The Company continues to provide financial advisory
services to businesses through 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 ESOPs. From its
formation in 1986 through the IPO, the Company arranged 29 financing
transactions aggregating over $400 million and invested in the equity securities
of eight of those transactions. From the IPO through March 31, 1999, the Company
invested $197 million in debt and equity securities of middle market companies
including over $5 million in funds committed but undrawn under credit
facilities.

The Company is a buyout and specialty finance company that is principally
engaged in providing senior debt, subordinated debt and equity to middle market
companies in need of capital for management buyouts including ESOP buyouts,
growth, acquisitions, liquidity and restructuring. The Company's ability to fund
the entire capital structure is an advantage in completing middle market
transactions. The Company generally 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 middle market
companies with attractive current yields and potential for equity appreciation.
The Company's loans typically range from $3 million to $20 million, mature in
five to ten years, and require monthly or quarterly interest payments at fixed
rates or 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 March 31, 1999, the weighted average effective yield on the
Company's investments was 13.1%.

In most cases, the Company receives Put Rights under various circumstances
including, typically, the repayment of the Company's loans or debt securities.
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. In most cases, the Company also
receives the right to representation on the businesses' board of directors. At
March 31, 1999, the Company had board seats on 13 out of 17 businesses and had
board observation rights on 2 of the remaining businesses in which it has made
investments.

The Company generally acquires equity interests in the companies from which
it has purchased debt securities with the goal of enhancing its overall return.
As of March 31, 1999, the Company had a weighted average ownership interest of
26.7% in our portfolio companies. The Company is prepared to be a long-term
partner to its portfolio companies thereby positioning the Company to
participate in their future financing needs. The opportunity to liquidate its
investments and realize a gain may occur if the business recapitalizes its
equity, either through a sale to new owners or a public offering of its equity
or if the Company exercises its Put Rights. 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 the underwriters.

The Company makes available significant managerial assistance to its
portfolio companies. Such assistance typically involves closely monitoring the
operations of the company, hiring additional senior management, if needed, being
available for consultation with its officers, developing the business plan and
providing financial guidance and participating on its board of directors.
Providing assistance to its borrowers serves as a means of influence for the
Company as well as an opportunity for the Company to assist in maximizing the
value of the portfolio company.

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

26
<PAGE>
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 is a leading firm in structuring and
implementing ESOP employee buyouts. The Company believes that its ESOP knowledge
and experience and its ability to fund transactions positions the Company
favorably in the market place.

The Company provides 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, accountants, commercial bankers,
unions, business and financial brokers, and existing ESOP companies. The Company
has also developed an extensive set of Internet sites that generates financing
requests and provides businesses an efficient tool for learning about the
Company and its capabilities.

The Company has a marketing department headed by a vice president of
marketing dedicated to maintaining contact with members of the referral network
and receiving opportunities for the Company to consider. During 1998, the vice
president of marketing received in excess of 1,500 transactions for
consideration. Many of those transactions did not meet the Company's criteria
for initial consideration, but the opportunities that met those criteria were
sent to the Company's principals for further review and consideration. The vice
president of marketing and CIC are 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.

The Company's executive offices are located at 3 Bethesda Metro Center,
Suite 860, Bethesda, MD 20814 and its telephone number is (301) 951-6122. In
addition to its executive offices, the Company maintains offices in New York,
Boston, Pittsburgh, San Francisco, Chicago and Dallas.

INTERNET STRATEGY

The Company believes that the Internet is a significant medium for
information and business commerce. The Company has been active in developing an
Internet web site that provides background and promotional information about the
Company and refers financing leads to the Company. During 1998, a $15.5 million
portfolio investment by the Company was originated as a result of the Internet
site. The site also generated other prospective opportunities that the Company
chose not to pursue because they did not meet the Company's investment criteria.
The Company has developed a strategy to utilize the Internet to expand its core
business, add value to its portfolio companies and enhance the liquidity of its
assets and thereby add value to its stockholders. The Company's strategy is as
follows:

o Financial Portal For Middle Market Companies. The Company intends to
operate a financial portal web site that middle market businesses can
utilize to learn about corporate finance, value their company, build
financial models, develop financing memorandums, find professionals to
assist in the financing process, find sources of capital and research
financing terms, criteria and the availability of a variety of financing
options. This site will also allow businesses to complete applications
online and submit them to the Company for consideration. The Company
intends to have this site operational by the third quarter of 1999. The
Company expects this site to generate additional opportunities to provide
financing to middle market companies as well as opportunities to refer
potential financing transactions that do not meet the Company's
investment criteria to other lenders and finance companies.

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<PAGE>

o Retail Internet Site For Products Manufactured By Portfolio
Companies. The Company is in the early stages of developing web sites to
market retail products manufactured by certain of its Portfolio Companies
directly to consumers. Additionally, the Company intends to target for
investment as possible Portfolio Companies manufacturing companies that
manufacture products that may be sold through a retail Internet site. The
strategy will entail a series of marketing joint ventures with these
portfolio companies. The Company believes that these sites will provide
incremental business to some of its portfolio companies and may thereby
enhance the Company's return on its investment with respect to such
portfolio companies. This initiative may lead to the creation of a new
Internet marketing subsidiary of the Company with the potential for
appreciation that would benefit the holders of our Common Stock.

o Private Securities Auction Site. The Company has commenced developing a
web site to auction certain securities of private companies to
institutional investors. This site is in an early stage of development
and will require the Company to meet numerous regulatory requirements,
including requirements of the Commission, prior to commencing operation
of the site. There is no assurance that such requirements can or will be
met. The Company believes that it can use its expertise in originating
securities to become a market maker in such securities and that the
Internet will provide an efficient medium to make such a market and to
communicate with and sell securities to qualified investors.

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 company's ability to service
and repay debt based on its historical results of operations. The Company
considers factors such as market shares, customer concentration, recession
history, competitive environment and ability to sustain margins. The Company
does not expect to lend or invest in start-up or other early stage companies.

Growth. The Company considers a target company's ability to increase its
cash flow. Anticipated growth is 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 many credit decisions. 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 portfolio
company have a management team that is experienced and properly incentivized
through a significant ownership interest in the portfolio company. The Company
requires that a potential recipient of the Company's financing have a management
team who have demonstrated the ability to execute the portfolio company's
objectives and implement its business plan.

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, a private sale of the Company's financial interest, a sale
of the portfolio company, an initial public offering or a purchase by the
portfolio company or one of its stockholders of the Company's equity position.

OPERATIONS

Marketing and Origination Process. The Company and CIC have 24
professionals responsible for originating loans and investments and providing
financial assistance to middle market companies and intends to hire an
additional three to six professionals during the next twelve months. To discover
potential financing opportunities, the Company has a dedicated marketing
department headed by a vice president who manages an extensive referral network
comprised of venture capitalists, investment bankers, unions, attorneys,
accountants, commercial bankers, business and financial brokers and prospective
or existing ESOP companies. The Company also has an extensive set of Internet
sites that it uses to attract financing opportunities.

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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 target 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. The Company engages professionals such
as environmental consultants, accountants, lawyers, risk managers and management
consultants to perform elements of the due diligence review as it deems
appropriate. Upon completion of a due diligence investigation, one of the
Company's principals prepares an investment committee report summarizing the
target company's historical and projected financial statements, industry and
management team and analyzing its conformity to the Company's general investment
criteria. The principal then presents this profile to the Company's Investment
Committee. The Company's Investment Committee and the Company's Board of
Directors must approve each financing.

Portfolio Management. In addition to the review at the time of original
underwriting, the Company attempts to preserve and enhance the earnings quality
of its portfolio companies through proactive management of its relationships
with its clients. This process includes attendance at portfolio company board
meetings, management consultation and review and management of covenant
compliance. The Company's investment and finance personnel regularly review
portfolio company monthly financial statements to assess cash flow performance
and trends, periodically evaluate the operations of the client, seek to identify
industry or other economic issues that may adversely affect the client, and
prepare quarterly summaries of the aggregate portfolio quality for management
review.

Support Services. A commercial bank provides certain 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.

LOAN GRADING

The Company has implemented a system to evaluate and classify all loans
based on their current risk profile. The system requires the Director of
Reporting and Compliance to grade a loan on a scale of one to four. Loans graded
four involve the least amount of risk of loss, while loans graded one have an
unacceptable level of risk and a high probability of loss. The loan grade is
then reviewed and approved by the Investment Committee and the Board of
Directors. This system is intended to reflect the performance of the portfolio
company's business, the collateral coverage of the loans and other factors
considered relevant. For more information regarding the Company's loan grading
practices, see 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Portfolio Credit Quality.'

COMPETITION

The Company competes with a large number of private equity funds and
venture capital companies, investment banks and other equity and non-equity
based investment funds; and other sources of financing, including traditional
financial services companies such as commercial banks. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company does. For example, some
competitors may have a lower cost of funds and access to funding sources that
are not available to the Company. In addition, certain of the Company's
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships and build their market shares. There is no assurance that the
competitive pressures the Company faces will not have a material adverse effect
on our business, financial condition and results of operations. Also, as a
result of this competition, the Company may not be able to take advantage of
attractive investment opportunities from time to time and there can be no
assurance that the Company will be able to identify and make investments that
satisfy its investment objectives or that the Company will be able to fully
invest its available capital.

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LEGAL PROCEEDINGS

While the Company may, from time to time, be a party to certain lawsuits in
connection with its business it currently has no pending lawsuits.

EMPLOYEES

As of March 31, 1999, the Company had thirty-two employees, twenty-four of
whom are professionals working on financings for middle market companies. The
Company believes that the relations with its employees are excellent.

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:

o 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;

o 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

o 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 the holders of
the majority, as defined in the 1940 Act, of the Company's outstanding voting
securities. Since the Company made its BDC election, it has not made any
substantial change in its structure or in the nature of its business.

Since October 1, 1997, the Company has operated so as to qualify as a RIC
under the Code. Generally, in order to qualify as a RIC, the Company must
continue to qualify as a BDC and distribute to stockholders in a timely manner,
at least 90% of its 'investment company taxable income' as defined by the Code.
Also, the Company must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains 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 (a) at least 50% of the value of
the Company's assets consists of cash, cash items, government securities,
securities of other RICs 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 (b) no more than 25% of the
value of the Company's assets (including those owned by CIC) are invested in the
securities of one issuer (other than U.S. government securities and securities
of other RICs), 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. If the
Company qualifies as a RIC, it will not be subject to federal income tax on the
portion of its taxable income and net capital gains it distributes in a timely
fashion to stockholders. In addition, with respect to each calendar year, if the
Company distributes or is treated as having distributed (including amounts
retained but designated as deemed distributed) in a timely manner 98% of its
capital gain net income for each one-year period ending on October 31, and
distributes 98% of its net ordinary income for such calendar year (as well as
any income not distributed in prior years), it will not be subject to the 4%
nondeductible federal excise tax imposed with respect to certain undistributed
income of RICs.

If the Company fails to satisfy the 90% distribution requirement or
otherwise fails to qualify as a RIC in any taxable year, it will be subject to
tax in such year on all of its taxable income, regardless of whether the Company
makes any distribution to its stockholders. In addition, in that case, all of
the Company's distributions to its

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stockholders will be characterized as ordinary income (to the extent of the
Company's current and accumulated earnings and profits).

Our wholly-owned subsidiary, CIC, is an ordinary corporation that is
subject to corporate level federal income tax.

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 and to take advantage of favorable
interest rates, the Company has issued, and intends to continue to issue, senior
debt securities and other evidences of indebtedness, 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 is 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 purposes.

INVESTMENT OBJECTIVES AND POLICIES

The Company's investment objectives are to achieve a high level of current
income from the collection of interest and advisory fees, as well as long-term
growth in its stockholders' equity through the appreciation in value of the
Company's equity interests in the portfolio companies in which it invests. The
following restrictions, along with these investment objectives, are the
Company's only fundamental policies--that is, policies which may not be changed
without the approval of the holders of the majority, as defined in the 1940 Act,
of the Company's outstanding voting securities. The percentage restrictions set
forth below other than the restriction pertaining to the issuance of Senior
Securities, as well as those contained elsewhere in this Prospectus, apply at
the time a transaction is effected, and a subsequent change in a percentage
resulting from market fluctuations or any cause other than an action by the
Company will not require the Company to dispose of portfolio securities or to
take other action to satisfy the percentage restriction.

The Company will at all times conduct its business so as to retain its
status as a BDC. In order to retain that status, the Company may not acquire any
assets (other than non-investment assets necessary and appropriate to its
operations as a BDC) if after giving effect to such acquisition the value of its
'Qualifying Assets' amounts to less than 70% of the value of its total assets.
For a summary definition of 'Qualifying Assets,' see

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'Regulation.' The Company believes that the securities it proposes to acquire
(provided that the Company controls, or through its officers or other
participants in the financing transaction, makes significant managerial
assistance available to the issuers of these securities), as well as Temporary
Investments, will generally be Qualifying Assets. Securities of public
companies, on the other hand, are generally not Qualifying Assets unless they
were acquired in a distribution, in exchange for or upon the exercise of a right
relating to securities that were Qualifying Assets.

The Company may invest up to 100% of its assets in securities acquired
directly from issuers in privately-negotiated transactions. With respect to such
securities, the Company may, for the purpose of public resale, be deemed an
'underwriter' as that term is defined in the 1933 Act. The Company may invest up
to 50% of its assets to acquire securities of issuers for the purpose of
acquiring control (up to 100% of the voting securities) of such issuers. The
Company will not concentrate its investments in any particular industry or group
of industries. Therefore, the Company will not acquire any securities (except
upon the exercise of a right related to previously acquired securities) if, as a
result, 25% or more of the value of its total assets (including assets held by
CIC) consists of securities of companies in the same industry.

The Company may issue Senior Securities to the extent permitted by the 1940
Act for the purpose of making investments, to fund share repurchases, or for
temporary or emergency purposes. A business development company may issue Senior
Securities up to an amount so that the asset coverage, as defined in the 1940
Act, is at least 200% immediately after each issuance of Senior Securities.

The Company will not (a) act as an underwriter of securities of other
issuers (except to the extent that it may be deemed an 'underwriter' of
securities purchased by it that must be registered under the 1933 Act before
they may be offered or sold to the public); (b) purchase or sell real estate or
interests in real estate or real estate investment trusts (except that the
Company may purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments and may own the
securities of companies or participate in a partnership or partnerships that are
in the business of buying, selling or developing real estate); (c) sell
securities short; (d) purchase securities on margin (except to the extent that
it may purchase securities with borrowed money); (e) write or buy put or call
options (except to the extent of warrants or conversion privileges in connection
with its acquisition financing or other investments, and rights to require the
issuers of such investments or their affiliates to repurchase them under certain
circumstances); (f) engage in the purchase or sale of commodities or commodity
contracts, including futures contracts (except where necessary in working out
distressed loan or investment situations); or (g) acquire more than 3% of the
voting stock of, or invest more than 5% of its total assets in any securities
issued by, any other investment company, except as they may be acquired as part
of a merger, consolidation or acquisition of assets. With regard to that portion
of the Company's investments in securities issued by other investment companies
it should be noted that such investments may subject the Company's stockholders
to additional expenses.

INVESTMENT ADVISOR

The Company has no investment advisor and is internally managed by its
executive officers under the supervision of the Board of Directors.

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PORTFOLIO COMPANIES

The following table sets forth certain information as of March 31, 1999,
regarding each portfolio company in which the Company currently has an equity
investment. Unless otherwise noted in the table or the descriptions that follow
the table, the only relationship between each portfolio company and the Company
is the Company's investment. Any such loans and investments will be made in
accordance with the Company's investment policies and procedures.

<TABLE>
<CAPTION>
% OF CLASS
OWNED ON A COST OR INITIAL
NAME AND ADDRESS OF NATURE OF FULLY VALUE OF
PORTFOLIO COMPANY BUSINESS TYPE OF SECURITY DILUTED BASIS(1) INVESTMENT
- -------------------------------- ---------------- ------------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
AUXI Health, Inc. .............. Home Health Care Subordinated Debt....... -- $ 9,532
810 Crescent Common Stock Warrants... 20% 2,599
Center Drive
Franklin, TN 37067
BIW Connector Systems, Inc. .... Specialty Senior Debt............. -- 3,404
500 Tesconi Circle Connectors Subordinated Debt....... -- 6,740
Santa Rosa, CA 95401 Member Interest 20% 652
Warrants................
Centennial Broadcasting, LLC ... Radio Stations Subordinated Debt....... -- 15,495
3825 Forrestgate Drive
Winston-Salem, NC 27103
Chance Coach, Inc. ............. Bus Manufacturer Senior Debt............. -- 1,232
2811 North Ohio Street Subordinated Debt....... -- 7,171
Wichita, KS 67219 Convertible Preferred 20% 2,000
Stock................... 43.7% 4,041
Common Stock Warrants... 18.3% 1,896
Common Stock............
Confluence Holdings Corp. ...... Kayak and Canoe Senior Debt............. -- 11,475
3761 Old Glenola Road Manufacturing Subordinated Debt....... -- 5,226
Trinity, NC 27370 Common Stock Warrants... 18.0% 1,319
Cycle Gear, Inc. ............... Motorcycle Parts Senior Debt............. -- 750
303 43rd Street and Accessories Subordinated Debt....... -- 639
Richmond, CA 94805 Common Stock Warrants... 16.5% 374
Decorative Surfaces Decorative Paper Subordinated Debt....... -- 5,516
International, Inc. ........... and Vinyl Convertible 2.9% 665
1280 N. Grant Avenue Manufacturing Preferred Stock......... 42.3% 4,571
Columbus, OH 43201 Common Stock Warrants...
Electrolux, LLC ................ Consumer Subordinated Debt....... -- 7,563
5956 Sherry Lane Appliances Member Interest......... 2.5% 246
Dallas, TX 75225
Euro-Caribe Packing ............ Meat Processing Senior Debt............. -- 7,062
Company, Inc. Subordinated Debt....... -- 8,921
PO Box 3146 Common Stock Warrants... 37.0% 1,110
Zona Industrial Sabana Abajo
Carolina (San Juan),
PR 00984
JAG Industries, Inc. ........... Diversified Senior Debt............. -- 1,200
2201 Aisquith Street Manufacturing Subordinated Debt....... -- 2,346
Baltimore, MD 21218 Common Stock Warrants... 75.0% 505
The LA Studios, Inc. ........... Audio Production Subordinated Debt....... -- 2,411
3453 Cahuenga Blvd., West Common Stock Warrants... 17.0% 902
Hollywood, CA 90068
Lion Brewery, Inc. ............. Malt Beverages Subordinated Debt....... -- 5,958
700 N. Pennsylvania Ave. Common Stock Warrants... 54.0% 675
Wilkes-Barre, PA 18705
Patriot Medical ................ Repair Services Senior Debt............. -- 3,000
Technologies, Inc. Subordinated Debt....... -- 2,090
210 Twenty-Fifth Avenue Common Stock Warrants... 17.0% 410
Nashville, TN 37203
The New Piper Aircraft, Inc. ... Aircraft Subordinated Debt....... -- 17,897
2926 Piper Drive Common Stock Warrants... 4.0% 2,231
Vero Beach, FL 32960
Specialty Transportation Municipal Waste Subordinated Debt....... -- 7,386
Services, Inc. ................ Transportation Common Stock Warrants... up to 39.1% 694
5979 McCasland Avenue Common Stock............ 9.1% 500
Portage, IN 46368
Starcom Holdings, Inc. ......... Electrical Subordinated Debt....... -- 12,877
(f/k/a ConStar Holdings, Inc.) Common Stock Warrants... 17.5% 3,171
661 Pleasant Street Common Stock............ 2.8% 500
Norwood, MA 02062

<CAPTION>
VALUE OF
INVESTMENT
NAME AND ADDRESS OF AS OF
PORTFOLIO COMPANY MARCH 31, 1999(2)
- -------------------------------- -----------------
<S> <C>
AUXI Health, Inc. .............. $ 9,532
810 Crescent 2,599
Center Drive
Franklin, TN 37067
BIW Connector Systems, Inc. .... 3,404
500 Tesconi Circle 6,740
Santa Rosa, CA 95401 513
Centennial Broadcasting, LLC ... 15,495
3825 Forrestgate Drive
Winston-Salem, NC 27103
Chance Coach, Inc. ............. 1,232
2811 North Ohio Street 7,171
Wichita, KS 67219 2,214
4,839
2,269
Confluence Holdings Corp. ...... 11,475
3761 Old Glenola Road 5,226
Trinity, NC 27370 1,319
Cycle Gear, Inc. ............... 750
303 43rd Street 639
Richmond, CA 94805 374
Decorative Surfaces 5,516
International, Inc. ........... 665
1280 N. Grant Avenue 6,805
Columbus, OH 43201
Electrolux, LLC ................ 7,563
5956 Sherry Lane 642
Dallas, TX 75225
Euro-Caribe Packing ............ 7,062
Company, Inc. 8,921
PO Box 3146 1,110
Zona Industrial Sabana Abajo
Carolina (San Juan),
PR 00984
JAG Industries, Inc. ........... 1,200
2201 Aisquith Street 2,346
Baltimore, MD 21218 454
The LA Studios, Inc. ........... 2,411
3453 Cahuenga Blvd., West 839
Hollywood, CA 90068
Lion Brewery, Inc. ............. 5,958
700 N. Pennsylvania Ave. 675
Wilkes-Barre, PA 18705
Patriot Medical ................ 3,000
Technologies, Inc. 2,090
210 Twenty-Fifth Avenue 410
Nashville, TN 37203
The New Piper Aircraft, Inc. ... 17,897
2926 Piper Drive 2,528
Vero Beach, FL 32960
Specialty Transportation 7,386
Services, Inc. ................ 1,007
5979 McCasland Avenue 458
Portage, IN 46368
Starcom Holdings, Inc. ......... 12,877
(f/k/a ConStar Holdings, Inc.) 3,171
661 Pleasant Street 500
Norwood, MA 02062
</TABLE>

33
<PAGE>

<CAPTION>
VALUE OF
INVESTMENT
NAME AND ADDRESS OF AS OF
PORTFOLIO COMPANY MARCH 31, 1999(2)
- -------------------------------- -----------------
<S> <C>
Westwind Holdings, Inc. ........ 2,945
12555 High Bluff Drive 271
San Diego, CA 92130
</TABLE>

- ------------------
(1) Percentages shown for warrants and preferred stock held represent the
percentage of class of security we may own, on a fully diluted basis,
assuming we exercise our warrants or convert our preferred stock to common
stock.

(2) These valuations were determined by the Company's Board of Directors.

The following is a summary of additional information concerning certain
portfolio companies in which the Company's investment in each such company
represents more than 5% of the Company's assets. This information was provided
to the Company by its respective portfolio companies. The Company has relied
exclusively on the information provided by its portfolio companies in preparing
this summary. For additional information relating to the value of the Company's
investments in its portfolio companies, see the Company's consolidated financial
statements as of March 31, 1999 appearing elsewhere in this Prospectus.

Chance Coach, Inc. Chance Coach, Inc. ('Chance') is a leading manufacturer
of transit buses under thirty feet in length and of buses that are vintage
streetcar replicas. Its primary customer base consists of municipal transit
authorities. Many of these customers are repeat buyers who desire to maintain
continuity in their fleets once a purchase decision is made. Growth
opportunities for Chance are expected to come from municipalities re-sizing
their bus fleets by adding smaller and more cost effective buses and those
instituting a 'trunk line' system with smaller buses on feeder routes and in
downtown areas. The vintage streetcar replicas are typically used in downtown
redevelopment projects.

Chance operates in a niche market and makes the leading heavy duty transit
vehicle seating under thirty passengers, as opposed to light duty minivan-type
vehicles competing in this market. However, its niche market position is not
protected by patents or other significant barriers to entry. Chance's primary
competitors in the under thirty feet transit bus market are Gillig Corporation,
El Dorado National, a division of Thor Industries, and New Flyer Corporation of
Winnipeg, Canada. Chance makes the leading streetcar replica purchased by
municipal transit authorities, and has no significant competition in that market
segment. The federal government is a major supplier of capital to the customers
of the bus manufacturing industry in the form of subsidies for the purchase of
equipment. A cutback in federal funding for mass transit, or a change in the
funding mix, could have a material adverse effect on Chance's business.

Scott Culbertson has been the president of Chance for 10 years. John
Freal, a principal of the Company, is a member of the Board of Directors of
Chance. The Company performs financial advisory services for Chance.

The New Piper Aircraft, Inc. The New Piper Aircraft, Inc. ('Piper') is a
manufacturer of piston-powered light general aviation aircraft, offering eight
different models of aircraft. Piper sells these aircraft through a network of
over 40 domestic and international distributors. Piper's aircraft are small,
generally from four to six seats, marketed to flight schools, commercial flight
training centers and individual owner/operators. The introduction of new
aircraft and significant enhancements to existing aircraft have historically
been the most important factors in maintaining and increasing Piper's revenues.
Piper is currently developing a new turbo-prop aircraft, called the 'Malibu
Meridian,' that is scheduled to be delivered to customers during the third
quarter of 2000 and will be the next step up in its product line. As of June
1999, Piper received approximately one hundred and ten non-refundable deposits
from customers awaiting delivery of the Malibu Meridian.

Piper is one of the three principal U.S. manufacturers of piston-powered
general aviation aircraft. Piper's principal competitors are Cessna and
Raytheon/Beechcraft, both of whom make piston as well as jet powered aircraft.
Of the three, only Piper is not part of a larger conglomerate. Piper has the
largest share of the piston market revenues, although Cessna has a larger share
of the actual deliveries. Piper's lead in piston market revenue is partially
attributable to a broader product line than both of its principal competitors.
Piper must also compete for sales of new aircraft against used aircraft in the
resale market. Piper holds various FAA Type Certificates on the design and
manufacture of its aircraft.

34
<PAGE>

In the 1980's, product liability lawsuits created a crisis in the general
aviation sector and led to a sharp decline in sales across the industry. An
oversupply of high quality, used aircraft and escalating product liability
awards led to structural changes in the aircraft industry. In July 1991, Piper
Aircraft Corp. ('Old Piper') declared bankruptcy as a result of these conditions
and, in 1995 Piper was formed upon the purchase of certain assets of Old Piper.
Tort reform and the fact that the average age of used aircraft is 30 years has
led to a mild resurgence in this industry, but it is not expected that overall
deliveries for the industry will reach the historical highs of the late 1970's.
In 1994, Congress passed the General Aviation Revitalization Act that limited
general aviation aircraft manufacturers' liability. Consequently, this
legislation reduced the Piper's pool of potential liability.

Piper has an experienced management team, led by Chuck Suma, president and
chief executive officer, who has 23 years of experience in the industry. The
Company has observation rights to attend and participate in Piper's board
meetings.

Decorative Surfaces International, Inc. Decorative Surfaces International,
Inc. ('DSI') manufactures and sells coated papers and vinyls used in wall
coverings and in laminates such as Formica(Registered), Wilsonart(Registered),
and Congoleum(Registered). DSI has manufacturing plants in St. Louis, Missouri
and Columbus, Ohio. DSI manufactures products that are sold to industrial
customers for laminates in furniture, cabinetry, floor tiles and wallboards. In
addition, DSI makes vinyl wall coverings sold directly or through
representatives to decorators, contractors and hotel chains for use in offices,
hotels and restaurants.

No single customer represents more than 15% of DSI's sales of industrial
products for laminates. DSI has a variety of competitors that manufacture
industrial products, some of whom are believed to have a significantly larger
market shares. No single customer represents more than 10% of DSI's sales of
vinyl wall covering. DSI's main competitors in the wall covering market are
Gencorp and RFG. Some of DSI's designs are protected by domestic and foreign
copyrights.

Malon Wilkus, Stephen Hester and John Ireland, the Chief Executive Officer,
a Vice President, and a principal of the Company, respectively, are members of
the DSI Board of Directors and CIC performs financial advisory services for DSI.
Additionally, Stephen P. Walko, the president and chief executive officer of
DSI, is a Director of the Company.

Confluence Holdings Corp. Confluence Holdings Corp. ('Confluence') is a
paddle sports manufacturing business whose brands include Wilderness Systems
('Wilderness'), the third largest U.S. brand of kayaks, and Mad River Canoe
('Mad River'), the second largest U.S. brand of canoes. Confluence recently
acquired the Wave Sport whitewater kayak brand.

Competition in the paddle sports industry historically was highly
fragmented and the industry is currently undergoing a rapid consolidation.
Wilderness' primary competitors in the kayak market include the Perception,
Dagger, Old Town, Ocean Kayaks, Neckye and Current Designs brands. Substantially
all of our competitors are focused in the lower to middle market segments as
defined by retail price points, Wilderness has focused on the upper middle to
high end segments of its markets in the touring, recreational and sit-on-top
categories. Mad River's competitors in the canoe market include the Old Town,
Dagger, Wenonah, Coleman and Mohawk brands.
Mad River competes mainly on design, durability and quality and is generally the
highest priced brand in the market. The recently acquired Wave Sport whitewater
brand also focuses on the high end of the market. While Confluence has various
trademarks, its products and processes are generally not protected by patents.

A recessionary period could have a material adverse effect on Confluence's
business due to the possible reduction in the discretionary demand for kayaks
and canoes. In addition, there is also the potential for a decrease in demand if
consumers shift away from kayaks and canoes to other product categories for
outdoor recreation. Andrew Zimmerman, founder of Wilderness is the chief
executive officer of Confluence. John Freal, a principal of the Company, is a
member of the Board of Directors of Confluence.

Euro-Caribe Packing Company, Inc. Euro-Caribe Packing Company, Inc.
('Euro-Caribe') is the largest independent producer of processed pork products
in Puerto Rico. Euro-Caribe estimates that it has more than 60% of the local
sausage market and over 90% of the local ham market. Euro-Caribe sells its
'Congusto' brand name sausage products to all seven of Puerto Rico's major
supermarket chains, the five minor supermarket chains, and the three
associations of independently owned smaller stores that buy on a cooperative
basis, as well

35
<PAGE>

as restaurants throughout Puerto Rico. The ham products are sold under the 'El
Serranito' brand name to major retail chains and many smaller supermarkets. Five
percent of Euro-Caribe's sales consist of sales of the 'Congusto' brand name
sausage to several U.S. mainland distributors that sell in Latin American
markets in New York and Miami.

Euro-Caribe's local competition includes approximately 16 companies that
fulfill USDA requirements and currently make meat products. Two of these
companies, Piku and Aguadillana, make competing sausages but have significantly
less market share than Euro-Caribe's sausage. Sausage from foreign competitors
is generally more expensive and not tailored specifically to Puerto Rican
tastes. In the ham market, competing products are primarily from Denmark and the
United States.

Demand for pork products is relatively stable, but prices for pork vary
cyclically and seasonally. Cyclical variation is caused by the time lags
inherent in the biological production of pigs that affects supply and demand.
When prices are high, more sows are bred and more pigs are produced. But these
pigs will not reach market for about a year after they are conceived. When they
do, supplies increase and prices fall thus causing a price cycle. Seasonal price
variations are caused by the annual increase in the demand for pork during the
Christmas holiday season and differing demand levels, such as increased demand
during summer months due to more people grilling outside. The variations in the
price for pork could have a material adverse effect on Euro-Caribe's business.
Jose M. Casanova, the president and chief executive officer of Euro-Caribe,
has 24 years of experience in the pork industry. Virginia Rollins, a principal
of the Company, is a member of the Board of Directors of Euro-Caribe.

Starcom Holdings, Inc. Starcom Holdings, Inc. ('Starcom'), through its
wholly-owned subsidiaries, is a provider of design, integration and installation
services of commercial electrical, telecommunications and computer networking
systems. Starcom is one of the leading providers of customer premise electrical
systems in the eastern United States and offers services primarily on a
negotiated and 'design and build' basis whereby Starcom is responsible for the
design, engineering, project management and installation of a customized
electrical system for its customers. Starcom also provides network design,
installation and consulting services related to telecommunication, local and
wide area networks and other connectivity systems.

Competition in the markets in which Starcom competes is highly fragmented.
Starcom's design and build capability gives it a competitive advantage over many
firms in the industry. Starcom's competitors include Mass. Electric
Construction, Williams Communications Group, IPC Information Systems, Amerilink
Corporation, ICG Fiber Optic Technologies, Inc., and Henkels and McCoy, Inc.
Starcom may not be able to hire enough field services and technical personnel to
support its projected growth in tight labor markets. In addition, in a
recession, commercial building activity is expected to decline. This may have a
material adverse effect on Starcom's business.

Starcom's chief executive officer, Stephen Bisson, has over 30 years of
experience in the electrical services business. John Freal, a principal of the
Company, is a member of the Board of Directors of Starcom.

Centennial Broadcasting, LLC. Centennial Broadcasting, LLC ('Centennial')
is the owner and operator of seven radio stations, three in Las Vegas, three in
New Orleans and one in Vero Beach, Florida. New Orleans and Las Vegas are among
the 50 largest radio advertising markets in the United States. The primary
assets of Centennial are the seven broadcast licenses owned by a wholly-owned
subsidiary. Centennial's programming decisions are aimed at narrowly defined
niches of the listening audience, with a strong preference towards targeting
listeners between the ages of 25 and 54, considered to be a desirable listener
group for advertisers. In an attempt to capture a larger share of these
listeners, Centennial has instituted format modifications that include adding a
younger listening base and increasing its sales efforts with advertisers.

36
<PAGE>

The radio broadcasting industry is competitive within Centennial's markets.
Centennial competes with other national radio broadcasters including, but not
limited to, Clear Channel Communications, Infinity Broadcasting and Sinclair
Broadcasting. Centennial's stations compete with numerous other stations in each
of its markets. It is possible that external market factors and increased
competition could reduce Centennial's market share in any of their local
markets. In addition, the format modifications instituted by Centennial at any
time may not be successful. Failure to compete effectively in any of their
markets could have a material adverse effect on Centennial's results of
operations.

The president and chief executive officer of Centennial is Allen Shaw, who
has nearly 30 years of experience in the radio broadcasting industry. The
Company has the right to designate an observer on Centennial's board of
managers.

37
<PAGE>
DETERMINATION OF NET ASSET VALUE

The net asset value per share of the Company's outstanding Common Stock is
determined quarterly, as soon as practicable after and as of the end of each
calendar quarter, by dividing the value of total assets minus liabilities
(including the liquidation preferences of the Company's preferred stock) by the
total number of shares of Common Stock outstanding at the date as of which the
determination is made.

In calculating the value of the Company's total assets, securities that are
traded in the over-the-counter market or on a stock exchange are valued at the
prevailing bid price on the valuation date, unless the investment is subject to
a restriction that requires a discount from such price, which is determined by
the Board of Directors. All other investments are valued at fair market value as
determined in good faith by the Board of Directors. In making such
determination, the Board of Directors will value loans and non- convertible debt
securities for which there exists no public trading market at cost plus
amortized original issue discount, if any, unless adverse factors lead to a
determination of a lesser value. In valuing convertible debt securities, equity
or other types of securities for which there exists no public trading market,
the Board of Directors will determine fair market value on the basis of
collateral, the issuer's ability to make payments, its earnings and other
pertinent factors.

A substantial portion of the Company's assets consist of securities carried
at fair market values determined by its Board of Directors. Determination of
fair market values involves subjective judgment not susceptible to
substantiation by auditing procedures. Accordingly, under current auditing
standards, the notes to the consolidated financial statements refer to the
uncertainty with respect to the possible effect of such valuations on the
financial statements.

38
<PAGE>
MANAGEMENT

The business and affairs of the Company are managed under the direction of
its Board of Directors. The Board of Directors has nine members, five of whom
are not 'interested persons' of the Company as defined in Section 2(a)(19) of
the 1940 Act (the 'Independent Directors'). The Board of Directors elects the
Company's officers who serve at the pleasure of the Board of Directors.

Pursuant to the terms of the Company's Second Amended and Restated
Certificate of Incorporation, the directors are divided into three classes. One
class holds office initially for a term expiring at the annual meeting of
stockholders to be held in 2000, a second class holds office initially for a
term expiring at the annual meeting of stockholders to be held in 2001 and a
third class holds office initially for a term expiring at the annual meeting of
stockholders to be held in 2002. Each director holds office for the term to
which he or she is elected and until his or her successor is duly elected and
qualified. Messrs. Wilkus, Harper and Walko have terms expiring in 2000, Messrs.
Gladstone, Allbritton and Puryear have terms expiring in 2001 and Messrs.
Blumenthal, Hahl and Lundine have terms expiring in 2002. At each annual meeting
of the stockholders of the Company, the successors to the class of directors
whose terms expire at such meeting will be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election.

EXECUTIVE OFFICERS AND DIRECTORS

The persons that are executive officers and directors of the Company and
their positions are set forth below:

<TABLE>
<CAPTION>
NAME(1) AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Malon Wilkus (1986)............... 47 President, Chief Executive Officer and Chairman of the Board of
Directors(2)
David Gladstone (1997)............ 56 Vice Chairman of the Board of Directors(2)
Adam Blumenthal (1993)............ 37 Executive Vice President, Chief Operating Officer, Secretary and
Director(2)

EXECUTIVE OFFICERS:
John Erickson..................... 39 Vice President and Chief Financial Officer
Stephen L. Hester................. 62 Vice President
Roland Cline...................... 51 Vice President

DIRECTORS:
Robert L. Allbritton (1997)....... 30 Director
Neil M. Hahl (1997)............... 50 Director
Philip R. Harper (1997)........... 55 Director
Stan Lundine (1997)............... 60 Director
Alvin N. Puryear (1998)........... 55 Director
Stephen P. Walko (1997)........... 48 Director(1)
</TABLE>

- ------------------
(1) For directors, year first elected as director is shown.

(2) Interested Person as defined in Section 2(a)(19) of the 1940 Act. Messrs.
Blumenthal, Gladstone and Wilkus are Interested Persons because they are
employees and officers of the Company. Mr. Walko is an Interested Person
because he is an officer and employee of Decorative Surfaces International,
Inc., a company under 'control,' as defined in Section 2(a)(9) of the 1940
Act, of the Company.

Malon Wilkus. Mr. Wilkus founded the Company in 1985 and has served as the
Company's Chief Executive Officer and President since that time. Mr. Wilkus
served as Vice Chairman of the Board of Directors of the Company from 1997 to
1998 and has served as Chairman of the Board of Directors since 1998. Mr. Wilkus
is the past Chairman and a current Director of the National Center for Employee
Ownership. Mr. Wilkus is a member of the Board of Governors of the ESOP
Association. Mr. Wilkus is a Director of Decorative Surfaces International, Inc.

David Gladstone. Mr. Gladstone served as Vice Chairman of the Board of the
Company since 1998. From 1974 to February 1997, Mr. Gladstone held various
positions, including Chairman and Chief Executive officer, with Allied Capital
Corporation and all of its predecessor companies. From 1992 to 1997, Mr.
Gladstone served as a Director and President and Chief Executive Officer of
Business Mortgage Investors, a Real Estate

39
<PAGE>
Investment Trust. Mr. Gladstone served as a Director of The Riggs National
Corporation (the parent of Riggs Bank) from 1993 to May 1997 and of Riggs Bank
from 1991 to 1993. He currently serves as a Trustee of The George Washington
University. Mr. Gladstone is the managing member of Capital Investor, a private
fund backed by Information Technology professionals to make investments in
start-up companies and is chairman of Coastal Berry Company, a large farming
business. He is also an advisor to the Women's Growth Fund, a venture capital
fund which invests in women-owned businesses.

Adam Blumenthal. Mr. Blumenthal has served as the Company's Executive Vice
President since 1995, and Chief Operating Officer since 1999. From 1990 to 1995,
Mr. Blumenthal served as a Vice President of the Company. Mr. Blumenthal
currently serves as a Director of Mobile Tool International, Inc.

Robert L. Allbritton. Mr. Allbritton has served as Director since 1997, as
Executive Vice President from 1994 to 1998, and as President since 1998 of
Allbritton Communications Company, an owner of eight television stations. Mr.
Allbritton currently serves as Director of Riggs National Corporation (owner of
Riggs Bank, N.A.), Riggs Bank Europe Limited, Perpetual Corporation (owner of
Allbritton Communications Company and a cable news programming company), and
Allbritton Jacksonville, Inc. (owner of a television station). Mr. Allbritton
also serves as a trustee of The Allbritton Foundation and Allbritton Art
Institute.

Neil M. Hahl. Mr. Hahl has been President of The Weitling Group, a
business consulting firm, since 1996. From 1995 to 1996, Mr. Hahl served as
Senior Vice President of the American Financial Group. From 1982 to 1996, Mr.
Hahl served as Senior Vice President and CFO of Penn Central Corporation. Mr.
Hahl is currently a Director of Buckeye Management Company and American
Financial Enterprises.

Philip R. Harper. Mr. Harper has served as Chairman, Chief Executive
Officer, and President, of US Investigations Services, Inc. since 1996. From
1991 to 1995, Mr. Harper served a President of Wells Fargo Alarm Services. From
1988 to 1991, Mr. Harper served as President of Burns International Security
Services-- Western Business Unite. Mr. Harper served in the U.S. Army from 1961
to 1982, where he commanded airborne infantry and intelligence units.

Stan Lundine. Mr. Lundine has served as Of Counsel for the law firm of
Sotir and Goldman since 1995. From 1987 to 1994, he was the Lieutenant Governor
of the State of New York. Mr. Lundine is a Director of US Investigations
Services, Inc. and National Forge Holdings. From 1976 to 1986, Mr. Lundine
served as a member of the U.S. House of Representatives.

Alvin N. Puryear. Dr. Puryear is a Professor of Management at Baruch
College of the City University of New York and has been on the faculty there
since 1970. He is Director of the Bank of Tokyo-Mitsubishi Trust Company, the
GreenPoint Bank and GreenPoint Financial Corporation.

Stephen P. Walko. Mr. Walko has been President, Chief Executive Officer
and a Director of Decorative Surfaces International, Inc. since 1998. From 1990
to 1998, he was President and a Director of Textileather Corporation. Mr. Walko
is a Director of Bliss Salem Steel Corp and Mobile Tool International, Inc.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

John Erickson. Mr. Erickson has served as Vice President and Chief
Financial Officer of the Company since 1998. From 1990 to 1996, he served as the
Chief Financial Officer of Storage USA, Inc. From 1996 to 1998, Mr. Erickson
served as President of Storage USA Franchise Corp.

Roland H. Cline. Mr. Cline has served as Vice President of the Company
since 1988. From 1988 to 1993, he was a Director of Roland Cline & Associates, a
consulting firm that specialized in financial services. From 1983 to 1986, Mr.
Cline structured employee buyouts and performed feasibility studies at the
Industrial Cooperative Association. From 1979 to 1983, he served as Director of
Technical Assistance and Senior Business Analyst at the Institute of Public
Administration's Trade Adjustment Assistance Center.

Stephen L. Hester. Mr. Hester has served as Vice President of the Company
since 1994. From 1973 to 1994, he was a senior partner in the Washington, D.C.
law firm of Arnold & Porter.

40
<PAGE>
EMPLOYMENT AGREEMENTS

The Company has employment agreements with each of the named executive
officers. Each of the agreements provides for a five-year term. However, two
years before expiration of each agreement, its term will be automatically
renewed for an additional year, unless either party has given six months advance
written notice that the automatic extensions are to cease.

The base salary under the employment agreements of Messrs. Gladstone,
Wilkus and Hester is $150,000 per year. The base salary under the employment
agreements of Messrs. Blumenthal and Cline is $135,000 and $132,500 per year,
respectively, subject to certain geographic cost of living adjustments. Mr.
Erickson's employment agreement provides for an annual base salary of $125,000.
Mr. Hester's base salary is subject to adjustment for part-time status. The
Board of Directors has the right to increase the base salary during the term and
also, generally, to decrease it, but not below the original base salary. The
employment agreements provide that the executive officers are entitled to
participate in a performance based bonus program under which each will receive
up to 200% of his base salary depending on the Company's performance against
certain criteria to be established annually by the Compensation Committee of the
Board of Directors. Each executive officer will be entitled to receive 5% of
this bonus regardless of the Company's performance.

Under these agreements, the executive officers are contractually entitled
to participate in the Company's Employee Option Plan. If the Company should
terminate an executive officer's employment by reason of the executive officer's
disability, the executive officer would be entitled for two years to receive
from the Company the difference between his base salary plus annual bonus and
any long-term disability benefits. Additionally, such executive officer's
unvested options that would have vested within one year of the disability
termination would vest. All outstanding loans made in connection with the prior
exercise of any options would have to be repaid within 60 days of the
termination date. If the Company should terminate an executive officer's
employment for any reason other than a disability or misconduct, the executive
officer would be entitled to receive his base salary and bonus for two years,
although the executive officer could choose to forgo the payments and thus
obtain a release from non-compete provisions applicable during this period.
These payments would also be made if the executive officer resigned with good
reason, which generally includes conduct by the Company materially and adversely
changing the executive's responsibilities and duties, a material breach by the
Company of the employment agreement or a change in control of the Company. Mr.
Gladstone's contract also defines good reason as determination by him of a
material difference with the Board of Directors regarding the director of the
Company. Additionally, an executive officer's unvested stock options would
generally vest if his employment were terminated for any reason other than a
disability or misconduct or if he resigned with good reason.

If the executive officer dies, his estate will be entitled to receive the
annual bonus in the year of death. Additionally, he will be considered to have
vested on the date of death in those options that would vest within one year of
the date of death, and would forfeit any unvested options. All such vested
options would expire unless exercised within 18 months of the date of death. All
outstanding loans made in connection with the prior exercise of any options
would have to be repaid within 60 days of the termination date.

In the event that the Company should terminate an executive officer's
employment as a result of the executive officer's misconduct or in the event
that the executive officer voluntary terminates his employment for other than
good reason, all unvested stock options would be forfeited and the executive
officer would have no more than 60 days to exercise any unexercised options (and
to repay any outstanding loans resulting from the prior exercise of any
options).

The employment agreements of Messrs. Blumenthal and Cline entitle them to
change their employment status to that of a part-time assistant secretary of the
Company for nominal compensation, unless the Company has terminated the
executive officer's employment for misconduct. If the executive officer elects
to change his employment status, the executive officer would continue to receive
the same benefits and payments as the executive officer would have received if
he or the Company had terminated his employment. This employment status could
generally continue, at the executive officer's option, as long as the executive
officer had an outstanding loan for the exercise of stock options. During the
term of this employment status, at the executive officer's election, the
executive officer would be bound by a non- competition covenant similar to that
applicable to the executive officer if such executive officer's employment

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was terminated. However, if the executive officer does not so elect, he would
not be entitled to benefits under a Company sponsored variable life insurance
program described below.

Upon termination of employment other than following the employment status
as a part-time assistant secretary described in the preceding paragraph, an
executive officer would be subject to certain non-compete covenants. These
covenants would generally apply for two years or as long as the executive
officer was receiving severance payments, although should the executive officer
resign without good reason and not receive severance payments, the covenants
would apply for only one year following resignation.

The Company has entered into stock option exercise agreements with Messrs.
Blumenthal and Cline whereby they have exercised options to purchase 312,788 and
181,032 shares of Common Stock, respectively, and the Company has lent to them
the sums of $5,123,000 and $2,945,000, respectively, representing the exercise
price under such options plus $431,000 and $229,000, respectively, for the
payment of income taxes incurred by them in connection with the exercise of such
options. Such loans require the current payment of interest at the applicable
federal rate for a term of up to ten years. They are due upon termination of
employment. The Common Stock purchased with the proceeds of these loans has been
pledged as collateral for them. In addition, under these agreements, the Company
has agreed to purchase split dollar variable life insurance policies for Messrs.
Blumenthal and Cline at a cost to the Company of $419,000 and $394,000,
respectively.

The Company has also entered into an agreement with Mr. Gladstone that will
provide a similar program for him once it is known whether a similar life
insurance program will be available for him. Under the agreement, Mr. Gladstone
will exercise an option to purchase 608,782 shares of Common Stock at an
aggregate price of $9,132,000 and the Company will loan him that amount plus an
additional amount for the payment of income taxes incurred by him in connection
with the exercise of such options. The cost of his life insurance program will
be $1,825,000.

The cost to the Company of these policies will generally be amortized over
a period equal to the shorter of ten years and as long as each executive officer
continues employment. During the period the loans are outstanding, the Company
will have a collateral interest in the cash value and death benefit of these
policies as security for the loans. Additionally, as long as the policy premium
is not fully amortized, the Company will have a collateral interest in such
items generally equal to the unamortized cost of the policies. In the event of
an individual's termination of employment with the Company prior to the end of
such ten year period, or, his election not to be bound by non compete agreements
as described above, such individual must reimburse the company the unamortized
cost of his policy. In the event that such policies cannot be obtained, the
Company will make cash payments, over a ten-year period, to the individuals in
the same amount as would have been expended on the insurance policies. Such
payments will only be made in the event of continued employment. In the event
that an individual terminates employment with the Company, or elects not to be
bound by non compete agreements as described above, payments will no longer be
made.

The Company and Messrs. Wilkus, Hester and Erickson have also entered into
option exercise agreements whereby they have exercised options to purchase
117,428, 20,000, and 25,000 shares of Common Stock respectively and have
borrowed $1,869,000, $300,000 and $412,000, respectively to fund such purchases.
However, the Company has not provided a life insurance program for these
executive officers.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors holds regular quarterly meetings and meets on other
occasions when required by special circumstances. Certain directors also serve
on the Board's principal standing committees. The committees, their primary
functions, and memberships are as follows:

Executive Committee. This Committee has the authority to exercise all
powers of the Board of Directors except for actions that must be taken by the
full Board of Directors under the Delaware General Corporation Law. Members of
the Executive Committee are Messrs. Wilkus, Gladstone and Blumenthal. All three
members of the Executive Committee are 'interested persons' under the 1940 Act.

Audit Committee. This committee makes recommendations to the Board of
Directors with respect to the engagement of independent auditors, reviews with
the independent auditors the plans and results of the audit engagement, approves
professional services provided by the independent auditors, reviews the
independence of the independent auditors and reviews the adequacy of the
Company's internal accounting controls. Members of the Audit Committee are
Messrs. Allbritton, Hahl, Walko and Lundine.

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Compensation Committee. This committee has the responsibility for
reviewing and approving the salaries, bonuses, and other compensation and
benefits of executive officers, reviewing and advising management regarding
benefits and other terms and conditions of compensation of management, and
administering the Company's 1997 Stock Option Plan (the 'Employee Option Plan').
Members of the Compensation Committee are Messrs. Puryear, Hahl and Harper.

The Board of Directors does not have a standing nominating committee.
Nominations for election to the Board of Directors may be made by the Board of
Directors, a nominating committee appointed by the Board of Directors or by any
stockholder entitled to vote for the election of directors. Nominations made by
stockholders must be made by written notice (setting forth the information
required by the Company's Bylaws) received by the Secretary of the Company at
least 120 days in advance of an annual meeting or within 10 days of the date on
which notice of a special meeting for the election of directors is first given
to stockholders.

The Board of Directors held thirteen formal meetings during 1998. The
Executive Committee held no formal meetings during 1998. The Compensation
Committee held four formal meetings during fiscal 1998 and the Audit Committee
held one meeting during fiscal 1998. Each of the directors attended at least 75%
of the meetings of the Board of Directors and the committees on which he served.

LONG TERM INCENTIVE PLANS

The Company maintains three long term incentive plans in which executive
officers and directors of the Company participate: (a) the ESOP in which all
employees of the Company are eligible to participate after meeting minimum
service requirements, (b) the 1997 Stock Option Plan (the 'Employee Option
Plan') in which all employees can participate and (c) the 1997 Disinterested
Director Stock Option Plan (the 'Director Option Plan') in which only
non-employee directors can participate. The Company maintains no stock
appreciation rights plan or defined benefit or actuarial plan.

ESOP. The Company maintains the ESOP for the benefit of its employees and
enables them to share in the growth of the Company. The ESOP is a combination
money purchase and stock bonus plan, designed to be invested primarily in Common
Stock of the Company and qualified under section 401(a) of the Code. The ESOP
provides that ESOP participants will receive allocations of Company stock at
least equal to 3% of their annual compensation, up to certain statutory
maximums. The Company has the ability to make additional contributions also
subject to certain statutory maximums. Each ESOP participant vests in his or her
ESOP account over a five-year period beginning on the date of first employment.

Employee Option Plan. The Employee Option Plan was established for the
purpose of attracting and retaining executive officers and other key employees.
Non-employee Directors may not participate. As of March 31, 1999, options for a
maximum of 1,828,252 shares of Common Stock were subject to issuance under the
Employee Option Plan. Of such amount, options for 1,617,778 shares of Common
Stock were outstanding and options for 48,000 shares of Common Stock had been
exercised. The Compensation Committee administers the Employee Option Plan and
may grant options for a maximum of 608,782 shares to any single participant. The
Compensation Committee uses such criteria as it deems important to determine who
will receive awards and the number of awarded options. The Compensation
Committee has the authority to set the exercise price for options and to adjust
the exercise price following the occurrence of events such as stock splits,
dividends, distribution and recapitalizations. Options may be exercised during a
period of no more than ten years following the date of grant. The Compensation
Committee has the discretion to set the vesting period for options and to permit
the acceleration of vesting under certain circumstances. Vesting is
automatically accelerated upon the occurrence of specified change of control
transactions.

Director Option Plan. The Director Option Plan provides for the issuance
of options to purchase an aggregate of 150,000 shares of Common Stock to
participants. Of such amount, options for 15,000 shares of Common Stock have
been granted to each of the six directors who are not employees of the Company.

The Director Option Plan is currently administered by the Company's
Executive Committee (which is currently composed of directors who are not
eligible to participate in the Director Option Plan). Options may be exercised
during a period of no more than ten years following the date of grant. Vesting
of options will be automatically accelerated upon the occurrence of specified
change of control transactions and certain other events including the death or
disability of the director. Options to purchase a maximum of 25,000 shares may
be issued to any single participant under the Director Option Plan.

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DIVIDEND REINVESTMENT PLAN

Pursuant to the Company's Dividend Reinvestment Plan (the 'Reinvestment
Plan'), a stockholder whose shares are registered in his own name may have all
distributions reinvested automatically in additional shares by EquiServe, L.P.,
the Reinvestment Plan administrator (the 'Reinvestment Plan Administrator'), by
providing the required enrollment notice to the Reinvestment Plan Administrator.
Stockholders whose shares are held in the name of a broker or other nominee may
have distributions reinvested automatically only if such a service is provided
by the broker or the nominee or if the broker or the nominee permits
participation in the Reinvestment Plan. Stockholders whose shares are held in
the name of a broker or other nominee should contact the broker or nominee for
details. A stockholder may terminate participation in the Reinvestment Plan at
any time by delivering written notice to the Reinvestment Plan Administrator
before the record date of the next dividend or distribution. All distributions
to stockholders who do not participate in the Reinvestment Plan will be paid by
check mailed directly to the record holder by or under the direction of the
Reinvestment Plan Administrator when the Board of Directors declares a dividend
or distribution.

When the Company declares a dividend or distribution, stockholders who are
participants in the Reinvestment Plan receive the equivalent of the amount of
the dividend or distribution in shares of the Common Stock. The Reinvestment
Plan Administrator buys shares in the open market, on the Nasdaq National Market
or elsewhere. Alternatively, the Board of Directors may choose to contribute
newly issued shares of Common Stock to the Reinvestment Plan, in lieu of the
payment of cash dividends on shares held in the Reinvestment Plan. The
Reinvestment Plan Administrator applies all cash received on account of a
dividend or distribution as soon as practicable, but in no event later than 30
days, after the payment date of the dividend or distribution except to the
extent necessary to comply with applicable provisions of the federal securities
laws. The number of shares to be received by the Reinvestment Plan participants
on account of the dividend or distribution is calculated on the basis of the
average price of all shares purchased for that 30 day period, including
brokerage commissions, and is credited to their accounts as of the payment date
of the dividend or distribution.

The Reinvestment Plan Administrator maintains all stockholder accounts in
the Reinvestment Plan and furnishes written confirmations of all transactions in
the account, including information needed by stockholders for personal and tax
records. Common Stock in the account of each Plan participant is held by the
Reinvestment Plan Administrator in non-certificated form in the name of the
participant, and each stockholder's proxy includes shares purchased pursuant to
the Reinvestment Plan.

There is no charge to participants for reinvesting dividends and capital
gains distributions. The fees of the Reinvestment Plan Administrator for
handling the reinvestment of dividends and capital gains distributions are
included in the fee to be paid by the Company to its transfer agent. There are
no brokerage charges with respect to shares issued directly by the Company as a
result of dividends or capital gains distributions payable either in shares or
in cash. However, each participant bears a pro rata share of brokerage
commissions incurred with respect to the Reinvestment Plan Administrator's open
market purchases in connection with the reinvestment of distributions.

The automatic reinvestment of distributions does not relieve participants
of any income tax that may be payable on distributions. See 'Business--The
Company's Operations as a BDC and RIC.'

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DESCRIPTION OF THE SECURITIES

The authorized capital stock of the Company consists of 70,000,000 shares
of Common Stock, $0.01 par value per share and 5,000,000 shares of preferred
stock, par value $0.01 per share (the 'Preferred Stock,' the Preferred Stock and
the Common Stock are collectively referred to as the 'Capital Stock'). The
following summary of the Company's Capital Stock and other securities does not
purport to be complete and is subject to, and qualified in its entirety by, the
Company's Second Amended and Restated Certificate of Incorporation, as amended.
Reference is made to the Company's Second Amended and Restated Certificate of
Incorporation, as amended, for a detailed description of the provisions
summarized below.

Common Stock. All shares of Common Stock have equal rights as to earnings,
assets, dividends and voting privileges and, when issued, will be duly
authorized, validly issued, fully paid and nonassessable. Distributions may be
paid to the holders of Common Stock if and when declared by the Board of
Directors of the Company out of funds legally available therefor. The holders of
Common Stock have no preemptive, conversion or redemption rights and their
interests therein are freely transferable. In the event of liquidation,
dissolution or winding up of the Company, each share of Common Stock is entitled
to share ratably in all assets of the Company that are legally available for
distribution after payment of all debts and other liabilities and subject to any
prior rights of holders of Preferred Stock, if any, then outstanding. Each share
of Common Stock is entitled to one vote and does not have cumulative voting
rights, which means that holders of a majority of such shares, if they so
choose, could elect all of the directors, and holders of less than a majority of
such shares would, in that case, be unable to elect any director.

Preferred Stock. In addition to shares of Common Stock, the Company's
Second Amended and Restated Certificate of Incorporation, as amended, authorizes
the issuance of shares of Preferred Stock. The Board of Directors is authorized
to provide for the issuance of Preferred Stock with such preferences, powers,
rights and privileges as the Board deems appropriate; except that, such an
issuance must adhere to the requirements of the 1940 Act. The 1940 Act requires,
among other things, that (i) immediately after issuance and before any
distribution is made with respect to Common Stock, the Preferred Stock, together
with all other Senior Securities, must not exceed an amount equal to 50% of the
Company's total assets and (ii) the holders of shares of Preferred Stock, if any
are issued, must be entitled as a class to elect two directors at all times and
to elect a majority of the directors if dividends on the Preferred Stock are in
arrears by two years or more. The Company has no present plans to issue any
shares of Preferred Stock, but believes the availability of such stock will
provide the Company with increased flexibility in structuring future financings
and acquisitions. If we offer preferred stock under this Prospectus, we will
issue an appropriate Prospectus Supplement. You should read that Prospectus
Supplement for a description of the Preferred Stock, including, but not limited
to, whether there will be an arrearage in the payment of dividends or sinking
fund installments, if any, restrictions with respect to the declaration of
dividends, requirements in connection with the maintenance of any ratio or
assets, or creation or maintenance of reserves, or provisions for permitting or
restricting the issuance of additional securities.

Warrants. In connection with the IPO, the Company sold to certain
underwriters named in the underwriting agreement (the 'Underwriters') warrants
(the 'Underwriters' Warrants') to purchase up to 442,751 shares of Common Stock,
representing 4% of the shares of Common Stock outstanding after completion of
the IPO, at a purchase price equal to the initial offering price per share. The
Underwriters' Warrants were immediately exercisable and have a term of five
years from the date of the IPO (the 'Warrant Exercise Term'). The Company has
also registered the shares of Common Stock underlying the Underwriters'
Warrants. During the Warrant Exercise Term, the holders are given the
opportunity to profit from a rise in market price of the shares of Common Stock.
To the extent that the Underwriters' Warrants are exercised, dilution to the
interests of the holders of the Common Stock will occur. In addition, the terms
upon which the Company will be able to obtain additional equity capital may be
adversely affected because the holders of the Underwriters' Warrants can be
expected to exercise them at a time when the Company likely would be able to
obtain any needed capital on terms more favorable to the Company than those
provided in the Underwriters' Warrants.

Debt Securities. The Company may issue debt securities that may be senior
or subordinated in priority of payment. The Company will provide a Prospectus
Supplement that describes the ranking, whether senior or subordinated, the
specific designation, the aggregate principal amount, the purchase price, the
maturity, the redemption terms, the interest rate or manner of calculating the
interest rate, the time of payment of interest, if any, the terms for any
conversion or exchange, including the terms relating to the adjustment of any
conversion or exchange mechanism, the listing, if any, on a securities exchange,
the name and address of the trustee and any other specific terms of the debt
securities.

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CERTAIN PROVISIONS OF THE SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION, AS AMENDED, AND THE SECOND AMENDED AND RESTATED BYLAWS

Limitation on Liability of Directors. The Company has adopted provisions
in its Second Amended and Restated Certificate of Incorporation, as amended,
limiting the liability of directors and officers of the Company for monetary
damages to the extent permitted under Delaware law. The effect of this provision
in the Second Amended and Restated Certificate of Incorporation, as amended, is
to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director or officers for breach of the fiduciary duty of care
as a director or officer except in certain limited situations. This provision
does not limit or eliminate the rights of the Company or any stockholder to seek
nonmonetary relief such as an injunction or rescission in the event of a breach
of a director's or officer's duty of care. These provisions will not alter the
liability of directors or officers under federal securities laws.

Certain Anti-takeover Provisions. The Second Amended and Restated
Certificate of Incorporation, as amended, and the Second Amended and Restated
Bylaws of the Company contain certain provisions that could make more difficult
the acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company to negotiate first with the Board of
Directors. The Company believes that the benefits of these provisions outweigh
the potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. The description set forth below is intended as a summary only and is
qualified in its entirety by reference to the Second Amended and Restated
Certificate of Incorporation, as amended, and the Second Amended and Restated
Bylaws.

Classified Board of Directors. The Second Amended and Restated Certificate
of Incorporation, as amended, provides for the Board of Directors to be divided
into three classes of directors serving staggered three-year terms, with each
class to consist as nearly as possible of one-third of the directors then
elected to the Board. A classified board may render more difficult a change in
control of the Company or removal of incumbent management. The Company believes,
however, that the longer time required to elect a majority of a classified Board
of Directors will help to ensure continuity and stability of the Company's
management and policies.

Number of Directors; Removal; Filing Vacancies. The Second Amended and
Restated Certificate of Incorporation, as amended, provides that the number of
directors will be determined pursuant to the Bylaws. In addition, the Second
Amended and Restated Bylaws provide that the number of directors shall not be
increased by 50% or more in any 12-month period without the approval of at least
66 2/3% of the members of the Board of Directors then in office. The Second
Amended and Restated Certificate of Incorporation, as amended, provides that any
vacancies will be filled by the vote of a majority of the remaining directors,
even if less than a quorum, and the directors so appointed shall hold office
until the next election of the class for which such directors have been chosen
and until their successors are elected and qualified. Accordingly, the Board of
Directors could temporarily prevent any stockholder from enlarging the Board of
Directors and filling the new directorships with such stockholder's own
nominees.

The Second Amended and Restated Certificate of Incorporation, as amended,
also provides that, except as may be provided in a resolution or resolution
designating any class or series of preferred stock, the directors may only be
removed for cause by the affirmative vote of 75% of the voting power of all of
the shares of capital stock of the Company then entitled to vote generally in
the election of directors, voting together as a single class.

No Stockholder Action by Written Consent. The Second Amended and Restated
Certificate of Incorporation, as amended, and the Second Amended and Restated
Bylaws provide that stockholder action can be taken only at an annual or special
meeting of Stockholders. They also prohibit stockholder action by written
consent in lieu of a meeting. These provisions may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting.

Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals. The Second Amended and Restated Bylaws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of stockholders of
the Company (the 'Stockholder Notice Procedure').

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The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting at which directors are to
be elected, will be eligible for election as directors of the Company and (ii)
at an annual meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Board of Directors or by a
stockholder who has given timely written notice to the Secretary of the Company
of such stockholder's intention to bring such business before the meeting.
Except for stockholder proposals submitted in accordance with the Federal proxy
rules as to which the requirements specified therein shall control, notice of
stockholder nominations or business to be conducted at a meeting must be
received by the Company not less than 60 days or more than 90 days prior to the
first anniversary of the previous year's annual meeting if the notice is to be
submitted at an annual stockholders meeting or no later than 10 days following
the day on which notice of the date of a special meeting of stockholders was
given if the notice is to be submitted at a special stockholders meeting.

Amendment of Certificate of Incorporation and Bylaws. The Company's Second
Amended and Restated Certificate of Incorporation, as amended, provides that the
provisions therein relating to the classified Board of Directors, the number of
directors, vacancies on the Board of Directors and removal of directors may be
amended, altered, changed or repealed only by the affirmative vote of the
holders of at least 75% of the voting power of all of the shares of capital
stock of the Company then entitled to vote generally in the election of
directors voting together as a single class.

The Company's Second Amended and Restated Certificate of Incorporation, as
amended, also provides that the other provisions of such Certificate may be
amended, altered, changed or repealed, subject to the resolutions providing for
any class or series of preferred stock, only by the affirmative vote of both a
majority of the members of the Board of Directors then in office and a majority
of the voting power of all of the shares of capital stock of the Company
entitled to vote generally in the election of directors, voting together as a
single class.

The Company's Second Amended and Restated Certificate of Incorporation, as
amended, also provides that the Second Amended and Restated Bylaws may be
adopted, amended, altered, changed or repealed by the affirmative vote of the
majority of the Board of Directors then in office. Any action taken by the
stockholders with respect to adopting, amending, altering, changing or repealing
the Second Amended and Restated Bylaws may be taken only by the affirmative vote
of the holders of at least 75% of the voting power of all of the shares of
capital stock of the Company then entitled to vote generally in the election of
directors, voting together as a single class.

These provisions are intended to make it more difficult for stockholders to
circumvent certain other provisions contained in the Company's Second Amended
and Restated Certificate of Incorporation and Second Amended and Restated
Bylaws, such as those that provide for the classification of the Board of
Directors. These provisions, however, also will make it more difficult for
stockholders to amend the Second Amended and Restated Certificate of
Incorporation or Second Amended and Restated Bylaws without the approval of the
Board of Directors, even if a majority of the stockholders deems such amendment
to be in the best interests of all stockholders.

REGULATION

The Company is a closed-end, non-diversified, management investment company
that has elected to be regulated as a business development company under Section
54 of the 1940 Act and, as such, is subject to regulation under that Act. The
1940 Act contains prohibitions and restrictions relating to transactions between
business development companies and their affiliates, principal underwriters and
affiliates of those affiliates or underwriters and requires that a majority of
the directors be persons other than 'interested persons,' as defined in the 1940
Act. In addition, the 1940 Act provides that the Company may not change the
nature of its business so as to cease to be, or to withdraw its election as, a
business development company unless so authorized by the vote of a majority, as
defined in the 1940 Act, of its outstanding voting securities.

The Company is permitted, under specified conditions, to issue multiple
classes of indebtedness and one class of stock senior to the shares of Common
Stock if its asset coverage, as defined in the 1940 Act, is at least

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200% immediately after each such issuance. In addition, while Senior Securities
are outstanding, provision must be made to prohibit any distribution to
stockholders or the repurchase of such securities or shares unless the Company
meets the applicable asset coverage ratios at the time of the distribution or
repurchase. The Company may also borrow amounts up to 5% of the value of its
total assets for temporary purposes.

Under the 1940 Act, a business development company may not acquire any
asset other than assets of the type listed in Section 55(a) of the 1940 Act
('Qualifying Assets') unless, at the time the acquisition is made, Qualifying
Assets represent at least 70% of the company's total assets. The principal
categories of Qualifying Assets relevant to the proposed business of the Company
are the following:

(1) Securities purchased in transactions not involving any public offering
from the issuer of such securities, which issuer is an eligible
portfolio company. An eligible portfolio company is defined in the 1940
Act as any issuer which:

(a) is organized under the laws of, and has its principal place of
business in, the United States or any state;

(b) is not an investment company other than a small business
investment company wholly-owned by the business development
company; and

(2) Securities of any eligible portfolio company which is controlled by the
business development company.

(3) Securities received in exchange for or distributed on or with respect
to securities described in (1) or (2) above, or pursuant to the
exercise of options, warrants or rights relating to such securities.

(4) Cash, cash items, government securities, or high quality debt
securities maturing in one year or less from the time of investment.

In addition, a BDC must have been organized (and have its principal place of
business) in the United States and must be operated for the purpose of making
investments in the types of securities described in (1) or (2) above. However,
in order to count portfolio securities as Qualifying Assets for the purpose of
the 70% test, the BDC must either control the issuer of the securities or must
offer to make available to the issuer of the securities significant managerial
assistance; except that, where the BDC purchases such securities in conjunction
with one or more other persons acting together, one of the other persons in the
group may make available such managerial assistance. Making available
significant managerial assistance means, among other things, any arrangement
whereby the BDC, through its directors, officers or employees, offers to
provide, and, if accepted, does so provide, significant guidance and counsel
concerning the management, operations or business objectives and policies of a
portfolio company.

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SHARE REPURCHASES

Common stock of closed-end investment companies frequently trades at
discounts from net asset value. The Company cannot predict whether its shares of
Common Stock will trade above, at or below the net asset value thereof. The
market price of our shares is determined by, among other things, the supply and
demand for our shares, our investment performance and investor perception of our
overall attractiveness as an investment as compared with alternative
investments. The Board of Directors has authorized officers of the Company in
their discretion, subject to compliance with the 1940 Act and other applicable
law, to purchase on the open market or in privately negotiated transactions,
outstanding shares of the Company in the event that the shares trade at a
discount to net asset value. There is no assurance that any such open market
purchases will be made and such authorization may be terminated at any time. In
addition, if at any time after September, 1999 the Company's shares publicly
trade for a substantial period of time at a substantial discount from the
Company's then current net asset value per share, the Company's Board of
Directors will consider authorizing periodic repurchases of the Company's shares
or other actions designed to eliminate the discount. The Board of Directors
would consider all relevant factors in determining whether to take any such
actions, including the effect of such actions on the Company's status as a RIC
under the Code and the availability of cash to finance these repurchases in view
of the restrictions on the Company's ability to borrow. No assurance can be
given that any share repurchases will be made or that if made, they will reduce
or eliminate market discount. Should any such repurchases be made in the future,
it is expected that they would be made at prices at or below the current net
asset value per share. Any such repurchase would cause the Company's total
assets to decrease, which may have the effect of increasing the Company's
expense ratio. The Company may borrow money to finance the repurchase of shares
subject to the limitations described in this Prospectus. Any interest on such
borrowing for this purpose will reduce the Company's net income. During 1998, in
accordance with the regulations governing RICs, the Company repurchased 30,000
shares of its outstanding Common Stock.

PLAN OF DISTRIBUTION

The Company may sell the Securities through underwriters or dealers,
directly to one or more purchasers, through agents or through a combination of
any such methods of sale. Any underwriter or agent involved in the offer and
sale of the Securities will be named in the applicable Prospectus Supplement.

The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at
prevailing market prices at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices, provided, however, that in
the case of Common Stock, the offering price per share less any underwriting
commissions or discounts must equal or exceed the net asset value per share of
the Company's Common Stock.

In connection with the sale of the Securities, underwriters or agents may
receive compensation from the Company or from purchasers of the Securities, for
whom they may act as agents, in the form of discounts, concessions or
commissions. Underwriters may sell the Securities to or through dealers and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Securities may be deemed to be underwriters under the
Securities Act, and any discounts and commissions they receive from the Company
and any profit realized by them on the resale of the Securities may be deemed to
be underwriting discounts and commissions under the Securities Act. Any such
underwriter or agent will be identified and any such compensation received from
the Company will be described in the applicable Prospectus Supplement.

Any Common Stock sold pursuant to a Prospectus Supplement will be listed on
the Nasdaq National Market, or another exchange on which the Common Stock is
traded.

Under agreements into which the Company may enter, underwriters, dealers
and agents who participate in the distribution of the Securities may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act. Underwriters, dealers and agents may
engage in transactions with, or perform services for, the Company in the
ordinary course of business.

49
<PAGE>
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase the Securities from the
Company pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
the Securities shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject. The underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts. Such contracts will be subject only to those
conditions set forth in the Prospectus Supplement, and the Prospectus Supplement
will set forth the commission payable for solicitation of such contracts.

In order to comply with the securities laws of certain states, if
applicable, the Securities offered hereby will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states, the Securities may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

The Company's securities are held under a custodian agreement by LaSalle
Bank, N.A. The address of the custodian is 135 South LaSalle Street, Chicago, IL
60603. The Company's assets are held under bank custodianship in compliance with
the 1940 Act. State Street Bank and Trust Company acts as the Company's transfer
and dividend paying agent and registrar. The principal business address of State
Street Bank and Trust is c/o. EquiServe, L.P., 150 Royall Street, mail stop
45-02-62, Canton, MA 02021.

LEGAL MATTERS

The legality of the Securities offered hereby will be passed upon for the
Company by Arnold & Porter, Washington, D.C. Certain legal matters will be
passed upon for the underwriters, if any, by the counsel named in the Prospectus
Supplement.

EXPERTS

Ernst & Young LLP, independent auditors, have audited the Company's
financial statements at December 31, 1998 and 1997, and for the year ended
December 31, 1998, the three months ended December 31, 1997, the nine months
ended September 30, 1997 and the year ended December 31, 1996, and financial
highlights for the year ended December 31, 1998 and the three months ended
December 31, 1997 as set forth in their report. The Company has included its
financial statements and financial highlights in this Prospectus and elsewhere
in the Registration Statement in reliance upon Ernst & Young LLP's report given
on their authority as experts in accounting and auditing.

50
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION

LOCATION
PAGE IN THE OF RELATED
STATEMENT DISCLOSURE IN
OF ADDITIONAL THE
INFORMATION PROSPECTUS
------------- -------------
<S> <C> <C>
General Information and History....................................................... SAI-2 1;27
Investment Objective and Policies..................................................... SAI-2 18
Management............................................................................ SAI-3 40
Compensation of Executive Officers and Directors...................................... SAI-3 16
Compensation of Directors............................................................. SAI-3 --
Stock Option Awards................................................................... SAI-6 53
Committees of the Board of Directors.................................................. SAI-6 5;18
Control Persons and Principal Holders of Securities................................... SAI-6 --
Investment Advisory Services.......................................................... SAI-7 --
Safekeeping, Transfer and Dividend Paying Agent and Registrar......................... SAI-7 --
Accounting Services................................................................... SAI-7 --
Brokerage Allocation and Other Practices.............................................. SAI-7 --
Tax Status............................................................................ SAI-7 --
</TABLE>

51
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors........................................................................... F-2
Balance Sheets as of December 31, 1998 and 1997.......................................................... F-3
Schedules of Investments as of December 31, 1998 and 1997................................................ F-4
Statements of Operations for the year ended December 31, 1998, the three months ended December 31, 1997,
the nine months ended September 30, 1997 and the year end December 31, 1996........................... F-7
Statements of Shareholders' Equity for the year ended December 31, 1998, the three months ended December
31, 1997, the nine months ended September 30, 1997 and the year ended December 31, 1996............... F-8
Statements of Cash Flows for the year ended December 31, 1998, the three months ended December 31, 1997,
the nine months ended September 30, 1997 and the year ended December 31, 1996......................... F-9
Financial Highlights for the year ended December 31, 1998 and the three months ended December 31, 1997... F-10
Notes to Financial Statements............................................................................ F-11

UNAUDITED FINANCIAL STATEMENTS
Balance Sheets as of March 31, 1999 and December 31, 1998................................................ F-21
Schedule of Investments as of March 31, 1999............................................................. F-22
Statements of Operations for the three months ended March 31, 1999 and 1998.............................. F-24
Statements of Shareholders' Equity for the three months ended March 31, 1999 and 1998.................... F-25
Statements of Cash Flows for the three months ended March 31, 1999 and 1998.............................. F-26
Financial Highlights for the three months ended March 31, 1999 and 1998.................................. F-27
Notes to Financial Statements............................................................................ F-28
</TABLE>

F-1
<PAGE>
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,
1998 and 1997, the related statements of operations, shareholders' equity and
cash flows for the year ended December 31, 1998, the three months ended December
31, 1997, the nine months ended September 30, 1997, and the year ended December
31, 1996, and the financial highlights for the year ended December 31, 1998 and
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 respects, the financial position of American Capital Strategies, Ltd.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for the year ended December 31, 1998, the three months ended December 31,
1997, the nine months ended September 30, 1997, and the year ended December 31,
1996, and the financial highlights for the year ended December 31, 1998 and the
three months ended December 31, 1997 in conformity with generally accepted
accounting principles.

/S/ ERNST & YOUNG LLP

Washington, D.C.
February 2, 1999

F-2
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS

Investments at fair value (cost of $252,718 and $133,274, respectively)........... $254,983 $133,415
Cash and cash equivalents......................................................... 6,149 8,862
Investment in unconsolidated operating subsidiary................................. 6,386 6,869
Due from unconsolidated operating subsidiary...................................... 778 861
Interest receivable............................................................... 1,561 644
Other............................................................................. 162 54
------------ ------------
Total assets............................................................ $270,019 $150,705
------------ ------------
------------ ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable and accrued liabilities.......................................... $ 126 $ 53
Accrued dividends payable......................................................... 1,222 --
Notes payable..................................................................... 85,948 --
Revolving credit facility......................................................... 30,000 --
------------ ------------
Total liabilities....................................................... 117,296 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 11,081 and 11,069
issued and outstanding, respectively......................................... 111 111
Capital in excess of par value.................................................. 145,245 144,940
Note receivable from sale of common stock....................................... (300) --
Distributions in excess of net realized earnings................................ (116) (55)
Unrealized appreciation of investments.......................................... 7,783 5,656
------------ ------------
Total shareholders' equity.............................................. 152,723 150,652
------------ ------------
Total liabilities and shareholders' equity.............................. $270,019 $150,705
------------ ------------
------------ ------------
</TABLE>

See accompanying notes.

F-3
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------------------------------------- -------- ----------
<S> <C> <C> <C>
SENIOR DEBT--9.47%
Four S Baking Company............................ Baking................................ $ 1,266 $ 1,266
BIW Connector Systems, LLC....................... Manufacturing......................... 3,404 3,404
Chance Coach, Inc................................ Bus Manufacturer...................... 1,286 1,286
JAG Industries, Inc.............................. Manufacturing......................... 1,200 1,200
Confluence Holdings Corp......................... Canoes & Kayaks....................... 9,675 9,675
Cycle Gear, Inc.................................. Motor Cycle Accessories............... 750 750
Eurocaribe, Inc.................................. Meat Processing....................... 7,181 7,181
-------- ----------
Subtotal............................................................................ 24,762 24,762
<CAPTION>

SUBORDINATED DEBT--41.37%
<S> <C> <C> <C>
Four S Baking Company............................ Baking................................ 1,588 1,588
BIW Connector Systems, LLC....................... Manufacturing......................... 6,710 6,710
Westwinds Holdings, Inc.......................... Restaurant............................ 2,932 2,932
JAG Industries, Inc.............................. Manufacturing......................... 2,335 2,335
Specialty Transportation Services, Inc........... Waste Hauler.......................... 7,368 7,368
Chance Coach, Inc................................ Bus Manufacturer...................... 7,060 7,060
The L.A. Studios, Inc............................ Audio Production...................... 2,393 2,393
Decorative Surfaces International, Inc........... Decorative Paper & Vinyl Mfg.......... 10,490 10,490
New Piper Aircraft, Inc.......................... Aircraft Manufacturing................ 17,858 17,858
Electrolux, LLC.................................. Vacuum Cleaner........................ 7,264 7,264
Cycle Gear, Inc.................................. Motor Cycle Accessories............... 633 633
Confluence Holdings Corp......................... Canoes & Kayaks....................... 4,701 4,701
Eurocaribe, Inc.................................. Meat Processing....................... 8,905 8,905
ConStar International, Inc....................... Electrical............................ 12,839 12,839
Centennial Broadcasting, Inc..................... Radio Stations........................ 15,040 15,040
-------- ----------
Subtotal............................................................................ 108,116 108,116
<CAPTION>

CONVERTIBLE PREFERRED STOCK(2)--2.10%
<S> <C> <C> <C>
Four S Baking Company 15% dividend convertible
into 51,390 shares of common stock or 10.89% of
Co............................................. Baking................................ 2,756 2,756
Chance Coach, Inc. 12% dividend convertible into
20% of Co...................................... Bus Manufacturer...................... 2,000 2,079
Decorative Surfaces International, Inc. prime
rate plus 4% dividend convertible into 2.9% of
Co............................................. Decorative Paper & Vinyl Mfg.......... 646 646
-------- ----------
Subtotal............................................................................ 5,402 5,481
<CAPTION>

COMMON STOCK WARRANTS(1)--8.52%
<S> <C> <C> <C>
Four S Baking Company(2) 15,390 shares 3.26% of
Co............................................. Baking................................ 462 600
BIW Connector Systems, LLC 8% of LLC............. Manufacturing......................... 652 540
Westwinds Holdings, Inc. 5% of Co................ Restaurant............................ 350 421
JAG Industries, Inc.(2) 75% of Co................ Manufacturing......................... 505 465
Specialty Transportation Services, Inc. 9.1% of
Co............................................. Waste Hauler.......................... 694 784
Chance Coach, Inc.(2) 43.7% of Co................ Bus Manufacturer...................... 4,041 4,543
</TABLE>

F-4
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS--(CONTINUED)

DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------------------------------------- -------- ----------
COMMON STOCK WARRANTS(1)--8.52%--(CONTINUED)
<S> <C> <C> <C>
The L.A. Studios, Inc. 17% of Co................. Audio Production...................... 902 857
Decorative Surfaces International, Inc.(2) 42.3%
of Co.......................................... Decorative Paper & Vinyl Mfg.......... 4,571 5,596
New Piper Aircraft, Inc. 4% of Co................ Aircraft Manufacturing................ 2,231 2,231
Electrolux, LLC 2.5% of Co....................... Vacuum Cleaner........................ 246 246
Cycle Gear, Inc. 16.5% of Co..................... Motor Cycle Accessories............... 374 374
Confluence Holdings Corp. 18% of Co.............. Canoes & Kayaks....................... 1,319 1,319
Eurocaribe, Inc. 37% of Co....................... Meat Processing....................... 1,110 1,110
ConStar International, Inc. 17.5% of Co.......... Electrical............................ 3,171 3,171
-------- ----------
Subtotal............................................................................ 20,628 22,257
<CAPTION>

COMMON STOCK(1)--1.69%
<S> <C> <C> <C>

Four-S Baking Company(2) 5.5% of Co.............. Baking................................ 966 1,004
Specialty Transportation Services, Inc. 9.1% of
Co............................................. Waste Hauler.......................... 500 784
Chance Coach, Inc.(2) 18.3% of Co................ Bus Manufacturer...................... 1,896 2,131
ConStar International, Inc. 2.8%................. Electrical............................ 500 500
-------- ----------
Subtotal............................................................................ 3,862 4,419
-------- ----------
Subtotal--non-publicly traded securities--63.15%.................................... 162,770 165,035
<CAPTION>

GOVERNMENT SECURITIES--34.41%
<S> <C> <C> <C>

FHLB Discount Note due 1/4/98............................................................ 89,948 89,948
-------- ----------
Total Investments................................................................... 252,718 254,983
<CAPTION>

INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--2.44%
<S> <C> <C> <C>

ACS Capital Investments Corporation(1)(2)-- 100%
of Co.......................................... Investment Banking.................... 403 6,386
-------- ----------
Totals.............................................................................. $253,121 $ 261,369
-------- ----------
-------- ----------
</TABLE>

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

(1) Non-income producing

(2) Affiliate

See accompanying notes.

F-5
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------------------------- -------- ----------
<S> <C> <C> <C>
SENIOR DEBT--4.07%
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--7.88%
<S> <C> <C> <C>
Four S Baking Company........................................ Baking.................... 1,492 1,492
BIW Connector Systems, LLC................................... Manufacturing............. 6,350 6,350
Westwinds Holdings, Inc...................................... Restaurant................ 3,206 3,206
-------- ----------
Subtotal............................................................................ 11,048 11,048
<CAPTION>

CONVERTIBLE PREFERRED STOCK(2)--1.64%
<S> <C> <C> <C>
Four S Baking Company 15% dividend convertible into 4%
dividend common stock or 10.89% of Co...................... Baking.................... 2,303 2,303
<CAPTION>

COMMON STOCK WARRANTS(1)(2)--1.13%
<S> <C> <C> <C>
Four S Baking Company 15,390 shares 3.26% of Co.............. Baking.................... 461 577
BIW Connector Systems, LLC 8% of LLC......................... Manufacturing............. 652 652
Westwinds Holdings, Inc. 5% of Co............................ Restaurant................ 350 350
-------- ----------
Subtotal............................................................................ 1,463 1,579
-------- ----------
Subtotal--non-publicly traded securities--14.72%.................................... 20,529 20,645
<CAPTION>

GOVERNMENT SECURITIES--80.38%
<S> <C> <C> <C>
FHLB Discount Note due 2/4/98............................................................ 20,969 20,981
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 14,480
FNMA 5.71% due 9/9/98.................................................................... 14,995 15,000
-------- ----------
Subtotal............................................................................ 112,745 112,770
-------- ----------
Total Investments................................................................... 133,274 133,415
<CAPTION>

INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--4.90%
<S> <C> <C> <C>
ACS Capital Investments Corporation(1)(2)--100% of Co........ Investment Banking........ 403 6,869
-------- ----------
Totals.............................................................................. $133,677 $ 140,284
-------- ----------
-------- ----------
</TABLE>

- ------------------
(1) Non-income producing
(2) Affiliate

See accompanying notes.

F-6
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 1997 DECEMBER 31, 1996
----------------- ----------------- ----------------- -----------------
Operating income:
Financial advisory fees..................... $ -- $ -- $ 1,122 $ 1,738
Financial performance fees.................. -- -- 798 649
Interest and dividend income................ 14,430 2,123 553 --
Loan processing fees........................ 2,549 654 -- --
Other....................................... -- 20 428 359
-------- -------- ------- -------
Total operating income.................. 16,979 2,797 2,901 2,746
Operating expenses:
Salaries and benefits....................... 843 243 1,221 1,283
General, administrative and other........... 809 308 1,514 1,282
Provision for (reversal of) doubtful
accounts.................................. -- -- (177) 224
Interest.................................... 57 -- 60 33
Depreciation and amortization............... -- -- 33 39
-------- -------- ------- -------
Total operating expenses................ 1,709 551 2,651 2,861
Operating income (loss) before equity in
earnings of unconsolidated operating
subsidiary.................................. 15,270 2,246 250 (115)
Equity in (loss) earnings of unconsolidated
operating subsidiary........................ (482) 24 -- --
-------- -------- ------- -------
Net operating income (loss)................... 14,788 2,270 250 (115)
Increase in unrealized appreciation of
investments................................. 2,127 167 5,321 483
-------- -------- ------- -------
Income before income taxes.................... 16,915 2,437 5,571 368
Provision for income taxes.................... -- -- 2,128 159
-------- -------- ------- -------
Net increase in shareholders' equity resulting
from operations............................. $16,915 $ 2,437 $ 3,443 $ 209
-------- -------- ------- -------
-------- -------- ------- -------
Net operating income per share
Basic....................................... $ 1.34 $ 0.21
Diluted..................................... $ 1.29 $ 0.20

Net increase in shareholders' equity resulting
from operations per share
Basic....................................... $ 1.53 $ 0.22
Diluted..................................... $ 1.48 $ 0.21
Weighted average shares of common stock
outstanding
Basic....................................... 11,068 11,069
Diluted..................................... 11,424 11,405
</TABLE>

See accompanying notes.

F-7
<PAGE>
AMERICAN CAPITAL STRATEGIES, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NOTE
UNEARNED COMMON STOCK CAPITAL IN RECEIVABLE UNDISTRIBUTED
PREFERRED ESOP ---------------- EXCESS OF RETAINED FROM SALE OF NET REALIZED
STOCK SHARES SHARES AMOUNT PAR VALUE EARNINGS COMMON STOCK EARNINGS
--------- -------- ------- ------ ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $ 1,419 $ (333) 480 $ 5 $ 10 $1,845 -- --
Net increase in
shareholders' equity
resulting from
operations........... -- -- -- -- -- 209 -- --
Options exercised...... -- -- 1 -- 1 -- -- --
ESOP shares earned..... -- 216 -- -- -- -- -- --
--------- -------- ------- ------ ---------- -------- ----- -------------
Balance at December 31,
1996................... $ 1,419 $ (117) 481 $ 5 $ 11 $2,054 -- --
--------- -------- ------- ------ ---------- -------- ----- -------------
Net increase in
shareholders' equity
resulting from
operations........... -- -- -- -- -- 3,443 -- --
Contribution of common
stock to ESOP........ -- -- 1 -- 8 (8) -- --
Conversion of preferred
stock to common
stock................ (1,419) -- 205 2 1,417 -- -- --
Issuance of common
stock................ -- -- 10,382 104 143,504 -- -- --
ESOP shares earned..... -- 117 -- -- -- -- --
--------- -------- ------- ------ ---------- -------- ----- -------------
Balance at September 30,
1997................... $ -- $ -- $11,069 $111 $ 144,940 $5,489 $ -- $ --
--------- -------- ------- ------ ---------- -------- ----- -------------
--------- -------- ------- ------ ---------- -------- ----- -------------
Effect of
reorganization as a
RIC.................. -- -- -- -- -- (5,489) -- --
Net increase in
shareholders' equity
resulting from
operations........... -- -- -- -- -- -- -- 2,269
Distributions.......... -- -- -- -- -- -- -- (2,324)
--------- -------- ------- ------ ---------- -------- ----- -------------
Balance at December 31,
1997................... $ -- $ -- 11,069 $111 $ 144,940 $ -- $ -- $ (55)
--------- -------- ------- ------ ---------- -------- ----- -------------
--------- -------- ------- ------ ---------- -------- ----- -------------
Issuance of common
stock under the 1997
Stock Option Plan.... -- -- 28 -- 396 -- -- --
Issue of common stock
under the Dividend
Reinvestment Plan.... -- -- 7 -- 128 -- -- --
Repurchase of
outstanding shares... -- -- (23) -- (219) -- -- --
Issuance of note
receivable from sale
of common stock...... -- -- -- -- -- -- (300) --
Net increase in
shareholders' equity
resulting from
operations........... -- -- -- -- -- -- -- 14,788
Distributions.......... -- -- -- -- -- -- -- (14,849)
--------- -------- ------- ------ ---------- -------- ----- -------------
Balance at December 31,
1998................... $ -- $ -- 11,081 $111 $ 145,245 $ -- $ (300) $ (116)
--------- -------- ------- ------ ---------- -------- ----- -------------
--------- -------- ------- ------ ---------- -------- ----- -------------

UNREALIZED TOTAL
APPRECIATION SHAREHOLDERS
OF INVESTMENTS EQUITY
-------------- ------------
<S> <C> <C>
Balance at December 31,
1995................... -- $ 2,946
Net increase in
shareholders' equity
resulting from
operations........... -- 209
Options exercised...... -- 1
ESOP shares earned..... -- 216
------ ------------
Balance at December 31,
1996................... -- $ 3,372
------ ------------
Net increase in
shareholders' equity
resulting from
operations........... -- 3,443
Contribution of common
stock to ESOP........ -- --
Conversion of preferred
stock to common
stock................ -- --
Issuance of common
stock................ -- 143,608
ESOP shares earned..... -- 117
------ ------------
Balance at September 30,
1997................... $ -- $150,540
------ ------------
------ ------------
Effect of
reorganization as a
RIC.................. 5,489 --
Net increase in
shareholders' equity
resulting from
operations........... 167 2,436
Distributions.......... -- (2,324)
------ ------------
Balance at December 31,
1997................... $5,656 $150,652
------ ------------
------ ------------
Issuance of common
stock under the 1997
Stock Option Plan.... -- 396
Issue of common stock
under the Dividend
Reinvestment Plan.... -- 128
Repurchase of
outstanding shares... -- (219)
Issuance of note
receivable from sale
of common stock...... -- (300)
Net increase in
shareholders' equity
resulting from
operations........... 2,127 16,915
Distributions.......... -- (14,849)
------ ------------
Balance at December 31,
1998................... $7,783 $152,723
------ ------------
------ ------------
</TABLE>

See accompanying notes.

F-8
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 1997 DECEMBER 31, 1996
----------------- ----------------- ----------------- -----------------
Operating activities
Net increase in shareholders' equity resulting
from operations............................. $ 16,915 $ 2,437 $ 3,443 $ 209
Adjustments to reconcile net increase in
shareholders' equity resulting from
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization............... -- -- 33 38
Unrealized appreciation of investments...... (2,127) (167) (5,321) (483)
Net amortization of securities.............. (1,336) (1,234) (337) --
Amortization of loan discounts.............. (913) -- -- --
Amortization of deferred finance costs...... -- -- 3 11
Provision for deferred income taxes......... -- -- 2,102 121
Contribution of stock to ESOP............... -- -- 117 216
Increase in interest receivable............. (917) (207) (122) --
Provision for doubtful accounts............. -- -- (177) 224
Increase in accrued payment-in-kind dividend
and interest.............................. (478) -- -- --
Decrease (increase) in due from
unconsolidated subsidiary................. 83 (526) -- --
Decrease (increase) in accounts
receivable................................ -- -- 486 (865)
Decrease in income taxes receivable......... -- -- 24 101
(Increase) decrease in other assets......... (71) 62 (113) 6
Increase (decrease) in accounts payable and
accrued liabilities....................... 73 (328) 128 228
Loss (earnings) of unconsolidated operating
subsidiary.................................. 482 (24) -- --
----------------- ----------------- ----------------- ------
Net cash provided by (used in) operating
activities.................................. 11,711 13 266 (194)
Investing activities
Proceeds from sale or maturity of
investments............................... 231,580 35,000 60 --
Principal repayments........................ 1,719 93 -- --
Purchase of investments..................... (142,865) (20,622) (483) (75)
Purchase of securities...................... (207,146) (16,593) (129,896) --
Purchases of property and equipment, net of
disposals................................. -- -- (29) (39)
----------------- ----------------- ----------------- ------
Net cash used in investing activities......... (116,712) (2,122) (130,348) (114)
Financing activities
Proceeds from short term notes payable,
net....................................... 85,948 -- (430) 269
Drawings on revolving credit facilities,
net....................................... 30,000 -- -- --
Increase in deferred financing costs........ (37) -- -- (4)
(Decrease) increase in due to related
parties, net.............................. -- -- (78) 6
Repurchase of common stock.................. (219) -- -- --
Issuance of common stock.................... 224 -- 143,608 --
Options exercised........................... -- -- -- 1
Distributions paid.......................... (13,628) (2,325) -- --
----------------- ----------------- ----------------- ------
Net cash provided by (used in) financing
activities.................................. 102,288 (2,325) 143,100 272
----------------- ----------------- ----------------- ------
Net (decrease) increase in cash and cash
equivalents................................. (2,713) (4,434) 13,018 (36)
Cash and cash equivalents at beginning of
period...................................... 8,862 13,296 323 359
----------------- ----------------- ----------------- ------
Cash and cash equivalents at end of period.... $ 6,149 $ 8,862 $ 13,341 $ 323
----------------- ----------------- ----------------- ------
----------------- ----------------- ----------------- ------
Non-cash financing activities:
Note receivable issued in sale of common
stock....................................... $ 300 $ -- $ -- $ --
</TABLE>

See accompanying notes.

F-9
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------
<S> <C> <C>
Per Share Data(1)
Net asset value at beginning of the period............................. $ 13.61 $ 13.60
Net operating income................................................... 1.34 0.21
Increase in unrealized appreciation on investments..................... 0.19 0.01
----------------- ------------------
Net increase in shareholders' equity from operations................... $ 1.53 $ 0.22
Distribution of net investment income.................................. 1.34 0.21
----------------- ------------------
Net asset value at end of period....................................... $ 13.80 $ 13.61
Per share market value at end of period................................ $ 17.25 $ 18.125
Total return(2).......................................................... 2.57% 22.23%
Common Stock outstanding at end of period................................ 11,081 11,069

Ratio/Supplemental Data
Net assets at end of period............................................ $ 152,723 $150,652
Ratio of operating expenses to average net assets(3)................... 1.13% 1.46%
Ratio of net operating income to average net assets(3)................. 9.75% 6.03%
</TABLE>

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

(1) Basic per share data.

(2) Amounts were not annualized for the results of the three month period ended
December 31, 1998.

(3) Amounts were annualized for the results of the three month period ended
December 31, 1997.

See accompanying notes.

F-10
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

1. ORGANIZATION

American Capital Strategies, Ltd., a Delaware corporation (the 'Company'),
was incorporated in 1986 to provide financial advisory services to and invest in
middle market companies. On August 29, 1997, the Company completed an initial
public offering ('IPO') of 10,382 shares of common stock ('Common Stock'), and
became a non-diversified close 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 middle market
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 continues
to provide 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, Chicago, and Dallas.

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 year ended December 31, 1996 the financial statements
are prepared on a consolidated basis with the accounts of 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 year ended December 31, 1998
and 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:

<TABLE>
<S> <C>
Investments in Erie Forge and Steel........................................ $2,736
Other assets............................................................... 791
Other liabilities.......................................................... 69
Deferred tax liability..................................................... 3,333
</TABLE>

As a result of these changes, the Company's financial statements for
periods through September 30, 1997 ('pre-RIC') are not comparable with the
financial statements for periods commencing after October 1, 1997 ('post-RIC').

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

F-11
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

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.

FINANCIAL ADVISORY AND PERFORMANCE FEE RECOGNITION

Financial advisory fees represent amounts received for providing advice and
analysis to middle market companies 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 FEE AND LOAN PROCESSING FEE RECOGNITION

The Company records loan fees as income on the closing date of the related
loan. Loan processing fees are recorded by the Company's wholly owned
subsidiary, CIC, 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 using the specific identification method. 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 stockholders 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 stockholders 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 year ended December 31, 1998 and the three
months ended December 31, 1997.

F-12
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

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 are carried at cost and are 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

As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ('SFAS') No. 130, 'Reporting Comprehensive Income' ('SFAS
130'). SFAS 130 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.

As of January 1, 1998, the Company adopted SFAS No. 131, 'Disclosures about
Segments of an Enterprise and Related Information' ('SFAS 131'). SFAS 131
established 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 established standards for related
disclosures about products and services, geographic areas and major customers.
Accordingly, the Company's reportable segments are its investing operations as a
business development company and the financial advisory operations of its
wholly-owned subsidiary, CIC (see Note 4).

As of January 1, 1998, the Company adopted SFAS No. 132, 'Employers'
Disclosures about Pensions and Other Postretirement Benefits--an amendment of
FASB Statements No. 87, 88, and 106' ('SFAS 132'). SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. Adoption of
SFAS 132 does not have a material impact on the financial statements of the
Company.

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, 'Accounting for Derivative Instruments and Hedging Activities' ('SFAS
133'). SFAS 133 establishes accounting and reporting standards for derivative
instruments. The statement requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Adoption of SFAS 133 is
not expected to have a material impact on the Company's financial statements or
disclosures.

F-13
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

3. INVESTMENTS

Investments consists of securities issued by various agencies of the
Federal government valued at $89,948 with maturities of less than one year from
the date of purchase and securities issued by privately-held companies valued at
$165,035. The securities issued by privately-held companies consist of senior
debt, subordinated debt with equity warrants, convertible preferred stock and
common stock. The debt securities have effective interest rates ranging from
8.8% to 22.4% and are payable in installments with final maturities from 5 to 10
years and are generally 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.

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 is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Assets:
Investments in portfolio companies, at fair value....................... $ 10,837 $ 10,361
Other assets, net....................................................... 1,359 991
------------ ------------
Total assets....................................................... $ 12,196 $ 11,352
------------ ------------
------------ ------------
Liabilities and Shareholder's Equity:
Deferred income taxes................................................... $ 2,921 $ 3,323
Due to parent........................................................... 778 861
Other liabilities....................................................... 2,111 299
Shareholder's equity.................................................... 6,386 6,869
------------ ------------
Total liabilities and shareholder's equity......................... $ 12,196 $ 11,352
------------ ------------
------------ ------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------
<S> <C> <C>
Operating income..................................... $ 5,227 $ 532
Operating expense.................................... 6,451 1,084
-------- -------
Net operating loss................................... (1,224) (552)
Increase in unrealized appreciation of investments... 481 605
Other................................................ 261 (29)
-------- -------
Net (loss) income.................................... $ (482) $ 24
-------- -------
-------- -------
</TABLE>

5. STOCK OPTION PLAN

The Company applies APB No. 25, 'Accounting for Stock Issued to Employees'
(APB 25), and related interpretations in accounting for its stock-based
compensation plan. In accordance with SFAS 123, 'Accounting for Stock-Based
Compensation' (SFAS 123), 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

F-14
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

5. STOCK OPTION PLAN--(CONTINUED)

the time the 1997 Stock Option Plan (the 1997 Plan) was established by the
Company. The 1997 Plan provides for the granting of options to purchase up to
1,328 shares of Common Stock at a price of not less than the fair market value
of the Common Stock on the date of grant to employees of the Company. On May 14,
1998, the Company authorized 500 additional shares to be granted under the 1997
Plan. As of December 31, 1998, there are 195 shares available to be granted
under the 1997 Plan.

Options granted under the 1997 Plan may be either incentive stock options
within the meaning of Section 422 of the Code or nonstatutory stock options.
Only employees of the Company and its subsidiaries are eligible to receive
incentive stock options under the 1997 Plan; such options generally vest over a
three year period. Incentive stock options must have a per share exercise price
of no less than the fair market value on the date of the grant. Nonstatutory
stock options granted under the 1997 Plan must have a per share exercise price
of no less than the fair market value on the date of the grant. Options granted
under the 1997 Plan may be exercised for a period of no more than ten years from
the date of grant.

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------
<S> <C> <C>
Net operating income
as reported...................................... $14,788 $2,270
pro forma........................................ $13,609 $2,030
Net increase in shareholder equity resulting from
operations
as reported...................................... $16,915 $2,437
pro forma........................................ $15,737 $2,197
</TABLE>

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.

For options granted during the year ended December 31, 1998, the Company
estimated a fair value per option on the date of grant of $4.72 using a
Black-Scholes option pricing model and the following assumptions: dividend yield
7.9%, risk free interest rate 5.1%, expected volatility factor .51, and expected
lives of the options of 7 years.

For options granted during the three months ended December 31, 1997, the
Company estimated a fair value per option on the date of grant of $2.44 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, and expected
lives of the options of 7 years.

F-15
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

5. STOCK OPTION PLAN--(CONTINUED)

A summary of the status of the Company's stock option plans as of and for
the year ended December 31, 1998 and as of and for the three months ended
December 31, 1997 is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
YEAR ENDED DECEMBER 31, 1998 1997
-------------------------------- -----------------------------------
WEIGHTED- WEIGHTED-
AVERAGE EXERCISE AVERAGE EXERCISE
COMMON STOCK PRICE COMMON STOCK PRICE
------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period................................. 1,297 $15.00 -- --
Granted.................................. 692 $18.42 1,303 $15.00
Exercised................................ (28) $15.00 -- --
Canceled................................. (328) $22.38 (6) $15.00
------ ------- ------ -------
Options outstanding, end of year......... 1,633 $14.96 1,297 $15.00
------ ------- ------ -------
------ ------- ------ -------
Options exercisable at year end.......... 1,633 1,297
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISABLE
RANGE OF EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 PRICE
- -------------------------------- -------------- ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Less than $14.01................ 62 9.7 years $14.00 62 $ 14.00
$14.01 to $15.00................ 1,571 8.9 years $15.00 1,571 $ 15.00
------ ---------------- ------- ------ -------
$14.00 to $15.00................ 1,633 8.9 years $14.96 1,633 $ 14.96
------ ---------------- ------- ------ -------
------ ---------------- ------- ------ -------
</TABLE>

In 1998, the Company issued 20 shares of Common Stock to an officer of the
Company in exchange for a note receivable in the amount of $300. The transaction
was executed pursuant to the 1997 Stock Option Plan, which allows the Company to
lend to its employees funds to pay for the exercise of stock options. All loans
made under this arrangement are fully secured by the value of the Common Stock
purchased. Interest is charged and paid on such loans at the Applicable Federal
Rate as defined in the Internal Revenue Code.

On November 6, 1997, the Board of Directors authorized the establishment of
a stock option plan for the non-employee directors. The Reinvestment Plan was
approved by stockholders at the annual meeting held on May 14, 1998. The Company
is awaiting approval of the Reinvestment Plan by the Securities and Exchange
Commission ('SEC'). Pending SEC approval, the Board of Directors has authorized
the Company to issue 15 options to each of the six non-employee directors.

6. RELATED PARTIES

Pursuant to a commitment entered into prior to the Company's IPO, ACS
Partners I, L.P., a Delaware partnership, was formed in 1997 with a wholly-owned
subsidiary of the Company, as sole general partner, and two 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 with 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. Upon completion of its IPO, the Company became subject to the 1940 Act and
an application was made to the SEC for an exemption from those provisions of the
1940 Act that could be construed as prohibiting an investment of the type made
by ACS Partners I, L.P. To date, the SEC has not acted on the Company's
exemption request. As of December 31, 1998 and December 31,

F-16
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

6. RELATED PARTIES--(CONTINUED)

1997, principals of the Company had invested $260 in ACS Partners I, L.P. for
investment commitments issued prior to the Company's IPO.

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.

7. NOTES PAYABLE

During December, 1998, the Company borrowed $80,948 secured by government
agency securities with a fair value of $89,948. The interest rate on the Note
was 4.25% and the note was fully repaid on January 4, 1999.

During November, 1998, the Company entered into a credit agreement with two
banks under which the Company has the ability to borrow up to $30 million.
Interest on borrowings is accrued and paid monthly at the prime rate (7.75% at
December 31, 1998). At December 31, 1998, the outstanding balance was $30
million, which is due in October, 2000. The credit facility is secured by the
certain investments of the Company.

During December, 1998, the Company borrowed $5 million from a corporation.
Interest is accrued and paid monthly at 7.75% and the principal of the note is
due on March 31, 1999.

During the year ended December 31, 1998, the nine months ended September
30, 1997 and the year ended December 31, 1996, the cash paid for interest was
approximately $56, $88, and $43, respectively. The weighted average interest
rates, including amortization of deferred finance costs, for the year ended
December 31, 1998, the nine months ended September 30, 1997 and the year ended
December 31, 1996 and 1995 were 5.9%, 16.9%, and 17.3%, respectively.

Due to the short term of the borrowings, the fair value of the notes
payable approximates cost.

8. 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 stockholders 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 year ended December 31, 1998 and the three
months ended December 31, 1997.

The components of the income tax provision were as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Current provision..................................... $ 2 $ 39
Deferred provision.................................... 2,126 120
------- ------
$ 2,128 $ 159
------- ------
</TABLE>

F-17
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

8. INCOME TAXES--(CONTINUED)

The differences between taxes at the Federal statutory tax rate and the
effective tax rate were as follows:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED
1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Statutory rate........................................ $ 1,803 $ 125
State taxes........................................... 342 15
Change in valuation
Allowance........................................ -- (26)
Other................................................. (17) 45
------- -------
Effective rate........................................ $ 2,128 $ 159
------- -------
------- -------
</TABLE>

During the nine months ended September 30, 1997 and the year ended December
31, 1996, cash paid for income taxes was approximately $2 and $1, respectively.

The aggregate gross and net unrealized appreciation over the cost for
Federal income tax purposes was $2,265, $7,414, and $3,399 as of December 31,
1998, December 31, 1997 and 1996, respectively. The aggregate cost of securities
for Federal income tax purposes was $252,718, $132,870 and $581, as of December
31, 1998, December 31,1997 and 1996, respectively.

As discussed in Note 1, the Company had been taxed under subchapter C prior
to October 1, 1997, when the Company converted to a subchapter M corporation for
Federal income tax purposes. As a subchapter M corporation, the Company is
entitled to deduct dividends it pays to stockholders from its income to
determine taxable income. The Company has distributed and intends to distribute
sufficient dividends to eliminate taxable income. As a result, the Company does
not have a provision for income taxes for the year ended December 31, 1998 and
the three months ended December 31, 1997.

The Company requested a ruling in June 1997 from the IRS seeking to clarify
the tax consequences of the conversion from taxation under subchapter C to
subchapter M. The Company was seeking to avoid having to incur a tax liability
associated with the unrealized appreciation of assets whose fair market value
exceeded their basis upon the ruling from the IRS in regards to the treatment of
the unrecognized gain. Provided the Company meets all the requirements to be
taxed as a RIC, it will be permitted to elect to be subject to rules similar to
the rules of Section 1374 of the Internal Revenue Code with respect to any
unrealized gain inherent in its assets, upon its conversion to RIC status
('built-in gain'). Generally, this treatment allows the deferring of recognition
of the built-in gain. If the Company were to divest itself of any assets in
which it had built-in gains prior to the end of a ten year recognition period,
the Company would then be subject to the extent of its built-in gain.

9. COMMITMENTS AND CONTINGENCIES

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 the
year ended December 31, 1998, the three months ended December 31, 1997, the nine
months ended September 30, 1997 and the year ended December 31, 1996 was
approximately $60, $73, $97, and $101, respectively.

F-18
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

9. COMMITMENTS AND CONTINGENCIES--(CONTINUED)

Future minimum lease payments under non-cancelable operating leases at
December 31, 1998 were as follows:

<TABLE>
<S> <C>
1999....................................................................... $ 240
2000....................................................................... 241
2001....................................................................... 248
2002....................................................................... 236
2003 and thereafter........................................................ 374
------
Total.................................................................... $1,339
------
------
</TABLE>

In addition, at December 31, 1998, the Company had commitments $7.4 million
to three portfolio companies. These commitments are composed of two working
capital credit facilities and one acquisition credit facility. The commitments
are subject to the borrowers meeting certain criteria. The terms of the
borrowings subject to commitment are comparable to the terms of other debt
securities in the Company's portfolio.

10. EMPLOYEE STOCK OWNERSHIP PLAN

The Company maintains an ESOP, which includes all employees and is fully
funded on a pro rata basis by the Company and its wholly owned subsidiary, CIC.
Contributions are made at the Company's discretion up to the lesser of $30 or
25% of annual compensation expense for each employee. Employees are not fully
vested until completing five years of service. For the year ended December 31,
1998, the Company and CIC contributed $97 to the ESOP, or 3% of total eligible
employee compensation.

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.

11. CAPITAL STOCK

In July, 1997, all unearned ESOP shares became earned and were allocated to
the ESOP accounts of the Company's 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 and increased its authorized shares of Common Stock to
20,000.

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 .029859 shares.
Outstanding shares and per share amounts for all periods presented have been
restated to reflect this stock split.

On August 29, 1997, the Company completed its IPO and sold 10,382 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 443
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 declared dividends of $14,849, or $1.34 per share for the year
ended December 31, 1998; at year end, $1,222 remained accrued and undistributed
to stockholders. For the three months ended December 31, 1997, the Company
distributed $2,324, or $0.21 per share, to its stockholders. For Federal income
tax purposes, the distributions were 100% from ordinary income. In addition, in
accordance with regulations governing RIC's,

F-19
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

11. CAPITAL STOCK--(CONTINUED)

the Company notified stockholders of its intention to periodically repurchase
its outstanding Common Stock. Following release of this notification, the
Company repurchased 23 shares of it Common Stock at a weighted average price of
$10.12 per share.

12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share for the year ended December 31, 1998 and 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.

<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------
<S> <C> <C>
Numerator for basic and diluted net increase in
shareholders' equity resulting from operations..... $16,915 $ 2,437
Denominator for basic-weighted average shares........ 11,068 11,069
Employee stock options............................... 269 251
Warrants............................................. 87 85
----------------- ----------
Dilutive potential shares............................ 356 336
Denominator for diluted.............................. 11,424 11,405
----------------- ----------
Basic earnings per share............................. $ 1.53 $ 0.22
Diluted earnings per share........................... $ 1.48 $ 0.21
</TABLE>

13. SUBSEQUENT EVENTS

During February 1999, the Company obtained a commitment for a $100,000
credit facility. The credit facility is funded by a commercial paper conduit and
requires the Company to create ACAS Funding, a bankruptcy remote wholly-owned
subsidiary. The Company is required to make a capital contribution of $115,000
consisting of loans and any related equity warrants to ACAS Funding. ACAS
Funding will then acquire loans and related equity warrants originated by the
Company and may borrow up to 50% of the eligible loan balance subject to certain
concentration limits. The term of the facility is two years and interest on
borrowings will be charged at LIBOR plus 2.50%. The full amount of principal is
due at the end of the term and interest is payable monthly.

F-20
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Investments at fair value (cost of $247,238 and $252,718, respectively)................ $ 251,489 $254,983
Cash and cash equivalents.............................................................. 1,231 6,149
Investment in unconsolidated operating subsidiary...................................... 5,991 6,386
Due from unconsolidated operating subsidiary........................................... 1,818 778
Interest receivable.................................................................... 2,030 1,561
Other.................................................................................. 992 162
--------- ------------
Total assets.................................................................... $ 263,551 $270,019
--------- ------------
--------- ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities............................................... $ 914 $ 126
Accrued dividends payable.............................................................. -- 1,222
Notes payable.......................................................................... 77,091 85,948
Revolving credit facility.............................................................. 30,000 30,000
--------- ------------
Total liabilities...................................................................... 108,005 117,296
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 11,122 and 11,081 issued
and outstanding, respectively..................................................... 111 111
Capital in excess of par value....................................................... 145,879 145,245
Note receivable from sale of common stock............................................ (580) (300)
Undistributed (distributions in excess of) net realized earnings..................... 372 (116)
Unrealized appreciation of investments............................................... 9,764 7,783
--------- ------------
Total shareholders' equity...................................................... 155,546 152,723
--------- ------------
Total liabilities and shareholders' equity...................................... $ 263,551 $270,019
--------- ------------
--------- ------------
</TABLE>

See accompanying notes.

F-21
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------------------------------------- -------- ----------
<S> <C> <C> <C>
SENIOR DEBT--10.92%
BIW Connector Systems, LLC......................... Manufacturing......................... $ 3,404 $ 3,404
Chance Coach, Inc.(2).............................. Bus Manufacturer...................... 1,232 1,232
JAG Industries, Inc.(2)............................ Manufacturing......................... 1,200 1,200
Confluence Holdings Corp........................... Canoes & Kayaks....................... 11,475 11,475
Cycle Gear, Inc.................................... Motor Cycle Accessories............... 750 750
Euro-Caribe, Inc.(2)............................... Meat Processing....................... 7,062 7,062
Patriot Medical Technologies, Inc.................. Repair Services....................... 3,000 3,000
-------- ----------
Subtotal.............................................................................. 28,123 28,123
<CAPTION>

SUBORDINATED DEBT--46.89%
<S> <C> <C> <C>
BIW Connector Systems, LLC......................... Manufacturing......................... 6,740 6,740
Westwind Holdings, Inc............................. Restaurant............................ 2,945 2,945
JAG Industries, Inc.(2)............................ Manufacturing......................... 2,346 2,346
Specialty Transportation Services, Inc............. Waste Hauler.......................... 7,386 7,386
Chance Coach, Inc.(2).............................. Bus Manufacturer...................... 7,171 7,171
The L.A. Studios, Inc.............................. Audio Production...................... 2,411 2,411
Decorative Surfaces International, Inc.(2)......... Decorative Paper & Vinyl Mfg.......... 5,516 5,516
New Piper Aircraft, Inc............................ Aircraft Manufacturing................ 17,897 17,897
Electrolux, LLC.................................... Vacuum Cleaner........................ 7,563 7,563
Cycle Gear, Inc.................................... Motor Cycle Accessories............... 639 639
Confluence Holdings Corp........................... Canoes & Kayaks....................... 5,226 5,226
Euro-Caribe, Inc.(2)............................... Meat Processing....................... 8,921 8,921
ConStar International, Inc......................... Electrical............................ 12,877 12,877
Centennial Broadcasting, Inc....................... Radio Stations........................ 15,495 15,495
Lion Brewery, Inc.(2).............................. Malt Beverages........................ 5,958 5,958
Auxi-Health, Inc................................... Home Health Care...................... 9,532 9,532
Patriot Medical Technologies, Inc.................. Repair Services....................... 2,090 2,090
-------- ----------
Subtotal.............................................................................. 120,713 120,713
<CAPTION>

CONVERTIBLE PREFERRED STOCK--1.12%
<S> <C> <C> <C>
Chance Coach, Inc.(2) 12% dividend convertible into
20% of Co........................................ Bus Manufacturer...................... 2,000 2,214
Decorative Surfaces International, Inc.(2) prime
rate plus 4% dividend convertible into 2.9% of
Co............................................... Decorative Paper & Vinyl Mfg.......... 665 665
-------- ----------
Subtotal.............................................................................. 2,665 2,879
<CAPTION>

COMMON STOCK WARRANTS(1)--10.70%
<S> <C> <C> <C>
BIW Connector Systems, LLC 8% of LLC............... Manufacturing......................... 652 513
Westwind Holdings, Inc. 5% of Co................... Restaurant............................ 350 271
JAG Industries, Inc.(2) 75% of Co.................. Manufacturing......................... 505 454
Specialty Transportation Services, Inc. up to 39.1%
of Co............................................ Waste Hauler.......................... 694 1,007
Chance Coach, Inc.(2) 43.7% of Co.................. Bus Manufacturer...................... 4,041 4,839
The L.A. Studios, Inc. 17% of Co................... Audio Production...................... 902 839
</TABLE>

F-22
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS--(CONTINUED)

MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------------------------------------- -------- ----------
COMMON STOCK WARRANTS(1)--10.70%--(CONTINUED)
<S> <C> <C> <C>
Decorative Surfaces International, Inc.(2) 42.3% of
Co............................................... Decorative Paper & Vinyl Mfg.......... $ 4,571 $ 6,805
New Piper Aircraft, Inc. 4% of Co.................. Aircraft Manufacturing................ 2,231 2,528
Electrolux, LLC 2.5% of Co......................... Vacuum Cleaner........................ 246 642
Cycle Gear, Inc. 16.5% of Co....................... Motor Cycle Accessories............... 374 374
Confluence Holdings Corp. 18% of Co................ Canoes & Kayaks....................... 1,319 1,319
Euro-Caribe, Inc.(2) 37% of Co..................... Meat Processing....................... 1,110 1,110
ConStar International, Inc. 17.5% of Co............ Electrical............................ 3,171 3,171
Lion Brewery, Inc.(2) 54% of Co.................... Malt Beverages........................ 675 675
Auxi Health, Inc. 20% of Co........................ Home Health Care...................... 2,599 2,599
Patriot Medical Technologies, Inc. 17% of Co....... Repair Services....................... 410 410
-------- ----------
Subtotal.............................................................................. 23,850 27,556
<CAPTION>

COMMON STOCK(1)--1.25%
<S> <C> <C> <C>

Specialty Transportation Services, Inc. 9.1% of
Co............................................... Waste Hauler.......................... 500 458
Chance Coach, Inc.(2) 18.3% of Co.................. Bus Manufacturer...................... 1,896 2,269
ConStar International, Inc. 2.8%................... Electrical............................ 500 500
-------- ----------
Subtotal.............................................................................. 2,896 3,227
-------- ----------
Subtotal--non-publicly traded securities--63.15%...................................... 178,247 182,498
<CAPTION>

GOVERNMENT SECURITIES--26.79%
<S> <C> <C> <C>

FMC Discount Note due 4/1/99............................................................... 68,991 68,991
-------- ----------
Total Investments..................................................................... 247,238 251,489
<CAPTION>

INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--2.33%
<S> <C> <C> <C>

ACS Capital Investments Corporation(1)(2)-- 100% of
Co............................................... Investment Banking.................... 403 5,991
-------- ----------
Totals................................................................................ $247,641 $ 257,480
-------- ----------
-------- ----------
</TABLE>

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

(1) Non-income producing

(2) Affiliate

See accompanying notes.

F-23
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
MARCH 31,
--------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Operating income:
Interest and dividend income................................................... $ 5,854 $ 2,680
Loan fees...................................................................... 666 612
-------------- --------------
Total operating income......................................................... 6,520 3,292
Operating expenses:
Salaries and benefits.......................................................... 310 170
General, administrative and other.............................................. 294 274
Interest....................................................................... 794 --
-------------- --------------
Total operating expenses.................................................... 1,398 444
Operating income before equity in (losses) earnings of unconsolidated operating
subsidiary..................................................................... 5,122 2,848
Equity in (loss) earnings of unconsolidated operating subsidiary................. (395) 101
-------------- --------------
Net operating income............................................................. 4,727 2,949
Net realized gain on investments................................................. 316 --
Increase in unrealized appreciation of investments............................... 1,981 28
-------------- --------------
Net increase in shareholders' equity resulting from operations................... $ 7,024 $ 2,977
-------------- --------------
-------------- --------------
Net operating income per share:
Basic.................................................................. $ 0.43 $ 0.27
Diluted................................................................ $ 0.42 $ 0.26
Net increase in shareholders' equity resulting from operations per share:
Basic.................................................................. $ 0.63 $ 0.27
Diluted................................................................ $ 0.62 $ 0.26
Weighted average shares of common stock outstanding:
Basic.................................................................. 11,070 11,069
Diluted................................................................ 11,279 11,480
</TABLE>

See accompanying notes.

F-24
<PAGE>

AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN NOTES RECEIVABLE UNDISTRIBUTED UNREALIZED TOTAL
--------------- EXCESS OF FROM SALE OF NET REALIZED APPRECIATION SHAREHOLDERS'
SHARES AMOUNT PAR VALUE COMMON STOCK EARNINGS INVESTMENTS EQUITY
------ ------ ---------- ---------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997...... 11,069 $111 $ 144,940 $ -- $ (55) $5,656 $ 150,652
Net increase in shareholder's
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
------ ------ ---------- ------ ------------- ------------ -------------
------ ------ ---------- ------ ------------- ------------ -------------
Balance at December 31, 1998 11,081 $111 $ 145,245 $ (300) $ (116) $7,783 $ 152,723
Issuance of common stock under
the 1997 Stock Option Plan... 20 -- 280 -- -- -- 280
Issue of common stock under the
Dividend Reinvestment Plan... 11 -- 188 -- -- -- 188
Issuance of restricted
stock........................ 10 -- 166 -- -- -- 166
Issuance of note receivable from
sale of common
stock........................ -- -- -- (280) -- -- (280)
Net increase in shareholders'
equity resulting from
operations................... -- -- -- -- 5,043 1,981 7,024
Distributions................... -- -- -- -- (4,555) -- (4,555)
------ ------ ---------- ------ ------------- ------------ -------------
Balance at March 31, 1999......... 11,122 $111 $ 145,879 $ (580) $ 372 $9,764 $ 155,546
------ ------ ---------- ------ ------------- ------------ -------------
------ ------ ---------- ------ ------------- ------------ -------------
</TABLE>

See accompanying notes.

F-25
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net increase in shareholders' equity resulting from operations.......................... $ 7,024 $ 2,977
Adjustments to reconcile net increase in shareholders' equity resulting from operations
to net cash provided by operating activities:
Unrealized appreciation of investments.................................................. (1,981) (28)
Net realized gain on investments........................................................ (316) --
Net amortization of securities.......................................................... -- (845)
Accretion of loan discounts............................................................. (408) (89)
Amortization of deferred finance costs.................................................. 25 --
Amortization of goodwill................................................................ 63 --
Increase in interest receivable......................................................... (469) (402)
Increase in accrued payment-in-kind dividend and interest............................... (380) --
(Increase) decrease in due from unconsolidated subsidiary............................... (1,040) 149
Increase in other assets................................................................ (153) (80)
Increase in accounts payable and accrued liabilities.................................... 788 116
Loss (earnings) of unconsolidated operating subsidiary.................................. 395 (101)
-------- --------
Net cash provided by operating activities................................................. 3,548 1,697

INVESTING ACTIVITIES
Proceeds from sale or maturity of investments........................................... 15,774 32,080
Principal repayments.................................................................... 6,860 303
Purchase of investments................................................................. (28,012) (29,715)
Purchase of securities.................................................................. (6,900) --
-------- --------
Net cash (used in) provided by investing activities....................................... (12,278) 2,668

FINANCING ACTIVITIES
Drawings on revolving credit facilities, net............................................ 10,000 --
Increase in deferred financing costs.................................................... (599) --
Issuance of common stock................................................................ 188 --
Distributions paid...................................................................... (5,777) (2,767)
-------- --------
Net cash provided by (used in) financing activities....................................... 3,812 (2,767)
-------- --------
Net (decrease) increase in cash and cash equivalents...................................... (4,918) 1,598
Cash and cash equivalents at beginning of period.......................................... 6,149 8,862
-------- --------
Cash and cash equivalents at end of period................................................ $ 1,231 $ 10,460
-------- --------
-------- --------
Non-cash financing activities:
Note receivable issued in exchange for common stock....................................... $ 280 $ --
Net repayment of margin borrowings through sale of securities............................. 18,857 --
</TABLE>

See accompanying notes.

F-26
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999
------------------
<S> <C>
Per Share Data(1)
Net asset value at beginning of the period................................................ $ 13.80
Net operating income...................................................................... 0.43
Increase in unrealized appreciation on investments........................................ 0.20
------------------

Net increase in shareholders' equity from operations...................................... $ 0.63
Distribution of net investment income..................................................... 0.41
------------------
Net asset value at end of period.......................................................... $ 14.02

Per share market value at beginning of period............................................. $ 17.250
Per share market value at end of period................................................... $ 17.125
Total return(2)........................................................................... %1.65
Shares outstanding at end of period....................................................... 11,122

Ratio/Supplemental Data
Net assets at end of period............................................................... $ 155,546
Ratio of operating expenses to average net assets......................................... %0.91
Ratio of net operating income to average net assets....................................... %3.07

1998
------------------
<S> <C>
Per Share Data(1)
Net asset value at beginning of the period................................................ $ 13.61
Net operating income...................................................................... 0.27
Increase in unrealized appreciation on investments........................................ --
------------------
Net increase in shareholders' equity from operations...................................... $ 0.27
Distribution of net investment income..................................................... 0.25
------------------
Net asset value at end of period.......................................................... $ 13.63
Per share market value at beginning of period............................................. $ 18.125
Per share market value at end of period................................................... $ 22.125
Total return(2)........................................................................... 23.45%

Shares outstanding at end of period....................................................... 11,069
Ratio/Supplemental Data
Net assets at end of period............................................................... $ 150,862
Ratio of operating expenses to average net assets......................................... %0.29
Ratio of net operating income to average net assets....................................... %1.96
</TABLE>

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

(1) Basic per share data.

(2) Amounts were not annualized for the results of the three month periods
ended March 31, 1999 and 1998.

See accompanying notes.

F-27
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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 the 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 for
the year ended December 31, 1998, as filed with the Securities and Exchange
Commission.

Use of Estimates in Preparation of Financial Statements

2. ORGANIZATION

American Capital Strategies, Ltd., a Delaware corporation (the 'Company'),
was incorporated in 1986 to provide financial advisory services to and invest in
middle market companies. On August 29, 1997, the Company completed an initial
public offering ('IPO') of 10,382 shares of 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 middle market
companies. 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 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, Chicago, and Dallas.

F-28
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

3. INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY

<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Assets:
Investments in portfolio companies, at fair value......... $ 9,657 $10,837
Other assets, net......................................... 2,532 1,359
-------------- -----------------
Total assets............................................ $ 12,189 $12,196
-------------- -----------------
-------------- -----------------
Liabilities and Shareholder's Equity:
Deferred income taxes..................................... $ 2,678 $ 2,921
Due to parent............................................. 1,818 778
Other liabilities......................................... 1,702 2,111
Shareholder's equity...................................... 5,991 6,386
-------------- -----------------
Total liabilities and shareholder's equity.............. $ 12,189 $12,196
-------------- -----------------
-------------- -----------------
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Operating income...................................................... $ 1,435 $ 1,779
Operating expense..................................................... 2,044 1,546
---------- ----------
Net operating loss.................................................... (609) 233
Realized gains on investments......................................... 925 --
Change in unrealized appreciation of investments...................... (954) (96)
Other income (expense)................................................ 243 (36)
---------- ----------
Net (loss) income..................................................... $ (395) $ 101
---------- ----------
---------- ----------
</TABLE>

4. NOTES PAYABLE

During March 1999, the Company borrowed $62,091 secured by government
agency securities with a fair value of $68,991. The interest rate on the Note
was 6.0% and the note was fully repaid on April 1, 1999.

During November 1998, the Company entered into a credit agreement with two
banks under which the Company has the ability to borrow up to $30 million.
Interest on borrowings is accrued and paid monthly at the prime rate (7.75% at
March 31, 1999). At March 31, 1999, the outstanding balance was $30 million,
which is due in October, 2000. The credit facility is secured by certain
investments of the Company.

During February 1999, the Company borrowed $15 million from a corporation.
Interest is accrued and paid monthly at 7.75%. The note was fully repaid on
April 30, 1999.

Due to the short term of the borrowings, the fair value of the notes
payable approximates cost.

As of March 31, 1999, the Company closed a maximum $100,000 debt funding
facility. In connection with the closing, the Company established ACS Funding
Trust I (the 'Trust'), an affiliated business trust and contributed or sold to
the Trust approximately $157,000 in loans. Subject to certain conditions, the
Company will remain servicer of the loans. Simultaneously with the initial
contribution, the Trust entered into a loan agreement with First Union Capital
Markets Corp., as deal agent, and certain other parties providing for loans in
an amount up to 50% of the eligible loan balance subject to certain
concentration limits. The term of the facility is two years

F-29
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

4. NOTES PAYABLE--(CONTINUED)

and interest on borrowings will be charged at LIBOR plus 2.50%. The full amount
of principal is payable over two years beginning at the end of the term and
interest is payable monthly. The transfer of assets to the Trust and the related
borrowings by the Trust will be treated as a financing arrangement by the
Company under Statement of Financial Accounting Standards No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.'

5. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 1999 and the three
months ended March 31, 1998.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Numerator for basic and diluted net increase in shareholders' equity
resulting from operations........................................... $ 7,024 $ 2,977
Denominator for basic-weighted average shares......................... 11,070 11,069
Employee stock options................................................ 196 307
Warrants.............................................................. 13 104
---------- ----------
Dilutive potential shares............................................. 209 411
Denominator for diluted............................................... 11,279 11,480
---------- ----------
Basic earnings per share.............................................. $ 0.63 $ 0.27
Diluted earnings per share............................................ $ 0.62 $ 0.26
---------- ----------
---------- ----------
</TABLE>

6. REALIZED GAIN ON INVESTMENTS

During March, 1999, the Company sold its investment in Four S Baking
Company. The Company's investment included senior debt, subordinated debt,
preferred stock, common stock and common stock warrants. The Company received
$7,163 in total proceeds from the sale and recognized a net realized gain of
$316. The realized gain was comprised of a $331 realization of unamortized loan
discounts on the subordinated debt and a net loss of $15 on the common stock and
warrants. In addition, the Company earned prepayment fees of $87 from the early
repayment of the senior and subordinated debt. In conjunction with the sale, no
dealer, salesman or other person is authorized hereby to give any information or
to make any representation not contained in this prospectus or any prospectus
supplement and, if given or made, such information or representation must not be
relied upon as having been authorized by the company or any underwriter or
agent. This prospectus and any prospectus supplement does not constitute an
offer to sell or a solicitation or any offer to buy any security other than the
securities offered hereby, nor does it constitute an offer to sell or a
solicitation of an offer to buy any securities offered hereby to any person in
any jurisdiction in which it is unlawful to make such an offer or solicitation
to such person. Neither the delivery of this prospectus or any prospectus
supplement nor any sale made hereunder or thereunder shall under any
circumstances imply that the information contained herein or therein is correct
as of any date subsequent to their respective dates.

7. SUBSEQUENT EVENTS

On May 6, 1999 the Company received shareholder approval to increase the
number of authorized shares of Common Stock from 20,000 to 70,000.

F-30
<PAGE>
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.

SUBJECT TO COMPLETION , 1999.

AMERICAN CAPITAL STRATEGIES, LTD.

STATEMENT OF ADDITIONAL INFORMATION , 1999

This Statement of Additional Information ('SAI') is not a prospectus, and
should be read in conjunction with the Prospectus dated __________, 1999
relating to this offering (the 'Prospectus') and the accompanying prospectus
supplement, if any. A copy of the Prospectus and the relevant accompanying
prospectus supplement, if any, may be obtained by calling American Capital
Strategies, Ltd. at (301) 951-6122 and asking for Shareholder Relations. Terms
not defined herein have the same meaning as given to them in the Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE IN THE LOCATION
STATEMENT OF RELATED
OF ADDITIONAL DISCLOSURE IN
INFORMATION THE PROSPECTUS
-------------- ---------------
<S> <C> <C>
General Information and History........................................... SAI-2 1;27
Investment Objective and Policies......................................... SAI-2 18
Management................................................................ SAI-3 40
Control Persons and Principal Holders of Common Stock..................... SAI-6 16
Investment Advisory Services.............................................. SAI-7 --
Safekeeping, Transfer and Dividend Paying Agent and Registrar............. SAI-7 53
Financial Statements...................................................... SAI-7 5;18
Brokerage Allocation and Other Practices.................................. SAI-7 --
Tax Status................................................................ SAI-7 --
</TABLE>

GENERAL INFORMATION AND HISTORY

This SAI contains information with respect to American Capital Strategies,
Ltd. (the 'Company'). The Company, a Delaware corporation, was incorporated in
1986 to provide financial advisory services to and invest in middle market
companies. 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').

INVESTMENT OBJECTIVES AND POLICIES

The Company's investment objectives are to achieve a high level of current
income from the collection of interest and advisory fees, as well as long-term
growth in its shareholders' equity through the appreciation in value of the
Company's equity interests in the companies in which it invests. The Company
will at all times seek to conduct its business so as to retain its status as a
BDC and to qualify to be taxed as a RIC. The Company seeks to achieve its
investment objectives by lending to and investing primarily in middle market
companies in a variety of industries and in diverse geographic locations
primarily in the United States. At March 31, 1999 the

SAI-1
<PAGE>
Company's investment portfolio totaled $182 million. A discussion of the
selected financial data, supplementary financial information and management's
discussion and analysis of financial condition and results of operations is
included in the Prospectus. In addition to its core lending business, 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, Chicago, and Dallas.

MANAGEMENT

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Under Commission rules applicable to BDCs, the Company is required to set
forth certain information regarding the compensation of certain of its executive
officers and directors.

The following table sets forth certain details of the aggregate
compensation paid to each of the three highest paid executive officers of the
Company during 1998, as well as to each of the Company's executive officers who
was also a director. For the aggregate compensation received by each
non-employee director, see 'Director Compensation.'

COMPENSATION TABLE

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS SECURITIES
COMPENSATION ACCRUED AS PART OF UNDERLYING
NAME OF PERSON, POSITION FROM COMPANY(1) COMPANY EXPENSE(2) OPTIONS/SARS(3)
- --------------------------------------------------------- --------------- ------------------ ---------------
<S> <C> <C> <C>
Malon Wilkus, President, Chief Executive Officer and
Chairman of the Board of Directors..................... $ 363,853 $4,800 35,000
David Gladstone, Vice Chairman of the Board of
Directors.............................................. $ 366,853 $4,800 --
Adam Blumenthal, Executive Vice President, Secretary and
Director............................................... $ 412,710 $4,800 25,000
</TABLE>

- ------------------
(1) The aggregate compensation from the Company for Messrs. Wilkus, Gladstone
and Blumenthal includes salary in the amount of $150,000, $150,000 and
$168,750 and bonus in the amount of $216,853, $216,853 and $243,960,
respectively. The executive officers did not receive any awards of
restricted stock or any payouts pursuant to a long-term incentive plan.

(2) Represents the value of the Company's Common Stock allocated in 1998 to the
executive officer's account in the Company ESOP. The named executive
officer's estimated annual benefits upon retirement are not determinable.

(3) On May 14, 1998, Messrs. Wilkus and Blumenthal were granted options to
purchase 35,000 and 25,000 shares of Common Stock, respectively, at an
exercise price of $23.50 per share that were due to expire on May 14, 2008.
These options were cancelled on September 14, 1998 in connection with an
option repricing pursuant to which Messrs. Wilkus and Blumenthal received
options to purchase 35,000 and 25,000 shares of Common Stock, respectively,
at an exercise price of $15.00 per share due to expire on September 14,
2008. On the date of the repricing, the closing price of the Company's
Common Stock on the NASDAQ Stock Market was $14.56 per share.

SAI-2
<PAGE>

DIRECTOR COMPENSATION

During 1998, each non-employee director received an annual retainer fee of
$10,000 and a fee of $1,000 for each meeting of the Board of Directors or each
separate committee meeting attended. For 1999, each non-employee director will
be paid an annual retainer of $10,000 and a fee of $1,000 for each meeting of
the Board of Directors or each separate committee meeting attended. Directors
are reimbursed for out-of-pocket expenses incurred in connection with Board and
committee meetings. Directors who are employees of the Company do not receive
additional compensation for service as a member of the Board of Directors. The
following table sets forth the compensation received by each non-employee
director during 1998:

<TABLE>
<CAPTION>
NAME 1998 COMPENSATION
- ---------------------------------------------------------------- -----------------
<S> <C>
Robert L. Allbritton............................................ $17,000
Landon Butler(1)................................................ $12,000
Neil M. Hahl.................................................... $25,000
Philip R. Harper................................................ $24,000
Stan Lundine.................................................... $20,000
Alvin N. Puryear(2)............................................. $ 5,334
Stephen P. Walko................................................ $20,000
</TABLE>

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

(1) Resigned from the Board of Directors effective August 14,
1998.

(2) Joined the Board of Directors effective September 15, 1998.

LONG TERM INCENTIVE PLANS

The Company maintains three long term incentive plans in which executive
officers and directors of the Company participate: (i) the ESOP in which all
employees of the Company are eligible to participate after meeting minimum
service requirements, (ii) the 1997 Stock Option Plan (the 'Employee Option
Plan') in which all employees can participate and (iii) the 1997 Disinterested
Director Stock Option Plan (the 'Director Option Plan') in which only
non-employee directors can participate. The Company maintains no stock
appreciation rights plan or defined benefit or actuarial plan.

ESOP. The Company maintains the ESOP for the benefit of its employees and
enables them to share in the growth of the Company. The ESOP is a combination
money purchase and stock bonus plan, designed to be invested primarily in Common
Stock of the Company and qualified under section 401(a) of the Internal Revenue
Code of 1986, as amended (the 'Code'). The ESOP provides that ESOP participants
will receive allocations of Company stock at least equal to 3% of their annual
compensation, up to certain statutory maximums. The Company has the ability to
make additional contributions also subject to certain statutory maximums. Each
ESOP participant vests in his or her ESOP account over a five-year period
beginning on the date of first employment.

Employee Option Plan. The Employee Option Plan was established for the
purpose of attracting and retaining executive officers and other key employees.
Non-employee Directors may not participate. Options for a maximum of 1,828,252
shares of Common Stock were subject to issuance under the Employee Option Plan.
Of such amount, options for 1,617,778 shares of Common Stock are outstanding and
options for 48,000 shares of Common Stock have been exercised. The Compensation
Committee administers the Option Plan and may grant options for a maximum of
608,782 shares to any single participant. The Compensation Committee uses such
criteria as it deems important to determine who will receive awards and the
number of awarded options. The Compensation Committee has the authority to set
the exercise price for options and to adjust the exercise price following the
occurrence of events such as stock splits, dividends, distribution and
recapitalizations. Options may be exercised during a period of no more than ten
years following the date of grant. The Compensation Committee has the discretion
to set the vesting period for options and to permit the acceleration of vesting
under certain circumstances. Vesting is automatically accelerated upon the
occurrence of specified change of control transactions.

SAI-3
<PAGE>

SAI-4
<PAGE>

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK APPRECIATION
UNDERLYING EMPLOYEES EXERCISE(1) FOR OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION -------------------
GRANTED (#SHS.) YEAR PRICE ($/SH.) DATE(2) 5%($) 10%($)
--------------- ------------- ------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Malon Wilkus................... 35,000 5.1% 15.00 9/14/2008 330,170 836,715
Adam Blumenthal................ 25,000 3.6% 15.00 9/14/2008 235,835 597,653
Roland Cline................... 15,000 2.2% 15.00 9/14/2008 141,501 358,592
John Erickson.................. 25,000 3.6% 15.00 9/14/2008 235,835 597,653
Stephen L. Hester.............. 5,000 0.7% 15.00 9/14/2008 47,167 119,531
</TABLE>

- ------------------
(1) On September 14, 1998, the Company repriced each of the options previously
awarded to the named executive officers thereby changing the exercise price
of such options from $23.50 per share to $15.00 per share. On the date of
the repricing, the closing trading price of the Company's Common Stock on
the NASDAQ Stock Market was $14.56 per share.
(2) On September 14, 1998, the Company repriced each of the options previously
awarded to the named executive officers thereby changing the expiration date
of such options from May 14, 2008 to September 14, 2008.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF COMMON STOCK

The following table sets forth, as of March 22, 1999 (unless otherwise
indicated), the beneficial ownership of each current director, each nominee for
director, each of the executive officers named in the Compensation Table (the
'Compensated Persons'), the executive officers and directors as a group and each
stockholder known to management of the Company to own beneficially more than 5%
of the outstanding shares of Common Stock of the Company. Unless otherwise
indicated, the Company believes that the beneficial owner set forth in the table
has sole voting and investment power.

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS(1)
- -------------------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Capital Research and Management Company(2)................................ 695,000 6.3%
333 South Hope Street
Los Angeles, California 90071

DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------
<S> <C> <C>
Malon Wilkus.............................................................. 828,567(3) 7.4%
3 Bethesda Metro Center
Suite 860
Bethesda, Maryland 20814
David Gladstone........................................................... 682,893(4) 6.1%
3 Bethesda Metro Center
Suite 860
Bethesda, Maryland 20814
Adam Blumenthal........................................................... 349,686(5) 3.1%
Roland Cline.............................................................. 218,601(6) 2.0%
John Erickson............................................................. 32,228(7) *
Stephen L. Hester......................................................... 61,019(8) *
Robert L. Allbritton...................................................... 5,057 *
Neil M. Hahl.............................................................. 2,177 *
Philip R. Harper.......................................................... 3,265 *
Stan Lundine.............................................................. 400 *
Alvin N. Puryear.......................................................... 3,000 *
</TABLE>

SAI-5
<PAGE>

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
DIRECTORS AND EXECUTIVE OFFICERS OWNERSHIP PERCENT OF CLASS(1)
- -------------------------------------------------------------------------- ----------------- -------------------
Stephen P. Walko.......................................................... 2,500 *
<S> <C> <C>

Officers and directors as a group (12 persons)............................ 2,189,393 19.6%
</TABLE>

- ------------------
* Less than one percent.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock subject to options held by directors and executive officers of
the Company that are exercisable within 60 days of March 22, 1999, are
deemed outstanding for the purposes of computing such director's or
executive officer's beneficial ownership.
(2) Capital Research and Management Company ('Capital'), a registered investment
advisor, is deemed to have beneficial ownership of 695,000 shares of Common
Stock believed to be outstanding as a result of acting as investment adviser
to various investment companies. The information in this footnote was
obtained from Schedule 13-G filed with the Securities and Exchange
Commission by Capital for calendar year 1998.
(3) Includes 44,375 shares allocated to the account of Mr. Wilkus as a
participant in the ESOP over which Mr. Wilkus has voting power under the
terms of the Company ESOP and 117,428 shares issuable upon the exercise of
options.
(4) Includes 2,246 shares allocated to the account of Mr. Gladstone as a
participant in the Company's Employee Stock Ownership Plan ('ESOP') over
which Mr. Gladstone has voting power under terms of the ESOP and 608,782
shares issuable upon the exercise of options.
(5) Includes 36,898 shares allocated to the account of Mr. Blumenthal as a
participant in the ESOP over which Mr. Blumenthal has voting power under
terms of the ESOP and 312,788 shares issuable upon the exercise of options.
(6) Includes 37,569 shares allocated to the account of Mr. Cline as a
participant in the ESOP over which Mr. Cline has voting power under terms of
the ESOP and 181,032 shares issuable upon the exercise of options.
(7) Includes 228 shares allocated to the account of Mr. Erickson as a
participant in the ESOP over which Mr. Erickson has voting power and 25,000
shares issuable upon the exercise of options, but does not include other
shares owned by the ESOP for which Mr. Erickson is the Trustee.
(8) Includes 13,271 shares allocated to the account of Mr. Hester as a
participant in the ESOP over which Mr. Hester has voting power and 7,748
shares issuable upon the exercise of options.

INVESTMENT ADVISORY SERVICES

The Company is internally managed and therefore has not entered into any
advisory agreement with, nor pays advisory fees to, an outside investment
adviser.

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

The Company's securities are held under a custodian agreement by LaSalle
Bank, N.A. The address of the custodian is 135 South LaSalle Street, Chicago, IL
60603. The Company's assets are held under bank custodianship in compliance with
the 1940 Act. State Street Bank and Trust Company will act as the Company's
transfer and dividend paying agent and registrar. The principal business address
of State Street Bank and Trust Company is c/o EquiServe, L.P., 150 Royall
Street, mail stop 45-02-62, Canton, MA 02021.

FINANCIAL STATEMENTS

The Company has included its financial statements at December 31, 1998 and
1997, and for the year ended December 31, 1998, the three months ended December
31, 1997, the nine months ended September 30, 1997, and the year ended December
31, 1996, and financial highlights for the year ended December 31, 1998 and the
three months ended December 31, 1997 in the Prospectus and elsewhere in the
Registration Statement.

SAI-6
<PAGE>
BROKERAGE ALLOCATION AND OTHER PRACTICES

Since the Company generally acquires and disposes of its investments in
privately negotiated transactions, it infrequently uses brokers in the normal
course of business.

TAX STATUS

The following discussion is a general summary of the material federal
income tax considerations applicable to the Company and does not purport to be a
complete description of the income tax considerations. The discussion is based
upon the Code, Treasury Regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change. Prospective investors should consult their own tax advisors with respect
to tax considerations which pertain to their purchase of Securities. This
summary does not discuss any aspects of foreign, state or local tax laws.

The Company has operated since October 1, 1997 so as to qualify to be taxed
as a 'regulated investment company' or 'RIC' within the meaning of Section 851
of the Code. If the Company qualifies as a RIC and annually distributes to its
stockholders in a timely manner at least 90% of its 'investment company taxable
income,' as defined in the Code, it will not be subject to federal income tax on
the portion of its taxable income and capital gains distributed to stockholders.
'Investment company taxable income' generally means taxable income, including
net short-term capital gains but excluding net long-term capital gains. In
addition, the Company will be liable for a nondeductible federal excise tax of
4% on its undistributed income unless for each calendar year it distributes
(including through 'deemed distributions') an amount equal to or greater than
the sum of (i) 98% of its 'ordinary income' (generally, taxable income excluding
net short-term and long-term capital gains), (ii) 98% of its 'capital gain net
income' (including both net short-term and long-term capital gains) realized for
the 12-month period ending October 31 of such calendar year, and (iii) any
shortfall in distributing all ordinary income and capital gain net income for
the prior calendar year. The Company generally will endeavor to make
distributions and have deemed distributions such that it will not incur the
federal excise tax on its earnings.

The Company received a ruling from the IRS clarifying the tax consequences
of its conversion to a RIC, especially with regard to the treatment of any
unrealized gain inherent in its assets (approximately $6.3 million) upon its
conversion to RIC status ('built-in gain'). Under the terms of the ruling and
applicable law, if the company realizes or is treated as realizing any of the
built-in gain before October 1, 2007, it generally will be liable for corporate
level federal income tax on the gain, which could not be eliminated by dividend
payments.

In order to qualify as a RIC for federal income tax purposes, the Company
must, among other things: (a) continue to qualify as a BDC under the 1940 Act,
(b) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale of
stock or securities, or other income derived with respect to its business of
investing in such stock or securities; and (c) diversify its holdings so that at
the end of each quarter of the taxable year (i) at least 50% of the value of the
Company's assets consists of cash, cash items, securities of other RICs, U.S.
government securities, and other securities if such other securities of any one
issuer do not represent more than 5% of the Company's assets or 10% of the
outstanding voting securities of the issuer, and (ii) no more than 25% of the
value of the Company's assets (including those owned by CIC) are invested in the
securities of one issuer (other than U.S. government securities or securities of
other RICS) or of two or more issuers that are controlled (as determined under
applicable Code rules) by the Company and are engaged in the same or similar or
related trades or businesses.

If the Company acquires or is deemed to have acquired debt obligations that
were issued originally at a discount or that otherwise are treated under
applicable tax rules as having original issue discount, the Company will be
required to include in income each year a portion of the original issue discount
that accrues over the life of the obligation regardless of whether the Company
receives cash representing such income in the same taxable year and to make
distributions accordingly.

Although it does not presently expect to do so, the Company is authorized
to borrow funds and to sell assets in order to satisfy distribution requirements
and diversification requirements. However, under the 1940 Act, the Company is
not permitted to make distributions to stockholders while the Company's debt
obligations and other senior securities are outstanding unless certain 'asset
coverage' tests are met. Moreover, the Company's ability to dispose of assets to
meet its distribution requirements may be limited by other requirements relating
to its status as a RIC, including the diversification requirements. If the
Company disposes of assets in order to meet

SAI-7
<PAGE>
distribution requirements, the Company may make such dispositions at times
which, from an investment standpoint, are not advantageous.

If the Company fails to satisfy the 90% distribution requirement or
otherwise fails to qualify as a RIC in any taxable year, it will be subject to
tax in such year on all of its taxable income, regardless of whether the Company
makes any distributions to its stockholders. In addition, in that case, all of
the Company's distributions to its stockholders will be characterized as
ordinary income (to the extent of the Company's current and accumulated earnings
and profits).

The Company's wholly-owned subsidiary, CIC, is an ordinary corporation that
is subject to corporate level federal income tax. The Company also owns all of
the equity interests issued by ACS Funding Trust I, a business trust that is
disregarded as a separate entity for tax purposes.

SAI-8
<PAGE>

PART C - OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1. Financial Statements:

Included in Parts A and B of the Registration Statement:

AMERICAN CAPITAL STRATEGIES, LTD.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors................................................................................... F-2
Balance Sheets as of December 31, 1998 and 1997.................................................................. F-3
Schedules of Investments as of December 31, 1998 and 1997........................................................ F-4
Statements of Operations for the year ended December 31, 1998, the three months ended December 31, 1997, the
nine months ended September 30, 1997 and the year end December 31, 1996........................................ F-7
Statements of Shareholders' Equity for the years ended December 31, 1998, the three months ended December 31,
1997, the nine months ended September 30, 1997 and the year ended December 31, 1996............................ F-8
Statements of Cash Flows for the years ended December 31, 1998, the three months ended December 31, 1997, the
nine months ended September 30, 1997 and the year ended December 31, 1996...................................... F-9
Financial Highlights for the year ended December 31, 1998 and the three months ended December 31, 1997........... F-10
Notes to Financial Statements.................................................................................... F-11

UNAUDITED FINANCIAL STATEMENTS
Balance Sheets as of March 31, 1999 and December 31, 1998........................................................ F-21
Schedule of Investments as of March 31, 1999 .................................................................... F-22
Statements of Operations for the three months ended March 31, 1999 and 1998...................................... F-24
Statements of Shareholders' Equity for the three months ended March 31, 1999 and 1998............................ F-25
Statements of Cash Flows for the three months ended March 31, 1999 and 1998...................................... F-26
Financial Highlights for the three months ended March 31, 1999 and 1998.......................................... F-27
Notes to Financial Statements.................................................................................... F-28
</TABLE>

2. Exhibits:

1. Form of Underwriting Agreement.

* 3.1. Second Amended and Restated Certificate of Incorporation,
incorporated herein by reference to Exhibit 2.a of the Amendment No. 1 to the
Form N-2 filed by the Company, filed on August 12, 1997 (Commission File No.
333-29943).

* 3.2. Second Amended and Restated Bylaws, incorporated herein by reference
to Exhibit 2.b of the Amendment No. 1 to the Form N-2 filed by the Company,
filed on August 12, 1997 (Commission File No. 333-29943).

* 4.1. Instruments defining the rights of holders of securities: See
Article IV of the Company's Second Amended and Restated Certificate of
Incorporation, incorporated herein by reference to Exhibit 2.a of the Amendment
No. 1 to the Form N-2 filed by the Company, filed on August 12, 1997 (Commission
File No. 333-29943).

* 4.2. Instruments defining the rights of holders of securities: See
Section I of the Company's Second Amended and Restated Bylaws, incorporated
herein by reference to Exhibit 2.b of the Amendment No. 1 to the Form N-2 filed
by the Company, filed on August 12, 1997 (Commission File No. 333-29943).

* 5. Opinion of Arnold & Porter

* 10.1. Amended and Restated Employment Agreement between the Company and
David Gladstone, dated as of August 18, 1998, incorporated herein by reference
to Exhibit 10.1 on Form 10-Q for the quarter ended September 30, 1998, filed on
November 16, 1998.

* 10.2. Form of Employment Agreement between the Company and Malon Wilkus,
incorporated herein by reference to Exhibit i.4 of the Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-2 (File No. 333-29943) filed on
August 12, 1997.

<PAGE>

* 10.3. Form of Employment Agreement between the Company and Adam
Blumenthal, incorporated herein by reference to Exhibit i.5 of the Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-29943)
filed on August 12, 1997.

* 10.4. Form of Employment Agreement between the Company and Stephen L.
Hester, incorporated herein by reference to Exhibit i.6 of the Pre-Effective
Amendment No. 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 Roland Cline,
incorporated herein by reference to Exhibit i.7 of the Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-2 (File No. 333-29943) filed on
August 12, 1997.

* 10.6. Amended and Restated Employment Agreement between the Company and
Adam Blumenthal dated June 7, 1999.

* 10.7. Amended and Restated Employment Agreement between the Company and
Roland Cline dated June 7, 1999.

* 10.8. Stock Option Exercise Agreement between the Company and Adam
Blumenthal dated June 7, 1999.

* 10.9. Stock Option Exercise Agreement between the Company and Roland
Cline dated June 7, 1999.

* 10.10. Stock Option Exercise Agreement between the Company and Malon
Wilkus dated June 7, 1999.

* 10.11. Stock Option Exercise Agreement between the Company and John
Erickson dated June 7, 1999.

* 10.12. Stock Option Exercise Agreement between the Company and Stephen L.
Hester dated June 7, 1999.

* 10.13. Letter Agreement Regarding the Exercise of Options dated as of
July 8, 1999 between the Company and David Gladstone.

* 10.14. Purchase Note dated as of June 7, 1999 by Adam Blumenthal in favor
of the Company.

* 10.15. Purchase Note dated as of June 7, 1999 by Roland Cline in favor of
the Company.

* 10.16. Purchase Note dated as of June 7, 1999 by Malon Wilkus in favor of
the Company.

* 10.17. Purchase Note dated as of June 7, 1999 by John Erickson in favor
of the Company.

* 10.18. Purchase Note dated as of June 7, 1999 by Stephen L. Hester in
favor of the Company.

* 10.19. 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 No. 1 to the Registration Statement on Form N-2 (File No. 333-29943)
filed on August 12, 1997.

* 10.20. 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.

* 10.21. 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.

C-1

<PAGE>

* 10.22. 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.

* 23.1. Consent of Arnold & Porter: See exhibit 5

* 23.2. Consent of Ernst & Young LLP

24. Power of Attorney

* 99.1. Dividend Reinvestment Plan, incorporated herein by reference to
Exhibit 2.e of the Pre-Effective Amendment No. 2 to the Registration Statement
on Form N-2 (Commission File No. 333-29943) filed on August 29, 1997.

* 99.2. 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 No. 1 to the Registration Statement
on Form N-2 (File No. 333-29943) filed on August 12, 1997.

* 99.3. Form of American Capital Strategies, Ltd. 1997 Stock Option Plan,
incorporated herein by reference to Exhibit i.2 of the Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-2 (File No. 333-29943), as
amended, filed on August 12, 1997.

- -------------------
* Previously filed.

C-2

<PAGE>

ITEM 25. MARKETING ARRANGEMENTS

The information contained under the heading "Plan of Distribution" on page 49 of
the Prospectus is incorporated herein by reference, and any information
concerning any underwriters will be contained in the accompanying Prospectus
Supplement, if any.

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 69,500
NASD Fee....................................................... $ 25,500
Nasdaq additional listing fee.................................. $ 20,000
Blue Sky fees and expenses..................................... $ 15,000
Accounting fees and expenses................................... $100,000
Legal fees and expenses........................................ $150,000
Printing and engraving......................................... $100,000
Registrar and transfer agent's fees............................ $ 10,000
Miscellaneous fees and expenses................................ $ 10,000
Total.......................................................... $500,000
</TABLE>

Note: All listed amounts are estimates.

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

1) ACS Capital Investments Corporation, a Delaware corporation ("CIC");
100% of stock owned by the Company.

2) ACS Labor Research, Inc., a Delaware corporation; 85% of stock owned
by the Company.

3) ACS Funding Trust I (the "Trust"), a Delaware business trust; the
Company is sole grantor, beneficiary and owner of the Trust and Malon Wilkus is
the beneficiary trustee of the Trust.

4) Employee Ownership Fund, a Delaware corporation; 100% of the stock
owned by CIC.

5) ACS Genpar, Inc., a Delaware corporation; 100% of stock owned by CIC

6) Employee Acquisition Corporation - 17, a Delaware corporation; 100%
of stock owned by CIC.

7) Employee Acquisition Corporation - 18, a Delaware corporation; 100%
of stock owned by CIC.

8) Employee Acquisition Corporation - 19, a Delaware corporation; 100%
of stock owned by CIC.

9) Employee Acquisition Corporation - 20, a Delaware corporation; 100%
of stock owned by CIC.

10) Employee Acquisition Corporation - 21, a Delaware corporation; 100%
of stock owned by CIC.

11) Employee Acquisition Corporation - 22, a Delaware corporation; 100%
of stock owned by CIC.

NOTE: The subsidiary listed above as item (3) is included in the
Company's consolidated financial statements. Separate financial statements are
prepared for the subsidiary listed above as item (1), and the subsidiary listed
as item (2) above is consolidated in such financial statements. The Company
accounts for the subsidiary listed as item (1) above under the equity method of
accounting, and the filing of separate financial statements by the subsidiary
listed as item (1) is not required. Financial statements for the subsidiaries
listed above as items (4)-(11) have not been filed or included in the Company's
consolidated financial statements because such affiliates are not active, do not
have any operations or have no assets other than their respective stated
capital. The foregoing list excludes all portfolio companies of the Company.
Except as noted below, the Company does not own in excess of 20% of any
portfolio company's voting securities or otherwise control any such company. The
Company does have the right to designate a majority of the directors of JAG
Industries, Inc. In addition, a majority of the board of directors of Decorative
Surfaces International, Inc. is either designated by the Company or otherwise
affiliated with the Company. The Company, however, does not consider portfolio
companies to be subsidiaries and carries its investments in such companies at
fair market value. Portfolio companies prepare their own accredited financial
statements that are not required to be filed herewith.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

The following table sets forth the number of record holders of the
Company's securities at March 31, 1999.

Number of
TITLE OF CLASS Record Holders
- -------------- --------------
Common Stock, par value
$0.01 per share 208

Preferred Stock, par value
$0.01 per share 0

Warrants 1

Debt Securities 2

ITEM 29. INDEMNIFICATION

The Delaware General Corporation Law (Section 102) allows a corporation to
eliminate the personal liability of directors of a corporation to the
corporation or to any of its stockholders for monetary damage for a breach of
his fiduciary duty as a director, except in the case where the director breached
his duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment of a dividend or
approved a stock repurchase in violation of Delaware corporate law or obtained
an improper personal benefit. The Company's Second Amended and Restated
Certificate of Incorporation, as amended, contains a provision which eliminates
directors' personal liability as set forth above.

C-3

<PAGE>

The Delaware General Corporation Law (Section 145) gives Delaware corporations
broad powers to indemnify their present and former directors and officers and
those of affiliated corporations against expenses incurred in the defense of any
lawsuit to which they are made parties by reason of being or having been such
directors or officers, subject to specified conditions and exclusions, gives a
director or officer who successfully defends an action the right to be so
indemnified. Such indemnification is not exclusive of any other right to which
those indemnified may be entitled under any bylaw, agreement, vote of
stockholders or otherwise. The Company's Second Amended and Restated Certificate
of Incorporation, as amended, provides for indemnification authorized by Section
145 of the Delaware General Corporation Law.

See Article VII of the Company's Second Amended and Restated Certificate of
Incorporation, as amended, and Section VI of the Second Amended and Restated
Bylaws.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Not applicable.

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

The Company will maintain at its principal office physical possession of each
account, book or other document required to be maintained by Section 31(a) of
the 1940 Act.

ITEM 32. MANAGEMENT SERVICES

Not applicable

ITEM 33. UNDERTAKINGS

The Registrant hereby undertakes:

(1) to suspend the offering of shares until the Prospectus is
amended if subsequent to the effective date of this Registration Statement, its
net asset value declines more than ten percent from its net asset value as of
the effective date of this Registration Statement;

(2) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by
Section 10(a) (3) of the Securities Act of 1933;

(ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act of 1933 if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and

(iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.

(3) that, for the purpose of determining any liability under
the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant under Rule 497(h)
under the Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective;

(4) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering;

(5) that, for the purpose of determining any liabilities under
the Securities Act of 1933, each post effective amendment that contains a form
of Prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering thereof.

(6) to send by first class mail or other means designed to
ensure equally prompt delivery, within two business days of receipt of a written
or oral request, any Statement of Additional Information.

Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.

C-4

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Washington and District of Columbia, on the 9th day
of July 1999.

AMERICAN CAPITAL STRATEGIES, LTD.

By: *
---------------------------------------
Malon Wilkus
President, Chief Executive Officer and
Chairman of the Board of Directors

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:

Signature Title Date
- --------- ----- ----

<S> <C> <C>
*
- --------------------------- President, Chief Executive Officer and
Malon Wilkus Chairman of the Board of Directors August 5, 1999
(Principal Executive Officer)

*
- --------------------------- Vice Chairman of the Board of Directors August 5, 1999
David Gladstone

*
- --------------------------- Executive Vice President
Adam Blumenthal Secretary and Director August 5, 1999

*
- --------------------------- Chief Financial Officer
John Erickson (Principal Accounting and August 5, 1999
Financial Officer)

- --------------------------- Director August 5, 1999
Robert L. Allbritton

*
- --------------------------- Director August 5, 1999
Alvin N. Puryear

- --------------------------- Director August 5, 1999
Neil M. Hahl

*
- --------------------------- Director August 5, 1999
Philip R. Harper

*
- --------------------------- Director August 5, 1999
Stan Lundine

- --------------------------- Director August 5, 1999
Stephen P. Walko

By: /s/ John Erickson
---------------------- August 5, 1999
(Attorney-in-Fact)*

</TABLE>

C-5

Exhibit 1

Form of Underwriting Agreement

___________, 1999

[________________________]
As Representative of the several Underwriters

Ladies and Gentlemen:

Introductory. American Capital Strategies, Ltd., a Delaware
corporation (the "Company), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of __________
shares (the "Firm Shares") of its Common Stock, par value $.01 per share (the
"Common Shares"). In addition, the Company has granted to the Underwriters an
option to purchase up to an additional __________ Common Shares (the "Option
Shares") as provided in Section 2. The Firm Shares and, if and to the extent
such option is exercised, the Option Shares are collectively called the
"Shares". [ ] has agreed to act as representative of the several Underwriters
(in such capacity, the "Representative") in connection with the offering and
sale of the Shares.

The Company has filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder (the "Securities
Act") and the Investment Company Act of 1940, as amended, and the rules and
regulations promulgated thereunder (the "Investment Company Act"), a
registration statement (No. 333-79377) on Form N-2 for the offer and sale of the
Shares, which registration statement has become effective and copies of which
have heretofore been delivered to you. Such registration statement meets the
requirements set forth in Rule 415(a)(1) under the Securities Act and complies
in all other material respects with such Rule. The Company proposes to file with
the Commission pursuant to Rule 424 and/or Rule 497, as applicable, under the
Securities Act a supplement, dated the date specified in Schedule C hereto, to
the prospectus, dated the date specified in Schedule C hereto, relating to the
Shares and the method of distribution thereof and has previously advised you of
all further information (financial and other) with respect to the Shares set
forth therein. Such registration statement, including the exhibits thereto, as
amended at the date hereof is hereinafter called the "Registration Statement";
such prospectus, in the form in which it will be filed with the Commission
pursuant to Rule 424 and/or Rule 497, as applicable, under the Securities Act,
is hereinafter called the "Basic Prospectus"; such supplement to the Basic
Prospectus, in the form in which it will be filed with the Commission pursuant
to Rule 424 and/or Rule 497, as the case may be, under the Securities Act, is
hereinafter called the "Prospectus Supplement"; and the Basic Prospectus and the
Prospectus Supplement together are hereinafter called the "Prospectus". All
references in this Agreement to the Registration Statement, a Preliminary
Prospectus, the Prospectus, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
<PAGE>

All references in this Agreement to financial statements and
schedules and other information which is "contained," "included" or "stated" in
the Registration Statement or the Prospectus (and all other references of like
import) shall be deemed to mean and include all such financial statements and
schedules and other information which is or is deemed to be incorporated by
reference in the Registration Statement or the Prospectus, as the case may be;
and all references in this Agreement to amendments or supplements to the
Registration Statement or the Prospectus shall be deemed to mean and include the
filing of any document under the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder (the "Exchange Act") which is or is
deemed to be incorporated by reference in the Registration Statement or the
Prospectus, as the case may be.

The Company hereby confirms its agreements with the
Underwriters as follows:

Section 1. Representations and Warranties of the Company.

Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter as follows:

(a) Compliance with Registration Requirements. The Registration
Statement has been declared effective by the Commission under the Securities
Act. The Company has complied to the Commission's satisfaction with all requests
of the Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose have been instituted or are pending or, to the best
knowledge of the Company, are contemplated or threatened by the Commission.

The Prospectus when filed complied in all material respects
with the Securities Act and Investment Company Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. As of
the date hereof, when the Registration Statement became effective, when the
Prospectus Supplement is first filed pursuant to Rule 497 under the Securities
Act, when, prior to the Closing Date (as defined in Section 2(b)), any other
amendment to the Registration Statement becomes effective, when, prior to the
Closing Date, any supplement to the Prospectus Supplement is filed with the
Commission, and at the Closing Date, (i) the Registration Statement, as amended
as of any such time, and the Prospectus, as amended or supplemented as of any
such time, complied or will comply in all material respects with the applicable
requirements of the Securities Act and the rules thereunder, (ii) the
Registration Statement, as amended as of any such time, did not and will not
contain any untrue statement of a material fact and did not and will not omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) the Prospectus, as amended or
supplemented as of any such time, did not and will not contain an untrue
statement of

2
<PAGE>

a material fact and did not and will not omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, that the Company makes no
representations or warranties as to the information contained in or omitted from
the Registration Statement or the Prospectus, or any amendment thereof or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by any Underwriter expressly for use therein. There are
no contracts or other documents required to be described in the Prospectus or to
be filed as exhibits to the Registration Statement which have not been described
or filed as required.

(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representative one complete conformed copy of the Registration
Statement and of each consent and certificate of experts filed as a part
thereof, and conformed copies of the Registration Statement (without exhibits)
and the Prospectus, as amended or supplemented, in such quantities and at such
places as the Representative has reasonably requested for each of the
Underwriters.

(c) Distribution of Offering Material By the Company. The Company has
not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than the Prospectus or the Registration
Statement.

(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.

(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.

(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.

(g) No Material Adverse Change. Subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to result
in a material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change or effect, where the
context so requires, is called a

3
<PAGE>

"Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company and
its subsidiaries, considered as one entity, have not incurred any material
liability or obligation, indirect, direct or contingent, not in the ordinary
course of business nor entered into any material transaction or agreement not in
the ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except for
dividends paid to the Company or other subsidiaries, any of its subsidiaries on
any class of capital stock or repurchase or redemption by the Company or any of
its subsidiaries of any class of capital stock.

(h) Independent Accountants. Ernst & Young LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) filed with the Commission as
a part of the Registration Statement and included in the Prospectus, are
independent public or certified public accountants as required by the Securities
Act and the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act").

(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present fairly the financial position of the Company and its
subsidiaries as of and at the dates indicated and the results of their
operations and cash flows for the periods specified. Such financial statements
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial statements or
supporting schedules are required to be included in the Registration Statement.
The financial data set forth in the Prospectus under the captions "Prospectus
Summary--Summary Financial Data", "Selected Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent with that
of the audited financial statements contained in the Registration Statement.

(j) Company's Accounting System. The Company and each of its
subsidiaries maintain a system of accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.

(k) Subsidiaries of the Company. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
entities in which it has an investment (each, a "Portfolio Company" and
collectively, the "Portfolio Companies") and the subsidiaries listed in Item 27
of the Registration Statement. The term "subsidiary" as used in this Agreement
shall be deemed to exclude each Portfolio Company.

4
<PAGE>

(l) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation or business trust, as the case may be,
in good standing under the laws of the jurisdiction in which it is organized
with full power and authority to own its properties and conduct its business as
described in the Prospectus, and is duly qualified to do business as a foreign
corporation or business trust, as the case may be, and is in good standing under
the laws of each jurisdiction that requires such qualification.

(m) Capitalization of the Subsidiaries. All the outstanding shares of
capital stock or interests of each subsidiary have been duly and validly
authorized and issued and are fully paid and nonassessable, and, except as
otherwise set forth in the Prospectus, all outstanding shares of capital stock
or interests of the subsidiaries are owned by the Company either directly or
through wholly owned subsidiaries free and clear of any security interests,
claims, liens or encumbrances.

(n) No Prohibition on Subsidiaries from Paying Dividends or Making
Other Distributions. No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on such subsidiary's capital stock, from repaying to the
Company any loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company or any
other subsidiary of the Company, except as described in or contemplated by the
Prospectus or as provided in the CP Conduit Facility (as defined in the
Prospectus).

(o) Capitalization and Other Capital Stock Matters. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" (other than for subsequent
issuances, if any, pursuant to employee benefit plans described in the
Prospectus or upon exercise of outstanding options described in the Prospectus).
The Common Stock (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Stock has been duly authorized and validly issued, is fully
paid and nonassessable and has been issued in compliance with federal and state
securities laws. None of the outstanding Common Stock was issued in violation of
any preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no authorized or
outstanding options, warrants, preemptive rights, rights of first refusal or
other rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or any of its
subsidiaries other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted thereunder, set forth in
the Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.

(p) Nasdaq National Market. The Shares are registered pursuant to
Section 12(b) or 12(g) of the Exchange Act and are listed on the Nasdaq National
Market, and the Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act or delisting the Common Stock from the Nasdaq National Market,

5
<PAGE>

nor has the Company received any notification that the Commission or the
National Association of Securities Dealers, LLC (the "NASD") is contemplating
terminating such registration or listing.

(q) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act, the Investment Company Act and such as may be required (i) under
the blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Shares by the Underwriters in the manner contemplated herein
and in the Prospectus, (ii) by the National Association of Securities Dealers,
LLC and (iii) by the federal and provincial laws of Canada.

(r) Non-Contravention of Existing Instruments Agreements. Neither the
issue and sale of the Shares nor the consummation of any of the other
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (i) the charter, by-laws, or other organizational
documents of the Company or any of its subsidiaries, (ii) the terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument to
which the Company or any of its subsidiaries is a party or bound or to which its
or their property is subject or (iii) any statute, law, rule, regulation,
judgment, order or decree applicable to the Company or any of its subsidiaries
of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or any of its
subsidiaries or any of its or their properties.

(s) No Defaults or Violations. Neither the Company nor any subsidiary
is in violation or default of (i) any provision of its charter, by-laws, or
other organizational document (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which it is a party or bound or
to which its property is subject or (iii) any statute, law, rule, regulation,
judgment, order or decree of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction over the
Company or such subsidiary or any of its properties, as applicable, except any
such violation or default which could not, singly or in the aggregate,
reasonably be expected to result in a Material Adverse Change except as
otherwise disclosed in the Prospectus.

(t) No Actions, Suits or Proceedings. No action, suit or proceeding by
or before any court or governmental agency, authority or body or any arbitrator
involving the Company or any of its subsidiaries or its or their property is
pending or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a Material Adverse Effect on the performance of
this Agreement or the consummation of any of the transactions contemplated
hereby or (ii) could reasonably be expected to result in a Material Adverse
Effect.

(u) All Necessary Permits, Etc. The Company and each subsidiary possess
such valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign

6
<PAGE>

regulatory agencies or bodies necessary to conduct their respective businesses,
and neither the Company nor any subsidiary has received any notice of
proceedings relating to the revocation or modification of, or non-compliance
with, any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, could
reasonably be expected to result in a Material Adverse Change.

(v) Title to Properties. The Company and each of its subsidiaries has
good and marketable title to all the properties and assets reflected as owned in
the financial statements referred to in the Prospectus, in each case free and
clear of any security interests, mortgages, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under lease by the
Company or any subsidiary are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use made
or proposed to be made of such real property, improvements, equipment or
personal property by the Company or such subsidiary.

(w) Tax Law Compliance. The Company and its subsidiaries have filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes required to be paid by any of them and, if due and payable, any
related or similar assessment, fine or penalty levied against any of them. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in the Prospectus in respect of all federal,
state and foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its subsidiaries has not been finally
determined. The Company is not aware of any tax deficiency that has been or
might be asserted or threatened against the Company or any subsidiary that could
result in a Material Adverse Change.

(x) Intellectual Property Rights. Each of the Company and its
subsidiaries owns or possesses adequate rights to use all patents, patent rights
or licenses, inventions, collaborative research agreements, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not result in a
Material Adverse Change that is not otherwise disclosed in the Prospectus; the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights; and the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of others with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a Material Adverse Effect. There is no
claim being made against the Company or any subsidiary regarding patents, patent
rights or licenses, inventions, collaborative research, trade secrets, know-how,
trademarks, service marks, trade names or copyrights. The Company and its
subsidiaries

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<PAGE>

do not in the conduct of their business as now or proposed to be conducted as
described in the Prospectus infringe or conflict with any right or patent of any
third party, or any discovery, invention, product or process which is the
subject of a patent application filed by any third party, known to the Company
or any of its subsidiaries, which such infringement or conflict is reasonably
likely to result in a Material Adverse Change.

(y) Year 2000 Preparedness. There are no issues related to the
Company's, or any of its subsidiaries', preparedness for the Year 2000 that (i)
are of a character required to be described or referred to in the Registration
Statement or Prospectus by the Securities Act, the Investment Company Act or by
the Exchange Act or the rules and regulations of the Commission thereunder which
have not been accurately described in the Registration Statement or Prospectus
or (ii) might reasonably be expected to result in any Material Adverse Change or
that might materially affect their properties, assets or rights. The Company
has inquired of material vendors and each Portfolio Company as to their
preparedness for the Year 2000 and has disclosed in the Registration Statement
or Prospectus any issues that might reasonably be expected to result in any
Material Adverse Effect.

(z) No Transfer Taxes or Other Fees. There are no transfer taxes or
other similar fees or charges under Federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the Shares.

(aa) BDC Election; RIC. The Company has duly filed with the Commission,
pursuant to Section 54(a) of the Investment Company Act, a duly completed and
executed Form N-54A, pursuant to which the Company has elected to be subject to
the provisions of Sections 55 through 65 of the Investment Company Act (the
"Company BDC Election"); the Company has not filed with the

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<PAGE>

Commission any notice of withdrawal of the Company BDC Election pursuant to
Section 54(c) of the Investment Company Act; the Company BDC Election remains in
full force and effect, and, to the Company's actual knowledge, no order of
suspension or revocation of such election under the Investment Company Act has
been issued or proceedings therefor initiated or threatened by the Commission.
The Company is, and at all times through completion of the transactions
contemplated here by, will be, in compliance in all material respects with the
terms and conditions of the Securities Act and the Investment Company Act. As
required by Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), the Company is currently in compliance with requirements to qualify as
they regulated investment company under the Code.

(bb) Insurance. Each of the Company and its subsidiaries are insured by
recognized, financially sound and reputable institutions with policies in such
amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes, general liability and directors and officers liability. The Company
has no reason to believe that it or any subsidiary will not be able (i) to renew
its existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that would
not result in a Material Adverse Change. Neither of the Company nor any
subsidiary has been denied any insurance coverage which it has sought or for
which it has applied.

(cc) Labor Matters. No labor disturbance by the employees of the
Company or any of its subsidiaries exists or, to the best of Company's
knowledge, is imminent.

(dd) No Price Stabilization or Manipulation. The Company has not taken
and will not take, directly or indirectly, any action designed to or that might
be reasonably expected to cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the Shares.

(ee) Lock-Up Agreements. Each officer and director of the Company has
agreed to sign an agreement substantially in the form attached hereto as Exhibit
A (the "Lock-up Agreements"). The Company has provided to counsel for the
Underwriters true, accurate and complete copies of all of the Lock-up Agreements
presently in effect or effected hereby. The Company hereby represents and
warrants that it will not release any of its officers, directors or other
stockholders from any Lock-up Agreements currently existing or hereafter
effected without the prior written consent of [_______________].

(ff) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any subsidiary or any other
person required to be described in the Prospectus which have not been described
as required.

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<PAGE>

(gg) Environmental Laws. (i) The Company is in compliance with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment ("Environmental
Laws") that are applicable to its business, except where the failure to comply
would not result in a Material Adverse Effect, (ii) the Company has received no
notice from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property that is owned, leased or occupied by the Company has been designated
as a Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. ss. 9601, et seq.), or otherwise
designated as a contaminated site under applicable state or local law.

(hh) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained by
the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are
in compliance with ERISA except where the failure to comply would not have a
Material Adverse Effect. "ERISA Affiliate" means, with respect to the Company or
a subsidiary, any member of any group of organizations described in Sections
414(b),(c),(m) or (o) of the Code of which the Company or such subsidiary is a
member. No "reportable event" (as defined under ERISA) has occurred or is
reasonably expected to occur with respect to any "employee benefit plan"
established or maintained by the Company, its subsidiaries or any of their ERISA
Affiliates. No "employee benefit plan" established or maintained by the Company,
its subsidiaries or any of their ERISA Affiliates, if such "employee benefit
plan" were terminated, would have any "amount of unfounded benefit liabilities"
(as defined under ERISA). Neither the Company, its subsidiaries nor any of their
ERISA Affiliates has incurred or reasonably expects to incur any liability under
(i) Title IV of ERISA with respect to termination of, or withdrawal from, any
"employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code.
Each "employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates that is intended to be qualified
under Section 401(a) of the Code, including the American Capital Strategies,
Ltd. Employee Stock Ownership Plan (the "ESOP") is so qualified and nothing has
occurred, whether by action or failure to act, which would cause the loss of
such qualification. The Company has not received any notification of any
investigation, examination, audit or review of any type by or with the Internal
Revenue Service or Department of Labor regarding or in connection with any
"employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates.

(ii) Exchange Act Compliance. The documents filed by the Company with
the Commission complied and will comply in all material respects with the
requirements of the Exchange Act, and, when read together with the other
information in the Prospectus, at the time the Registration Statement and any
amendments thereto become effective and at the First Closing Date and the Second
Closing Date, as the case may be, will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.

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<PAGE>

(jj) Reports Filed. The Company has filed all reports required to be
filed pursuant to the Securities Act, the Investment Company Act and the
Exchange Act.

(kk) Conditions for Use of Form N-2. The Company has satisfied the
conditions for the use of Form N-2, as set forth in the general instructions
thereto, with respect to the Registration Statement and Rule 415(a)(1) of the
Act.

(ll) Officer Certificates. Any certificate signed by an officer of the
Company and delivered to the Representative or to counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company to each
Underwriter as to the matters set forth therein.

Section 2. Purchase, Sale and Delivery of the Shares.

(a) The Firm Shares. The Company agrees to issue and sell to the
several Underwriters the Firm Shares upon the terms herein set forth. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company the respective
number of Firm Shares set forth opposite their names on Schedule A. The purchase
price per Firm Share to be paid by the several Underwriters to the Company shall
be $[___].

(b) The First Closing Date. Delivery of the Firm Shares to be purchased
by the Underwriters and payment therefor shall be made by the Company and the
Representative at 6:00 a.m. San Francisco time, at the offices of
___________________________________ (or at such other place as may be agreed
upon among the Representative and the Company), (i) on the third (3rd) full
business day following the date of this Agreement, (ii) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (iii) at such other time and date not later that seven (7) full
business days following the first day that Shares are traded as the
Representative and the Company may determine (or at such time and date to which
payment and delivery shall have been postponed pursuant to Section 8 hereof),
such time and date of payment and delivery being herein called the "First
Closing Date;" provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
4(d) hereof, the Representative may, in its sole discretion, postpone the First
Closing Date until no later that two (2) full business days following delivery
of copies of the Prospectus to the Representative.

(c) The Option Shares; the Second Closing Date. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of __________ Option Shares from the Company at
the purchase price per share to be paid by the Underwriters for the Firm Shares.
The option granted hereunder is for use by the Underwriters solely in covering
any over-allotments in connection with the sale and distribution of the Firm
Shares. The option granted hereunder may be

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<PAGE>

exercised at any time upon notice by the Representative to the Company, which
notice may be given at any time within 30 days from the date of this Agreement.
The time and date of delivery of the Option Shares, if subsequent to the First
Closing Date, is called the "Second Closing Date" and shall be determined by the
Representative and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Option Shares
are to be purchased, each Underwriter agrees, severally and not jointly, to
purchase, and the Company agrees to sell to such Underwriter, the number of
Option Shares (subject to such adjustments to eliminate fractional shares as the
Representative may determine) that bears the same proportion to the total number
of Option Shares to be purchased as the number of Firm Shares set forth on
Schedule A opposite the name of such Underwriter bears to the total number of
Firm Shares. The Representative may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.

(d) Public Offering of the Shares. The Representative hereby advises
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed as the Representative, in its sole
judgment, has determined is advisable and practicable.

(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.

It is understood that the Representative has been authorized,
for its own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Shares and any Option Shares the Underwriters have agreed to purchase.
[________________], individually and not as the Representative of the
Underwriters, may (but shall not be obligated to) make payment for any Shares to
be purchased by any Underwriter whose funds shall not have been received by the
Representative by the First Closing Date or the Second Closing Date, as the case
may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.

(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representative for the
accounts of the Representative and the several Underwriters at the First Closing
Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representative and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.

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<PAGE>

(g) Delivery of Prospectus to the Underwriters. Not later than 12:00
noon (New York time) on the second business day following the date the Shares
are released by the Underwriters for sale to the public, the Company shall
deliver or cause to be delivered copies of the Prospectus in such quantities and
at such places as the Representative shall request.

Section 3. Covenants of the Company.

Covenants of the Company. The Company further covenants and agrees with
each Underwriter as follows:

(a) Registration Statement and Prospectus. The Company will promptly
advise the Underwriters (i) when, during any period that a prospectus relating
to the Shares is required to be delivered under the Securities Act, any
amendment to the Registration Statement affecting the Shares shall have become
effective, (ii) of any request by the Commission for any amendment to the
Registration Statement or the Prospectus, or for any additional information,
affecting or in respect of the Shares, (iii) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement
affecting the Shares or the institution or threatening of any proceeding for
that purpose and (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will not file any amendment to the Registration Statement
affecting the Shares or any supplement to the Prospectus unless the Company has
furnished you with a copy for your review prior to filing, and will not file any
such proposed amendment or supplement to which you reasonably object, in any
event until after the end of the period during which a prospectus is required to
be delivered to purchasers of the Shares under the Securities Act. Subject to
the foregoing sentence, the Company will cause the Prospectus Supplement to be
transmitted to the Commission for filing pursuant to Rule 424 and/or Rule 497,
as applicable, under the Securities Act by means reasonably calculated to result
in filing with the Commission pursuant to said Rules. The Company will use its
best efforts to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement affecting the Shares and, if issued,
to obtain as soon as possible the withdrawal thereof. The Company will timely
file the requisite copies of the Prospectus with the Commission pursuant to Rule
497(c) or Rule 497(h) of the Securities Act, whichever is applicable or, if
applicable, will timely file the certification permitted by Rule 497(j) of the
Securities Act and will advise the Representative of the time and manner of such
filing.

(b) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representative may reasonably have designated in writing and
will make such applications, file such documents, and furnish such information
as may be reasonably required for that purpose, provided the Company shall not
be required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time, prepare
and file such statements, reports and other documents, as are or may be required
to continue such

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<PAGE>

qualifications in effect for so long a period as the Representative may
reasonably request for distribution of the Shares.

(c) Amendments and Supplements to the Prospectus. The Company will
comply with the Securities Act, the Exchange Act, and the Investment Company Act
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representative or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.

(d) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representative, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto (including any documents
incorporated or deemed incorporated by reference therein) as the Representative
may request.

(e) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) shall cause [_______________] to be
added as an additional insured to such policy in respect of the offering
contemplated hereby.

(f) Notice of Subsequent Events. If at any time during the ninety (90)
day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Company Shares has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.

(g) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.

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<PAGE>

(h) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
ending July 31, 2000 that satisfies the provisions of Section 11(a) of the
Securities Act.

(i) Periodic Reporting Obligations. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act.

(j) Agreement Not to Offer or Sell Additional Securities. The Company
will not, without the prior written consent of [_______________], for a period
of 90 days following the date of the Prospectus Supplement, offer, sell or
contract to sell, or otherwise dispose of or enter into any transaction that is
designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, or announce the offering of, any other shares of Common Stock or any
senior securities (as defined in the Investment Company Act) or any securities
convertible into, or exchangeable for, shares of Common Stock or any senior
securities (as defined in the Investment Company Act); provided, however, that
the Company may (i) issue and sell shares of Common Stock or any senior
securities (as defined in the Investment Company Act) pursuant to any director
or employee stock option plan, stock ownership plan or dividend reinvestment
plan of the Company in effect at the date of the Prospectus and described in the
Prospectus so long as none of those shares may be transferred by the recipient
during the period of 90 days from the date that the Registration Statement is
declared effective (the "Lock-Up Period") and the Company shall enter stop
transfer instructions with its transfer agent and registrar against the transfer
of any such shares of Common Stock or senior securities, (ii) the Company may
issue shares of Common Stock issuable upon the conversion of securities or the
exercise of warrants outstanding at the date of the Prospectus and described in
the Prospectus and (iii) enter into credit agreements with and borrow funds from
banks, commercial lenders and other financial institutions.

(k) Future Reports to the Representative. During the period of five
years hereafter the Company will furnish to the Representative (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the Company as of the close of such
fiscal year and statements of income, stockholders' equity and cash flows for
the year then ended and the opinion thereon of the Company's independent public
or certified public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly
Report on Form 10-Q, Current Report on Form 8-K or other report filed by the
Company with the Commission, the National Association of Securities Dealers, LLC
or any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.

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<PAGE>

(l) Exchange Act Compliance. During the Prospectus Delivery Period, the
Company will file all documents required to be filed with the Commission
pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within
the time periods required by the Exchange Act.

Section 4. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:

(a) Compliance with Registration Requirements; No Stop Order; No
Objection from the National Association of Securities Dealers, LLC. The
Registration Statement shall have become effective prior to the execution of
this Agreement, and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been initiated
or, to the knowledge of the Company or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel; and the
National Association of Securities Dealers, LLC shall have raised no objection
to the fairness and reasonableness of the underwriting terms and arrangements.

(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.

(c) No Material Adverse Change. Subsequent to the execution and
delivery of this Agreement and prior to the First Closing Date, or the Second
Closing Date, as the case may be, there shall not have been any Material Adverse
Change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company and its subsidiaries considered as one
enterprise from that set forth in the Registration Statement or Prospectus,
which, in your sole judgment, that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.

(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Arnold & Porter counsel for the Company substantially in the form of Exhibit
B attached hereto, dated the First Closing Date, or the Second Closing Date, as
the case may be, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters.

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<PAGE>

Counsel rendering the opinion contained in Exhibit B may rely
as to questions of law not involving the laws of the United States or the
General Corporation Law of the State of Delaware upon opinions of local counsel,
and as to questions of fact upon representations or certificates of officers of
the Company and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representative of the Underwriters, and to Underwriters'
Counsel.

(e) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of _______________, substantially in the form of Exhibit D hereto. The
Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.

(f) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Ernst & Young LLP addressed to the Underwriters, dated the First Closing Date or
the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
four (4) business days prior to the First Closing Date or the Second Closing
Date, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the First Closing Date or the Second Closing Date, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed
to or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheets including the schedule of
investments of the Company as of December 31, 1998 and December 31, 1997 and
related statements of operations, shareholders' equity, and cash flows for the
twelve (12) months ended December 31, 1998 and December 31, 1996, the nine (9)
months ended September 30, 1997 and the three (3) months ended December 31, 1997
(iii) state that Ernst & Young LLP has performed the procedures set out in
Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim
financial information and providing the report of Ernst & Young LLP as described
in SAS 71 on the financial statements for the first-quarter periods ended March
31, 1999 and March 31, 1998 (the "Quarterly Financial

17
<PAGE>

Statements"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications need
to be made to the Quarterly Financial Statements in order for them to be in
compliance with generally accepted accounting principles consistently applied
across the periods presented, and address other matters agreed upon by Ernst &
Young LLP and you.

(g) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:

(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the First Closing
Date or the Second Closing Date, as the case may be;

(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Securities Act;

(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Securities Act, the Investment Company Act or
the Exchange Act, as the case may be, and in all material respects
conformed to the requirements of the Securities Act, the Investment
Company Act or the Exchange Act, as the case may be, the Registration
Statement and the Prospectus, and any amendments or supplements
thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
and, since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and

(iv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been
(a) any Material Adverse Change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its Subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its Subsidiaries
considered as one enterprise, except transactions entered into in the
ordinary course of business, (c) any obligation, direct or contingent,
that is material to the Company and its Subsidiaries considered as one
enterprise, incurred by the Company or its Subsidiaries, except
obligations incurred in the ordinary course of business, (d) any change
in the capital stock or outstanding indebtedness of the Company or any
of its subsidiaries that is material to the Company and its
subsidiaries considered as one enterprise,

18
<PAGE>

(e) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company or any of its subsidiaries, or (f) any
loss or damage (whether or not insured) to the property of the Company
or any of its subsidiaries which has been sustained or will have been
sustained which has a Material Adverse Effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one
enterprise.

(h) Lock-up Agreement from Certain Stockholders of the Company. The
Company shall have obtained and delivered to you an agreement substantially in
the form of Exhibit A attached hereto from each officer and director of the
Company.

(i) Nasdaq National Market. The Shares shall have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.

(j) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(d) hereof with respect
to the furnishing of Prospectuses.

(k) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, as the case may be, the Representative and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Shares as contemplated herein, or in
order to evidence the accuracy of any of the representations and warranties, or
the satisfaction of any of the conditions or agreements, herein contained.

If any condition specified in this Section 4 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Representative by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 7 (Indemnification and Contribution) and Section 10 (Representations and
Indemnities to Survive Delivery) shall at all times be effective and shall
survive such termination.

Section 5. Payment of Expenses. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Shares to the Underwriters, (iv) all fees and expenses of the Company's
counsel, independent public or certified public accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits,

19
<PAGE>

schedules, consents and certificates of experts), each preliminary prospectus
and the Prospectus, and all amendments and supplements thereto, and this
Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Shares for offer and sale under the state securities or blue sky laws or
the provincial securities laws of Canada or any other country, and, if requested
by the Representative, preparing and printing a "Blue Sky Survey", an
"International Blue Sky Survey" or other memorandum, and any supplements
thereto, advising the Underwriters of such qualifications, registrations and
exemptions, (vii) the filing fees incident to, and the reasonable fees and
expenses of counsel for the Underwriters in connection with, the National
Association of Securities Dealers, LLC review and approval of the Underwriters'
participation in the offering and distribution of the Shares, (viii) the fees
and expenses associated with including the Shares on the Nasdaq National Market,
and (ix) all other fees, costs and expenses referred to in or all of Part C of
the Registration Statement. Except as provided in this Section 5 and Section 7
hereof, the Underwriters shall pay their own expenses, including the fees and
disbursements of their counsel, and all costs and expenses incident to the
preparation and undertaking of "road show" presentations to be made to
prospective investors (except the Company's travel and accommodation expenses).

Section 6. [Reserved]

Section 7. Indemnification and Contribution.

(a) Indemnification of the Underwriters.

(1) The Company agrees to indemnify and hold harmless each
Underwriter, its officers and employees, and each person, if any, who controls
any Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter, officer, employee or such controlling person may become
subject, under the Securities Act, the Investment Company Act, the Exchange Act
or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of the Company, which consent shall not be
unreasonably withheld), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment

20
<PAGE>

thereto, including any information deemed to be a part thereof pursuant to Rule
430A or Rule 434 under the Securities Act, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading; or (ii) upon any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; or (iii) in whole or in part upon any inaccuracy in
the representations and warranties of the Company contained herein; or (iv) in
whole or in part upon any failure of the Company to perform its obligations
hereunder or under law; or (v) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Shares or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action arising
out of or based upon any matter covered by clause (i), (ii), (iii) or (iv)
above, provided that the Company shall not be liable under this clause (v) to
the extent that a court of competent jurisdiction shall have determined by a
final judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by
[__________]) as such expenses are reasonably incurred by such Underwriter or
such controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that the foregoing indemnity agreement shall not
apply to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company by the
Representative expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or expense
purchased Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage, liability
or expense. The indemnity agreement set forth in this Section 7(a) shall be in
addition to any liabilities that the Company may otherwise have.

(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Investment Company Act, the Exchange

21
<PAGE>

Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representative expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.

(c) Information Provided by the Underwriters. The Company hereby
acknowledges that the only information that the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth in the table in the first paragraph and the second
paragraph under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct.

(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise

22
<PAGE>

participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of such indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party ([ ] in the case of Section 7(b)
and Section 8), representing the indemnified parties who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.

(e) Settlements. The indemnifying party under this Section 7 shall not
be liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 30 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes (i) an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified party.

(f) Contribution. If the indemnification provided for in this Section 7
is unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law then

23
<PAGE>

each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriter on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses) received by
the Company bears to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus or Prospectus Supplement. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.

The Company and Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 7(f) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7(f). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 7(f) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (f), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 7(f) to contribute are several in proportion to their respective
underwriting obligations and not joint.

(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than thirty
(30) days of invoice to the indemnifying party.

(h) Survival. The indemnity and contribution agreements contained in
this Section 7 and the representation and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter, its officers
or employees, or any person controlling any Underwriter, the Company, its
directors or officers or any persons controlling the Company, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company,

24
<PAGE>

shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 7.

(i) Acknowledgments of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.

Section 8. Default of One or More of the Several Underwriters. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares of Common Stock which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Shares set forth opposite their respective names on Schedule A bears to
the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as may be specified by
the Representative with the consent of the non-defaulting Underwriters, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date. If, on the First Closing Date or the
Second Closing Date, as the case may be, any one or more of the Underwriters
shall fail or refuse to purchase Shares and the aggregate number of Shares with
respect to which such default occurs exceeds 10% of the aggregate number of
Shares to be purchased on such date, and arrangements satisfactory to the
Representative and the Company for the purchase of such Shares are not made
within 48 hours after such default, this Agreement shall terminate without
liability of any party to any other party except that the provisions of Section
4, and Section 7 shall at all times be effective and shall survive such
termination. In any such case either the Representative or the Company shall
have the right to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.

As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under this
Section 8. Any action taken under this Section 8 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.

Section 9. Termination of this Agreement. Prior to the First Closing
Date, this Agreement may be terminated by the Representative by notice given to
the Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq Stock Market, or trading in securities generally on either the Nasdaq
Stock Market

25
<PAGE>

or the New York Stock Exchange shall have been suspended or limited, or minimum
or maximum prices shall have been generally established on any of such stock
exchanges by the Commission or the National Association of Securities Dealers,
LLC; (ii) a general banking moratorium shall have been declared by any of
federal, New York, Delaware or California authorities; (iii) there shall have
occurred any outbreak or escalation of national or international hostilities or
any crisis or calamity, or any change in the United States or international
financial markets, or any substantial change or development involving a
prospective change in United States' or international political, financial or
economic conditions, as in the judgment of the Representative is material and
adverse and makes it impracticable or inadvisable to market the Shares in the
manner and on the terms described in the Prospectus or to enforce contracts for
the sale of securities; (iv) in the judgment of the Representative there shall
have occurred any Material Adverse Change; or (v) the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as in the judgment of the Representative may interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured. Any termination
pursuant to this Section 9 shall be without liability on the part of (a) the
Company to any Underwriter, except that the Company shall be obligated to
reimburse the expenses of the Representative and the Underwriters pursuant to
Section 5 hereof, (b) any Underwriter to the Company, or (c) of any party hereto
to any other party except that the provisions of Section 7 shall at all times be
effective and shall survive such termination.

Section 10. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.

Section 11. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:

If to the Representative:

[_____________________]
[ADDRESS]

If to the Company:

AMERICAN CAPITAL STRATEGIES, LTD.
3 Bethesda Metro Center
Suite 860
Bethesda, MD 20814
Facsimile: (301) 654-6714
Attention: Malon Wilkus

26
<PAGE>

Any party hereto may change the address for receipt of communications by giving
written notice to the others.

Section 12. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7, and to their
respective successors, and personal representatives, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares as such from any of the Underwriters merely by
reason of such purchase.

Section 13. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.

Section 14. Governing Law Provisions.

(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.

(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.

27
<PAGE>

Section 15. General Provisions. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Section headings herein are for the convenience of the parties only and
shall not affect the construction or interpretation of this Agreement.

[The remainder of this page has been intentionally left blank.]

28
<PAGE>

If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.

Very truly yours,

AMERICAN CAPITAL STRATEGIES, LTD.

By:
-------------------------------
Name:
Title:

The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representative as of the date first above written.

[_________________________]

On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.

By [__________________________________]

By:
--------------------------------
Authorized Signatory

29
<PAGE>

SCHEDULE A

Number of
Firm
Shares
Underwriters To be Purchased

[_________________________].......... [___]
[_________________________].......... [___]
[_________________________].......... [___]
[_________________________].......... [___]
[_________________________].......... [___]
[_________________________].......... [___]
[_________________________].......... [___]
Total................................ [___]

S-A
<PAGE>

SCHEDULE B

[NO SELLING SHAREHOLDER]

S-B
<PAGE>

SCHEDULE C

[TO BE COMPLETED]

S-C

Exhibit 24
POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and
officer of American Capital Strategies, Ltd., a corporation organized under the
laws of the state of Delaware (the "Corporation"), hereby constitutes and
appoints John Erickson and Samuel A. Flax, and each of them (with full power to
each of them to act alone), his true and lawful attorneys-in-fact and agents for
him and on his behalf and in his 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 seal to and file with the Securities and Exchange
Commission (or any other governmental or regulatory authority) a Registration
Statement on Form N-2 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
registration of up to $250 million aggregate initial offering price of common
stock, $0.01 par value per share, preferred stock, $0.01 par value per share,
and debt securities of the Corporation, 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 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 hand and seal, as of the date specified.

AMERICAN CAPITAL STRATEGIES, LTD.

Dated: July 29, 1999. /s/
-----------------------------------
Adam Blumenthal
Executive Vice President,
Chief Operating Officer,
Secretary and Director
<PAGE>

- 2 -

Signature Title Date
--------- ----- ----

President, Chief Executive July 29, 1999
/s/ Officer and Chairman of the
- ------------------------------ Board of Directors (Principal
Malon Wilkus Executive Officer)
/s/
- ------------------------------ Vice Chairman of the Board July 29, 1999
David Gladstone of Directors
/s/
- ------------------------------ Executive Vice President, July 29, 1999
Adam Blumenthal Secretary and Director

Vice President and Chief July 29, 1999
/s/ Financial Officer (Principal
- ------------------------------ Accounting and Financial
John Erickson Officer)

- ------------------------------ Director July 29, 1999
Robert L. Allbritton
/s/
- ------------------------------ Director July 29, 1999
Alvin N. Puryear

- ------------------------------ Director July 29, 1999
Neil M. Hahl
/s/
- ------------------------------ Director July 29, 1999
Philip R. Harper
/s/
- ------------------------------ Director July 29, 1999
Stan Ludine

- ------------------------------ Director July 29, 1999
Stephen P. Walko