AMERICAN CAPITAL STRATEGIES LTD, 497, 2000-05-23

AMERICAN CAPITAL STRATEGIES LTD
497, 2000-05-23

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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 11, 2000)

[LOGO]

5,500,000 SHARES

COMMON STOCK

American Capital Strategies, Ltd. is offering 5,500,000 shares of its
common stock. Our common stock is traded on the Nasdaq National Market under the
symbol 'ACAS.' The last reported sale price of our common stock on the Nasdaq
National Market on May 18, 2000 was $20.50 per share.

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

INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE 'RISK FACTORS' BEGINNING ON PAGE 7 OF THE PROSPECTUS.

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

<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Offering Price..................................... $ 20.50 $112,750,000
Underwriting Discounts and Commissions.................... $ 1.13 $ 6,201,250
Proceeds to American Capital Strategies................... $ 19.37 $106,548,750
</TABLE>

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES ARE TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

We have granted the underwriters a 30-day option to purchase up to an
additional 825,000 shares of common stock to cover over-allotments.

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

ROBERTSON STEPHENS FIRST UNION SECURITIES, INC.

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

A.G. EDWARDS & SONS, INC. PAINEWEBBER INCORPORATED

THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 18, 2000
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, ORDINARY SHARES
ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.

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

TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
-----
The Company ............................................................ S-4
Fees and Expenses ...................................................... S-5
Recent Developments .................................................... S-6
Use of Proceeds ........................................................ S-6
Capitalization ......................................................... S-7
Underwriting ........................................................... S-8
Taxation ............................................................... S-10
Legal Matters .......................................................... S-12
Experts ................................................................ S-12
Additional Information ................................................. S-13

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

PROSPECTUS

Prospectus Summary ..................................................... 1
Risk Factors ........................................................... 7
Use of Proceeds ........................................................ 14
Price Range of Common Stock and Distributions .......................... 15
Selected Financial Data ................................................ 16
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 17
Business ............................................................... 25
Portfolio Companies .................................................... 32
Determination of Net Asset Value ....................................... 36
Management ............................................................. 37
Dividend Reinvestment Plan ............................................. 42
Description of the Securities .......................................... 43
Certain Provisions of the Second Amended and Restated Certificate of
Incorporation, as Amended, and the Second Amended and Restated
Bylaws ............................................................... 44
Regulation ............................................................. 46
Share Repurchases ...................................................... 47
Plan of Distribution ................................................... 47
Safekeeping, Transfer and Dividend Paying Agent and Registrar .......... 48
Legal Matters .......................................................... 48
Experts ................................................................ 48
Table of Contents of Statement of Additional Information ............... 49
Index to Financial Statements .......................................... F-1

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

S-3
<PAGE>
THE COMPANY

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 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 American Capital Financial Services, Inc. ('ACFS'), our
wholly-owned subsidiary. We are a non-diversified, closed end investment company
that has elected to be treated as a business development company under the
Investment Company Act of 1940, as amended. 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 Internal Revenue
Code of 1986, as amended (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. During the
period from August 1997 through March 31, 2000, we invested $378 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.

We typically invest between $5 million and $25 million in each transaction
and through our subsidiary, ACFS, 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.

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
December 31, 1999, we had a weighted average ownership interest of 25% 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. 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.

S-4
<PAGE>
FEES AND EXPENSES

The following table will assist you in understanding the various costs and
expenses that an investor in our common stock (the 'Common Stock') will bear
directly or indirectly.

<TABLE>
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
Sales load (as a percentage of offering price)......................................................... 5.50%
Dividend reinvestment plan fees(1)..................................................................... --
ANNUAL EXPENSES (as a percentage of net assets attributable to Common Stock)(2)
Management fees........................................................................................ --
Interest payments on borrowed funds(3)................................................................. 1.51%
Other expenses(4)...................................................................................... 0.81%
------
Total annual expenses (estimated)(5)................................................................ 2.32%
</TABLE>

- ------------------
(1) 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.'

(2) Net assets attributable to common shares equal net assets (i.e., total
assets less total liabilities) at December 31, 1999.

(3) The interest payments on borrowed funds percentage is based on interest
payments for the year ended December 31, 1999 divided by net assets
attributable to our common shares. We had outstanding borrowings of $78.5
million at December 31, 1999. See 'Risk Factors--We may incur debt which
could increase our investment risks.'

(4) Other expenses are based on amounts for the year ended December 31, 1999 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.

(5) Total annual expenses as a percentage is based on amounts for the year ended
December 31, 1999. Total annual expenses as a percentage of net assets
attributable to common shares 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 1.83% 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 Common Stock. 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............................................................ $ 92 $ 138 $ 189 $341
</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 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'

S-5
<PAGE>
RECENT DEVELOPMENTS

For the first quarter of 2000, ending March 31, 2000, the Company's
earnings increased to $19.3 million from $7.0 million for the first quarter of
1999. On a diluted per share basis, earnings increased 69% to $1.05 per share
compared to $0.62 in first quarter 1999. Net operating income in first quarter
2000 increased to $8.5 million compared to $4.7 million in first quarter 1999.
On a diluted per share basis, net operating income increased 12% to $0.47 per
share compared to $0.42 per share in first quarter 1999.

In first quarter 2000, the Company completed three financing transactions
totaling $32 million, an increase of 22% over first quarter 1999's total of
$26.2 million. First quarter 2000 transactions were composed of $13.5 million of
senior debt, $12.0 million of subordinated debt, $4.0 million of preferred stock
and $2.5 million of warrants, including $1.8 million of unfunded commitments.

Earnings for the quarter included unrealized appreciation of $10.8 million.
The Company recorded unrealized appreciation of $11.8 million at eight portfolio
companies, including $7.6 million of appreciation on the Company's investment in
Clear Communications Group, and unrealized depreciation of $1.0 million at one
portfolio company. The value of the Company's investment in Capital.com remained
unchanged at $72.5 million.

The weighted average interest rate on the total capital invested during the
quarter was 11.9%. The weighted average interest rate on the Company's total
capital invested as of March 31, 2000, was 13.8%. All loans are current and at
March 31, 2000, the weighted average grade of the Company's loan portfolio
increased from 3.2 in the fourth quarter of 1999 to 3.3 on a 4.0 scale.

USE OF PROCEEDS

The net proceeds from the sale of the Common Stock, after deducting
estimated expenses, are approximately $106,200,000 ($122,180,000 if the
over-allotment option is exercised). We intend to use substantially all of the
net proceeds from this offering to repay indebtedness on the Company's existing
revolving indebtedness owed under a Loan Funding and Servicing Agreement, dated
as of March 31, 1999, as amended, by and among the Company, ACS Funding Trust I
and certain affiliates of First Union Securities, Inc., one of the underwriters.
As of April 28, 2000, the interest rate on such debt, which varies from time to
time based on certain indices, was 7.79%, and the final maturity date on this
indebtedness is March 31, 2004.

S-6
<PAGE>
CAPITALIZATION
(ALL DOLLAR AMOUNTS IN THOUSANDS)

The following table sets forth (a) the actual capitalization of our Company
at March 31, 2000, and (b) the capitalization of our Company at March 31, 2000,
as adjusted to reflect the effects of the sale of the Common Stock offered
hereby by us, and the application of the net proceeds as set forth under 'Use of
Proceeds.'

<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------------
ACTUAL AS ADJUSTED(1)(3)
-------- -----------------
<S> <C> <C>
Borrowings:
Revolving credit facility......................................................... $117,212 $ 10,663
-------- --------
Total borrowings............................................................... 117,212 10,663
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized and no shares issued
and outstanding................................................................ -- --
Common Stock, $0.01 par value, 70,000,000 shares authorized; 18,270,000 issued and
outstanding (23,770,000 issued as outstanding as adjusted)(2).................. 183 238
Capital in excess of par value.................................................... 256,297 362,791
Notes receivable from sale of Common Stock........................................ (23,003) (23,003
Undistributed net realized earnings............................................... 1,409 1,409
Unrealized appreciation of investments............................................ 88,380 88,380
-------- --------
Total shareholders' equity..................................................... 323,266 429,815
-------- --------
Total Capitalization.............................................................. $440,478 $440,478
-------- --------
-------- --------
</TABLE>

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

(1) Reflects the offering price of $20.50 per share.

(2) Excludes an aggregate of 294,748 shares issuable pursuant to stock options
outstanding at March 31, 2000 that vest over varying periods of time.

(3) Does not include the underwriters' overallotment of 825,000 shares.

S-7
<PAGE>
UNDERWRITING

The underwriters named below (the 'Underwriters'), acting through their
representative, FleetBoston Robertson Stephens Inc., have severally and not
jointly agreed with us, subject to the terms and conditions set forth in the
underwriting agreement (the 'Underwriting Agreement'), to purchase from us the
number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares if any are
purchased.

NUMBER
UNDERWRITER OF SHARES
- -------------------------------------------------------------------- ---------
FleetBoston Robertson Stephens Inc. ................................ 1,785,000
First Union Securities, Inc. ....................................... 1,785,000
A.G. Edwards & Sons, Inc. .......................................... 765,000
PaineWebber Incorporated............................................ 765,000
Fahnestock & Co. Inc. .............................................. 100,000
Friedman Billings Ramsey............................................ 100,000
Legg Mason Wood Walker, Incorporated................................ 100,000
Scott & Stringfellow, Inc. ......................................... 100,000
---------
Total............................................................. 5,500,000
---------
---------

The Underwriters' representative has advised us that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus Supplement and to certain
dealers at such price less a concession of not more than $0.62 per share, of
which $0.10 may be reallowed to other dealers. After the completion of this
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Underwriters' representative. No such reduction shall change
the amount of proceeds to be received by us as set forth on the cover page of
this Prospectus Supplement.

Over-allotment Option. We have granted to the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus
Supplement, to purchase up to 825,000 additional shares of Common Stock at the
same price per share as we will receive for the 5,500,000 shares that the
Underwriters may purchase. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares that the number of shares of Common Stock to be purchased by it shown in
the above table represents as a percentage of the 5,500,000 shares offered
hereby. If purchased, such additional shares will be sold by the Underwriters on
the same terms as those on which the 5,500,000 shares are being sold.

Indemnity. We have agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933 and
liabilities arising from breaches of representations and warranties contained in
the Underwriting Agreement, or to contribute to payments that the Underwriters
may be required to make in respect thereof.

Lock-up Agreements. Our directors and executive officers have agreed with
the Underwriters' representative that, for a period of 90 days after the date of
this Prospectus Supplement, they will not offer to sell, contract to sell or
otherwise sell, dispose of, loan, pledge or grant any option to purchase any
shares of Common Stock or any securities convertible into, or exchangeable for,
or any rights to purchase or acquire, shares of Common Stock, now owned or
hereafter acquired directly by such holders or with respect to which they have
the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens Inc. which may, in its sole discretion and at any time or
from time to time, without notice, release all or any portion of the shares
subject to the lock-up agreements. There are no existing agreements between
FleetBoston Robertson Stephens Inc. and any of our shareholders who have
executed a lock-up agreement providing consent to the sale of shares prior to
the expiration of the lock-up period.

Future Sales. We have agreed that, for a period of 90 days after the date
of this Prospectus Supplement, we will not, without the prior written consent of
FleetBoston Robertson Stephens Inc. issue, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock or any securities convertible into or exercisable for or
exchangeable for shares

S-8
<PAGE>
of Common Stock other than our sale of shares in this offering, the issuance of
Common Stock upon the exercise of outstanding options and our grant of options
to purchase shares of Common Stock under existing stock option or stock purchase
plans.

The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.

Stabilization. The Underwriters' representative has advised us that,
pursuant to Regulation M under the Securities Exchange Act of 1934, as amended,
certain persons participating in the offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids, which may have the effect of stabilizing or maintaining the market
price of the Common Stock at a level above that which might otherwise prevail in
the open market. A 'stabilizing bid' is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of fixing or maintaining the
price of the Common Stock. A 'syndicate covering transaction' is the bid for or
the purchase of the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with this offering. A
'penalty bid' is an arrangement permitting the Underwriters' representative to
reclaim the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Underwriters'
representative in a syndicate covering transaction and has therefore not been
effectively placed by such Underwriter or syndicate member. The Underwriters'
representative has advised us that such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

Passive Market Making. In connection with this offering, certain
Underwriters and selling group members (if any) who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of
the Regulation M, during the business day prior to the pricing of the offering,
before the commencement of offers or sales of the Common Stock. Passive market
makers must comply with applicable volume and price limitations and must be
identified as such. In general, a passive market maker must display its bid at a
price not in excess of the highest independent bid for such security; if all
independent bids are lowered below the passive market maker's bid, however, such
bid must then be lowered when certain purchase limits are exceeded.

The shares of our Common Stock are being offered by the Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.

Certain of the Underwriters or their affiliates from time to time have
provided investment banking and financial advisory services to us and our
affiliates, and may in the future provide investment banking and financial
advisory services to us and our affiliates.

More than 10% of the proceeds from the sale of the Common Stock, not
including underwriting compensation, will be paid to certain affiliates of First
Union Securities, Inc., one of the Underwriters, in connection with the
repayment of debt owed under a Loan Funding and Servicing Agreement, dated as of
March 31, 1999, as amended, by and among the Company, ACS Funding Trust I and
certain other parties, including certain affiliates of First Union Securities,
Inc. Accordingly, the offering is being conducted pursuant to Rule 2710(c)(8) of
the National Association of Securities Dealers, Inc.

S-9
<PAGE>
TAXATION

The following discussion is a general summary of the material federal
income tax considerations applicable to us and to an investment in the Common
Stock and does not purport to be a complete description of the income tax
considerations applicable to such an investment. 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 stockholders should consult their own tax advisors with
respect to tax considerations which pertain to their purchase of Common Stock.
This summary assumes that the investors in our business hold Common Stock as
capital assets. This summary does not discuss all aspects of federal income
taxation relevant to holders of the Common Stock in light of their particular
circumstances, or to certain types of holders subject to special treatment under
federal income tax laws, including foreign taxpayers, dealers in securities,
financial institutions, qualified plans and individual retirement accounts. This
summary does not discuss any aspects of foreign, state or local tax laws. Unless
otherwise stated, this summary deals only with stockholders who are United
States persons. A United States person generally is a:

o citizen or resident of the United States;

o a corporation or partnership created or organized in or under the laws of
the United States, any state thereof or the District of Columbia;

o an estate whose income is subject to United States federal income tax
regardless of its source; or

o a trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of the
trust.

TAXATION AS A RIC

We have operated since October 1, 1997 so as to qualify to be taxed as a
RIC. If we qualify as a RIC and annually distribute to our stockholders in a
timely manner at least 90% of our 'investment company taxable income,' as
defined in the Code, we will not be subject to federal income tax on the portion
of our taxable income and capital gains we distribute to stockholders.
'Investment company taxable income' generally means our taxable income,
including net short-term capital gains but excluding net long-term capital
gains. In addition, we will be liable for a nondeductible federal excise tax of
4% on our undistributed income unless for each calendar year we distribute
(including through 'deemed distributions' as described below) an amount equal to
or greater than the sum of (a) 98% of our 'ordinary income' (generally, our
taxable income excluding net short-term and long-term capital gains), (b) 98% of
our '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 (c) any shortfall in distributing all ordinary income and
capital gain net income for the prior calendar year. We generally will endeavor
to make distributions and have deemed distributions such that we will not incur
the federal excise tax on our earnings.

Our income for tax purposes, which determines the required distributions,
may differ from our income as measured for other purposes. If we invest in
certain options, futures, and forward contracts, we may be required to recognize
unrealized gains and losses on those contracts at the end of our taxable year.
In such event, 60% of any net gain or loss will generally be treated as
long-term capital gain or loss and the remaining 40% of such net gain or loss
will be treated as short-term capital gain or loss, regardless of the fact that
we may not eventually experience such gain or loss. If we engage in certain
hedging transactions, the results may be treated as a deemed sale of appreciated
property which may accelerate the gain on the hedged transaction.

If we acquire or are 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, we 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 we receive cash representing such
income in the same taxable year and to make distributions accordingly.

S-10
<PAGE>
In order to qualify as a RIC for federal income tax purposes, we must,
among other things: (a) continue to qualify as a business development company
('BDC') under the Investment Company Act of 1940, as amended ('1940 Act'); (b)
derive in each taxable year at least 90% of our 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 our business
of investing in such stock or securities; and (c) diversify our holdings so that
at the end of each quarter of the taxable year (i) at least 50% of the value of
our assets consist 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 our assets or 10% of the outstanding voting
securities of the issuer, and (ii) no more than 25% of the value of our assets
(including those owned by ACFS) are invested in securities of one issuer (other
than U.S. government securities or securities of other RICs), or of two or more
issuers that are controlled by us and are engaged in the same or similar or
related trades or businesses.

If we fail to satisfy the 90% distribution requirement or otherwise fail to
qualify as a RIC in any taxable year, we will be subject to tax in such year on
all of our taxable income, regardless of whether we make any distribution to our
stockholders. In addition, in that case, all of our distributions to our
stockholders will be characterized as ordinary income (to the extent of our
current and accumulated earnings and profits). In contrast, as is explained
below, if we qualify as a RIC, a portion of our distributions may be
characterized as long-term capital gain in the hands of stockholders.

We received a ruling from the IRS clarifying the tax consequences of our
conversion to a RIC, especially with regard to the treatment of unrealized gain
inherent in our assets (approximately $6.3 million) upon our conversion to RIC
status ('built-in gain'). Under the terms of the ruling and applicable law, if
we realize or are treated as realizing any of the built-in gain before October
1, 2007, we generally will be liable for corporate level federal income tax on
the gain, which could not be avoided by our payment of dividends.

Our wholly-owned subsidiary, ACFS, is an ordinary corporation that is
subject to corporate level federal income tax. We also own all of the equity
interests issued by ACS Funding Trust I, a business trust that is disregarded as
a separate entity for tax purposes.

TAXATION OF STOCKHOLDERS

Our distributions generally are taxable to you as ordinary income or
capital gains. Our stockholders receive notification from us at the end of the
year as to the amount and nature of the income or gains distributed to them for
that year. The distributions from us to a particular stockholder may be subject
to the alternative minimum tax under the provisions of the Code.

Our distributions of ordinary income and net short-term capital gain
generally are taxable to you as ordinary income. Distributions of net long-term
capital gain, if any, that we designate as capital gain dividends generally will
be taxable to you as a long-term capital gain, regardless of the length of time
you have held the shares. All distributions are taxable, whether invested in
additional shares or received in cash.

If we retain any net long-term capital gains, we will designate them as
'deemed distributions' and pay tax on them for the benefit of our stockholders.
Stockholders would then report their share of the retained capital gains on
their tax returns as if it had been received, and report a credit for the tax
paid thereon by us. Stockholders add the amount of the deemed distribution, net
of such tax, to the stockholder's basis in his shares. Since we expect to pay
tax on capital gains at the regular corporate tax rate and the maximum rate
payable by individuals on such gains is substantially lower, the amount of the
credit that individual stockholders may report will exceed the amount of tax
that they would be required to pay on the capital gains, allowing recovery of
the difference in the tax otherwise owed by, or refunds due to, such
shareholders.

In general, any gain or loss realized upon a taxable disposition of our
shares, or upon receipt of a liquidating distribution, will be treated as
capital gain or loss. If you realize a gain, it will be subject to taxation at
various tax rates depending on the length of time you have held such shares and
other factors. The gain or loss will be short-term capital gain or loss if you
have held the shares for one year or less. If you receive a capital gain
dividend ( or deemed distributions) with respect to such shares, any loss you
realize upon a taxable disposition of shares you held for six months or less
will be treated as a long-term

S-11
<PAGE>
capital loss, to the extent of such capital gain dividends (or deemed
distributions). Capital losses can be deducted by corporations only in the
extent of capital gains. Individuals can deduct capital losses to the extent of
capital gains, and then up to $3,000 of other income annually. All or a portion
of any loss you realize upon a taxable disposition of our shares may be
disallowed if you purchase other shares of ours are purchased (under a Dividend
Reinvestment Plan or otherwise) within 30 days before or after the disposition.

If you are not a 'United States person' (a 'Non-U.S. stockholder') you will
generally be subject to a withholding tax of 30% (or lower applicable treaty
rate) on dividends from us (other than capital gain dividends) that are not
'effectively connected' with your United States trade or business. Accordingly,
investment in our business is likely to be appropriate for a Non-U.S.
stockholder only if you can utilize a foreign tax credit or corresponding tax
benefit in respect of such United States withholding tax. Non-effectively
connected capital gain dividends and gains realized from the sale of the Common
Stock will not be subject to United States federal income tax in the case of (a)
a Non-U.S. stockholder that is a corporation, and (b) a Non-U.S. stockholder
that is not present in the United States for more than 182 days during the
taxable year (assuming that certain other conditions are met). Prospective
foreign investors should consult their U.S. tax advisors concerning the tax
consequences to them of an investment in the Common Stock.

We are required to withhold and remit to the Internal Revenue Service (the
'IRS') 31% of the dividends paid to any stockholder who (a) fails to furnish us
with a certified taxpayer identification number; (b) has underreported dividend
or interest income to the IRS; or (c) fails to certify to us that he, she or it
is not subject to backup withholding.

LEGAL MATTERS

The validity of the Common Stock we are offering will be passed upon for us
by Arnold & Porter, Washington, D.C. Certain matters for the Underwriters will
be passed upon by Sidley & Austin, New York, New York.

EXPERTS

Ernst & Young LLP, independent auditors, have audited the Company's
financial statements at December 31, 1999 and 1998, and for the year ended
December 31, 1999 and 1998, the three months ended December 31, 1997, and the
nine months ended September 30, 1997 and financial highlights for the years
ended December 31, 1999 and 1998. We have included our financial statements and
financial highlights in the 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.

S-12
<PAGE>
ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission (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 shares of Common Stock
offered by this Prospectus Supplement and the 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 Common Stock,
reference is made to the Registration Statement, including the exhibits and
schedules thereto and the Statement of Additional Information ('SAI'), contained
in the Registration Statement. You may obtain a copy of our SAI by writing us at
our principal office, which is located at 2 Bethesda Metro Center, 14th Floor,
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 SAI is incorporated in its entirety in the Prospectus by reference
and its table of contents appears on page SAI-1 of the Prospectus.

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. 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.'

S-13
<PAGE>
PROSPECTUS

[LOGO]

$350,000,000

COMMON STOCK
PREFERRED STOCK
DEBT SECURITIES

We may offer, from time to time, up to $350,000,000 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.' As of May 10, 2000, the last reported sales
price for our Common Stock was $22.00.

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 American Capital Financial
Services, Inc. ('ACFS'), 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 December 31, 1999, we invested $347 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 2 Bethesda Metro Center,
14th Floor, 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 MAY 11, 2000.
<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 American Capital Financial Services, Inc. ('ACFS'), 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 generally acquire equity interests in the companies from which we have
purchased debt securities with the goal of enhancing our overall return. As of
December 31, 1999, we had a weighted average ownership interest of 25% 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.'

1
<PAGE>
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.

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 $350,000,000 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
</TABLE>

2
<PAGE>

<TABLE>
<S> <C>
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 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)................................................................. 1.51%
Other expenses(5)...................................................................................... 0.81%
------
Total annual expenses (estimated)(6)................................................................ 2.32%
</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

3
<PAGE>
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, 1999.

(4) The interest payments on borrowed funds percentage is based on interest
payments for the year ended December 31, 1999 divided by net assets
attributable to our Common Stock. We had outstanding borrowings of $79
million at December 31, 1999. 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, 1999 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, 1999. 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 1.83% 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............................................................ $92 $ 138 $ 189 $341
</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 17 for more information.

<TABLE>
<CAPTION>
THREE MONTHS || NINE MONTHS
YEAR ENDED YEAR ENDED ENDED || ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, || SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997 || 1997 1996 1995
------------ ------------ ------------ || ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: ||
Total operating income................ $ 33,405 $ 16,979 $ 2,797 || $ 2,901 $2,746 $2,706
Total operating expenses.............. 7,251 1,709 551 || 2,651 2,862 2,928
------------ ------------ ------------ || ------------- ------ ------
Operating income (loss) before equity ||
in (loss) earnings of unconsolidated ||
operating subsidiary................ 26,154 15,270 2,246 || 250 (116) (222)
Equity in (loss) earnings of ||
unconsolidated operating ||
subsidiary.......................... (1,493) (482) 24 || -- -- --
------------ ------------ ------------ || ------------- ------ ------
Net operating income (loss)........... 24,661 14,788 2,270 || 250 (116) (222)
Increase in unrealized appreciation on ||
investments......................... 69,829 2,127 167 || 5,321 484 371
Realized gain (loss) on investments... 2,711 -- -- || -- -- 66
------------ ------------ ------------ || ------------- ------ ------
Income before income taxes............ 97,201 16,915 2,437 || 5,571 368 215
Provision for income taxes............ -- -- -- || 2,128 159 57
------------ ------------ ------------ || ------------- ------ ------
Net increase in shareholders' equity ||
resulting from operations........... $ 97,201 $ 16,915 $ 2,437 || $ 3,443 $ 209 $ 158
------------ ------------ ------------ || ------------- ------ ------
------------ ------------ ------------ || ------------- ------ ------
Per share data: ||
Net operating income: ||
Basic............................. $ 1.79 $ 1.34 $ 0.21 ||
Diluted........................... $ 1.73 $ 1.29 $ 0.20 ||
Net increase in shareholders' equity ||
resulting from operations: ||
Basic............................. $ 7.07 $ 1.53 $ 0.22 ||
Diluted........................... $ 6.80 $ 1.48 $ 0.21 ||
Weighted average shares of Common ||
Stock outstanding: ||
Basic............................. 13,744 11,068 11,069 ||
Diluted........................... 14,294 11,424 11,405 ||
Cash dividends...................... $ 1.74 $ 1.34 $ 0.21 ||
BALANCE SHEET DATA: ||
Total assets........................ $395,372 $270,019 $150,705 || $ 154,322 $5,432 $4,382
Total shareholders'equity........... $311,745 $152,723 $150,652 || $ 150,539 $3,372 $2,946
OTHER DATA: ||
Number of portfolio companies at ||
period end........................ 33 15 3 ||
Principal amount of loan ||
originations........................ $139,433 $116,864 $ 16,817 ||
Investments in equity securities.... $ 32,162 $ 26,001 $ 3,805 ||
Principal amount of loan ||
repayments........................ $ 30,731 $ 1,719 $ 93 ||
Return on equity(1)(2).............. 41.9% 11.2% 6.5% ||
Weighted average yield on ||
investments to date............... 13.9% 13.0% 12.2% ||
</TABLE>

- ------------------
(1) Amount is annualized for the three months ended 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.

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.

7
<PAGE>
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. 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

8
<PAGE>
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.

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 March 31, 2000 we have one CP
Conduit Facility with an aggregate commitment of $225 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)....... -20.7% -14.4% -8.0% -1.7% 4.6% 11.0% 17.3%
</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

9
<PAGE>
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 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 December 31, 1999, none of our borrowings were
at fixed rates of interest and $79 million were at variable rates of interest
determined on the basis of a benchmark LIBOR rate. In addition, approximately
75% of the loans in our portfolio were at fixed rates and approximately 25% 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 our CP Conduit
Facility administered by First Union Capital Markets Corp. This facility, which
has an aggregate commitment of $225 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.

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

10
<PAGE>
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.'

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 Chairman and Chief Executive
Officer, Adam Blumenthal, our 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

11
<PAGE>
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 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.'

WE MAY NOT BE ABLE TO EXECUTE OUR BUSINESS STRATEGY IF USE OF THE INTERNET AS
REQUIRED BY OUR STRATEGY DOES NOT DEVELOP AND OUR NET ASSET VALUE COULD BE
ADVERSELY AFFECTED

We have begun to implement a business strategy that uses the Internet as a
financial portal for middle market companies. A significant portion of our net
asset value is attributable to Capital.com, Inc. ('Capital.com'), a portfolio
company that seeks to implement this strategy. Additionally, our Internet
strategy contemplates the use of the Internet to auction securities to
institutional investors, and development of a retail site for certain of our
portfolio companies. There can be no assurance that the implementation of this
strategy will be successful and it is likely that our net asset value would be
adversely affected if the business strategy is not successfully implemented.

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.

12
<PAGE>
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 March 21, 2000, the Company had 268 stockholders of record
and approximately 7,600 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 May 10, 2000.

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 $19.00 $14.00 $ 0.41 (0.14)% 35.52%
Second Quarter................................... $ 13.80 $21.25 $16.00 $ 0.43 15.94% 53.99%
Third Quarter.................................... $ 13.64 $20.00 $16.25 $ 0.43 19.13% 46.63%
Fourth Quarter................................... $ 17.08 $23.13 $17.88 $ 0.47 4.60% 35.42%
2000
First Quarter.................................... $ 17.69 $26.81 $20.88 $ 0.45 18.03% 51.55%
Second Quarter (Through May 10, 2000)............ -- $27.75 $21.31 $ 0.49 -- --
</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.
<TABLE>
<CAPTION>
THREE MONTHS || NINE MONTHS
YEAR ENDED YEAR ENDED ENDED || ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, || SEPTEMBER 30, DECEMBER 31,
1999 1998 1997 || 1997 1996
------------ ------------ ------------- || ------------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: ||
Total operating income............... $ 33,405 $ 16,979 $ 2,797 || $ 2,901 $2,746
Total operating expenses............. 7,251 1,709 551 || 2,651 2,862
------------ ------------ ------------- || ------------- ------
Operating income (loss) before equity ||
in (loss) earnings of ||
unconsolidated operating ||
subsidiary......................... 26,154 15,270 2,246 || 250 (116)
Equity in (loss) earnings of ||
unconsolidated operating ||
subsidiary......................... (1,493) (482) 24 || -- --
------------ ------------ ------------- || ------------- ------
Net operating income (loss).......... 24,661 14,788 2,270 || 250 (116)
Increase in unrealized appreciation ||
on investments..................... 69,829 2,127 167 || 5,321 484
Realized gain (loss) on ||
investments........................ 2,711 -- -- || -- --
------------ ------------ ------------- || ------------- ------
Income before income taxes........... 97,201 16,915 2,437 || 5,571 368
Provision for income taxes........... -- -- -- || 2,128 159
------------ ------------ ------------- || ------------- ------
Net increase in shareholders' equity ||
resulting from operations.......... $ 97,201 $ 16,915 $ 2,437 || $ 3,443 $ 209
------------ ------------ ------------- || ------------- ------
------------ ------------ ------------- || ------------- ------
PER SHARE DATA: ||
Net operating income: ||
Basic............................ $ 1.79 $ 1.34 $ 0.21 ||
Diluted.......................... $ 1.73 $ 1.29 $ 0.20 ||
Net increase in shareholders' ||
equity resulting from operations: ||
Basic............................ $ 7.07 $ 1.53 $ 0.22 ||
Diluted.......................... $ 6.80 $ 1.48 $ 0.21 ||
Weighted average shares of Common ||
Stock outstanding: ||
Basic............................ 13,744 11,068 11,069 ||
Diluted.......................... 14,294 11,424 11,405 ||
Cash dividends................... $ 1.74 $ 1.34 $ 0.21 ||
BALANCE SHEET DATA: ||
Total assets....................... $395,372 $270,019 $ 150,705 || $ 154,322 $5,432
Total shareholders' equity......... $311,745 $152,723 $ 150,652 || $ 150,539 $3,372
OTHER DATA: ||
Number of portfolio companies at ||
period end....................... 33 15 3 ||
Principal amount of loan ||
originations..................... $139,433 $116,864 $ 16,817 ||
Investments in equity securities... $ 32,162 $ 26,001 $ 3,805 ||
Principal amount of loan ||
repayments....................... $ 30,731 $ 1,719 $ 93 ||
Return on equity(1)(2)............. 41.9% 11.2% 6.5% ||
Weighted average yield on ||
investments to date.............. 13.9% 13.0% 12.2% ||

<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Total operating income............... $2,706
Total operating expenses............. 2,928
------
Operating income (loss) before equity
in (loss) earnings of
unconsolidated operating
subsidiary......................... (222)
Equity in (loss) earnings of
unconsolidated operating
subsidiary......................... --
------
Net operating income (loss).......... (222)
Increase in unrealized appreciation
on investments..................... 371
Realized gain (loss) on
investments........................ 66
------
Income before income taxes........... 215
Provision for income taxes........... 57
------
Net increase in shareholders' equity
resulting from operations.......... $ 158
------
------
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
Total shareholders' equity......... $2,946
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>

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 the investment; volatility in the value of equity investments
including Internet properties, such as Capital.com; 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 Securities and Exchange Commission. The Company
cautions readers not to place undue reliance on any such forward looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act 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
regulated investment company ('RIC'). After the IPO, the Company changed its
primary business plan and format from structuring and arranging financing for
buyout transactions on a fee for services basis to being a lender to and
investor in 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, ACFS, 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 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 publicly and non-publicly traded securities, excluding government
securities, was $377,554 and $165,035 at December 31, 1999 and 1998,
respectively. During the years ended December 31, 1999 and 1998, the Company
made investments totaling $175,823 and $150,249, including $13,500 and $7,384 in
funds committed but undrawn under credit facilities, respectively. The weighted
average effective interest rate on the investment portfolio was 13.9% and 13.0%
at December 31, 1999 and 1998, respectively. Summaries of the composition of the
Company's portfolio of publicly and non-publicly

17
<PAGE>
traded securities, excluding government securities, at December 31, 1999 and
1998 at cost and fair value are shown in the following table:
<TABLE>
<CAPTION>
COST DECEMBER 31, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Senior debt...................................................... 11.9% 15.2%
Subordinated debt................................................ 69.4% 66.4%
Convertible preferred stock...................................... 2.2% 3.3%
Common stock warrants............................................ 13.6% 12.6%
Common stock..................................................... 2.9% 2.5%

FAIR VALUE DECEMBER 31, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Senior debt...................................................... 9.7% 15.0%
Subordinated debt................................................ 56.0% 65.5%
Convertible preferred stock...................................... 2.0% 3.3%
Common stock warrants............................................ 11.6% 13.4%
Common stock..................................................... 20.7% 2.8%
</TABLE>

On a fair value basis, the Company's portfolio composition was weighted
more heavily toward common stock at December 31, 1999 than at December 31, 1998
due to the value of the Capital.com investment of $72,500. At December 31, 1999,
Capital.com accounted for 19% of the total portfolio value of investments in
publicly and non-publicly traded securities (see discussion of Capital.com under
Results of Operations).

The following table shows the portfolio composition by industry grouping at
cost and at fair value:
<TABLE>
<CAPTION>
COST DECEMBER 31, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Manufacturing.................................................... 56.6% 65.9%
Wholesale & Retail............................................... 11.5% 7.4%
Construction..................................................... 7.7% 10.1%
Healthcare....................................................... 6.5% --
Media............................................................ 5.5% 9.2%
Telecommunications............................................... 4.3% --
Service.......................................................... 3.5% 2.0%
Information Technology........................................... 2.5% --
Transportation................................................... 1.4% 5.4%
Internet......................................................... 0.5% --

FAIR VALUE DECEMBER 31, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Manufacturing.................................................... 46.2% 66.1%
Internet......................................................... 19.2% --
Wholesale & Retail............................................... 9.3% 7.4%
Construction..................................................... 6.2% 10.0%
Healthcare....................................................... 5.2% --
Media............................................................ 4.5% 9.1%
Telecommunications............................................... 3.5% --
Service.......................................................... 2.8% 2.0%
Information Technology........................................... 2.0% --
Transportation................................................... 1.1% 5.4%
</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 three 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

18
<PAGE>
contributions, depreciation and interest expense. For periods prior to October
1, 1997, ESOP contributions represented a significant component of total
operating expenses. 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.

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 ACFS, which prior
to RIC status was consolidated, is presented on the equity method effective
October 1, 1997.

The operating results for the years ended December 31, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Operating income........................................................... $ 33,405 $ 16,979
Operating expenses......................................................... 7,251 1,709
Equity in loss of unconsolidated operating subsidiary...................... (1,493) (482)
------------ ------------
Net operating income....................................................... 24,661 14,788
Net realized gain on investments........................................... 2,711 --
Increase in unrealized appreciation of investments......................... 69,829 2,127
------------ ------------
Net increase in shareholders' equity resulting from operations............. $ 97,201 $ 16,915
------------ ------------
------------ ------------
</TABLE>

Total operating income for the year ended December 31, 1999, increased
$16,426, or 97%, over the year ended December 31, 1998. The increase is a result
of the company closing 24 investments in private companies totaling $162 million
and selling investments in 2 portfolio companies during 1999. Total operating
income for 1999 consisted of $2,044 in loan fees, $528 in prepayment fees,
$29,893 in interest and dividends on non-publicly traded securities, and $940 in
interest on government agency securities, bank deposits, repurchase agreements,
and shareholder loans. Total operating income for 1998 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.

Operating expenses for 1999 increased $5,542, or 324%, over 1998. The
increase is primarily due to an increase in interest expense from $57 in 1998 to
$4,716 in 1999. Interest expense increased due to an increase in the Company's
weighted average borrowings from $1,031 in 1998 to $48,608 in 1999. In addition,
the weighted average interest rate on outstanding borrowings, including
amortization of deferred finance costs, increased from 5.9% in 1998 to 9.7% in
1999. Operating expenses for 1999 consisted of $1,045 in salaries and benefits,
$1,490 in general and administrative expenses, and $4,716 in interest expense.
Operating expenses also increased due to increases in salaries and benefits from
$843 in 1998 to $1,045 in 1999 due to an increase in employees from 30 at
December 31, 1998 to 39 at December 31, 1999.

Equity in loss of unconsolidated operating subsidiary, which represents
ACFS's results, increased from a loss of $482 in 1998 to a loss of $1,493 in
1999. For the year ended December 31, 1999, ACFS's results included $6,030 of
operating income, $9,114 of operating expenses, $925 of realized gains, $246 of
unrealized depreciation of investments, and $912 of other income. The realized
gain was a result of the sale of ACFS's common stock investment in Four-S Baking
Company ('Four-S') and the unrealized depreciation was due to the reversal of
previously recorded unrealized appreciation of ACFS's Four S investment, netted
against unrealized gains on other investments. For the year ended December 31,
1998, ACFS's results included $5,227 of operating income, $6,451 of operating
expenses, $481 of unrealized appreciation of

19
<PAGE>
investments, and $261 in other income. The decrease in ACFS's earnings for 1999
was primarily attributable to the increase in salaries and benefits caused by an
increase in employees from 30 to 39.

During 1999, the Company recorded a realized gain of $2,395 from the
prepayment of $8,000 of subordinated debt by Specialty Transportation Services,
Inc. ('STS') and the sale of the Company's common stock and warrant investments
in STS, and a realized gain of $316 on the sale of its investment in Four-S.
Total proceeds from the repayment of the STS subordinated debt and the sale of
the Company's equity interest in STS totaled $11,000; the realized gain on the
subordinated debt was a result of the realization of unamortized loan discounts
and the gains on the warrants and equity were equal to the excess cash received
over the cost basis of the securities. In addition, STS paid ACFS a $1,000 fee
to terminate an investment banking contract between STS and ACFS. Total proceeds
from the sale of the Four-S securities, which included senior debt, subordinated
debt, preferred stock, common stock warrants, and common stock, were $7,200. The
realized gain for the Four-S transactions was comprised of the realization of
unamortized loan discounts. The Company did not record any realized gains on
investments in 1998.

During 1999, the Company paid federal income taxes of $309 on retained
realized gains recorded on the Four-S and STS transactions during the tax year
ended September 30, 1999; $1,844 of gains on the STS sale were realized
subsequent to September 30, 1999. The payment was treated as a deemed
distribution because it was paid on behalf of the Company's shareholders. As a
result, the Company did not record income tax expense. The Company may elect to
retain future realized gains and pay taxes on behalf of the shareholders.

The increase in unrealized appreciation of investments is based on
portfolio asset valuations determined by the Company's Board of Directors. The
increase in unrealized appreciation of investments was $69,829 in 1999, compared
to $2,717 in 1998. The increase was primarily due to the increase in the
valuation of Capital.com of $71,008 (see further discussion of Capital.com
below). Excluding Capital.com, the Company experienced unrealized depreciation
of investments of $1,179, which consisted of valuation increases of $6,254 at
seven portfolio companies, valuation decreases of $6,719 at eight portfolio
companies, valuation decreases of $163 related to interest rate basis swaps used
to manage interest rate risk, and $551 of unrealized depreciation resulting from
the reversal of previously recorded unrealized appreciation of the Company's
investments in Four-S and STS. The increase in unrealized appreciation of
investments for the year ended December 31, 1998 was $2,127, which consisted of
valuation increases of $2,324 at nine portfolio companies and valuation
decreases of $197 at three portfolio companies.

Capital.com, an Internet finance portal, was launched in July 1999 under
the name of AmericanCapitalOnline.com. In December 1999, the assets of
AmericanCapitalOnline.com were contributed to Capital.com, Inc., a newly formed
entity, and the site was renamed Capital.com. The total cost of the assets
contributed to Capital.com by the Company was $1,492. During December, 1999, a
subsidiary of First Union Corporation ('First Union') invested $15,000 in
Capital.com in exchange for a 15% common equity stake and warrants to acquire up
to an additional 5% of the common equity at a nominal price. The warrants are
exercisable based on a subsequent valuation of Capital.com in connection with a
subsequent investment or offer to invest within a year of First Union's stock
purchase. If the subsequent valuation results in a value of Capital.com of
$100,000 or more, the warrants will be extinguished. If the subsequent valuation
results in a value of Capital.com of $75,000 or less, all the warrants will be
exercisable. If the subsequent valuation results in a value between $75,000 and
$100,000, a pro-rata portion of the warrants will be exercisable.

In considering the appropriate valuation of this investment at December 31,
1999, in addition to the value implied by First Union's investment for a 15%
equity interest, management and the Board of Directors considered several
factors including:

o The valuation of comparable public company entities;

o The very early development stage of Capital.com;

o An estimated value for the warrants issued to First Union and the
uncertainty of a subsequent valuation of Capital.com affecting the number
of shares for which such warrants could be exercised.

20
<PAGE>
total shareholders' equity at December 31, 1999 and the change in unrealized
appreciation represents 73% of the net increase in shareholders' equity
resulting from operations for 1999. Realization of this valuation in subsequent
periods is subject to a high degree of uncertainty including the ability of
Capital.com to attract and retain financial and service providers, develop and
maintain a significant customer base that will support the on going investment
and capital needs of the business, attract additional investors in the business,
and develop and execute an exit strategy for investors. The outcome of these
matters is highly uncertain. Inability to achieve these or other factors could
negatively impact future valuations of Capital.com and such differences could be
material.

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

<TABLE>
<CAPTION>
THREE MONTHS 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 $1,897 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 ACFS's
results including the portfolio companies. For the three months ended December
31, 1997, ACFS's results included $414 of operating income, $987 of operating
expenses, $605 of unrealized appreciation of investments 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 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.

The pre-RIC operating results for the nine months ended September 30, 1997
are as follows:

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

Total operating income was $2,901 for the nine months ended September 30,
1997, consisting of financial advisory fees of $1,122, financial performance
fees of $798, other operating income of $428, and interest income earned on
investment securities and overnight repurchase agreements of $553.

21
<PAGE>
Total operating expenses for the nine months ended September 30, 1997, were
$2,651. Operating expenses consisted of salaries and benefits of $1,221, general
and administrative expenses of $1,547, and interest expense of $60. In addition,
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, the Company recorded net
increases in unrealized appreciation of investments in its portfolio companies
of $5,321. Included in unrealized appreciation of investments during the first
nine months of 1997 was $4,400 associated with an investment in Biddeford
Textile Coorporation, 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, and
depreciation of $138 associated with Martino's Bakery, Inc.

The following table sets forth the components of the increase in unrealized
appreciation of investments for the nine months ended September 30, 1997:

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

The Company recorded a provision for income taxes for the nine months ended
September 30, 1997, of $2,128. 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 ACFS.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

At December 31, 1999, the Company had $2,037 in cash and cash equivalents.
In addition, the Company had outstanding debt secured by assets of the Company
of $78,545 under a $225,000 debt funding facility. During 1999, the Company
funded its investments with proceeds from a debt funding facility, short term
borrowings, and a follow-on equity offering from which it received net proceeds
of approximately $90,000.

On March 31, 1999, the Company closed a maximum $100,000 debt funding
facility; this facility was increased to a $125,000 on June 17, 1999, and to
$225,000 on December 10, 1999. 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. The Company
subsequently contributed an additional $100,000 in loans to the Trust. Subject
to certain conditions precedent, 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 transfer of assets to the
Trust and the related borrowings by the Trust have been treated as a financing
arrangement by the

22
<PAGE>
Company under Statement of Financial Accounting Standards No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.' The term of the facility is two years and interest on borrowings
had been charged at LIBOR (6.47% at December 31, 1999) plus 2.50%; the interest
rate was decreased to LIBOR plus 1.50% on December 10, 1999. The full amount of
principal is due at the end of the term and interest is payable monthly. The
Company has used borrowings under this facility to repay debt and to make
investments in the debt and equity securities of middle market companies; the
Company intends to continue to use this facility in this fashion. As of December
31, 1999, the Company has $78,545 of borrowings outstanding under this facility.

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 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 slightly 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 the fair value generally will be
lowered. 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 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 investment grade. The weighted average investment grade was 3.2
at both December 31, 1999 and 1998. In addition, all of the Company's
outstanding loans are performing and paying as agreed as of December 31, 1999.
At December 31, 1999 and 1998, the Company's investment portfolio was graded as
follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- --------------------------------
PERCENTAGE OF PERCENTAGE OF
INVESTMENTS AT TOTAL INVESTMENTS AT TOTAL
GRADE FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
- ------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
4 $ 65,638 21.5% $ 26,036 15.8%
3 223,898 73.4% 138,999 84.2%
2 15,577 5.1% -- 0.0%
1 -- -- -- --
-------------- ------ -------------- ------
305,113 100.0% 165,035 100.0%
</TABLE>

The amounts at December 31, 1999 do not include the Company's investments
in Capital.com, Wrenchead.com, and ACS Equities, LP for which the Company has
only invested in the equity securities of these companies.

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

23
<PAGE>
of third parties, and the systems of the portfolio companies. The Company 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 replaced its accounting
software package during 1999 and purchased upgrades of various other software
products.

Subsequent to December 31, 1999, the Company's internal
information-technology systems did not experience any significant Year 2000
related difficulties. In addition to the internal technology systems, the
Company has not experienced any Year 2000 related problems with its
non-information technology systems, such as telecommunications systems, or with
third parties that do not share information systems with the Company, such as
banks, landlords, telecommunication providers and other vendors.

During 1999, the Company evaluated the Year 2000 readiness of its portfolio
companies. Beginning in the summer of 1998, the Company had 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 had 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.
Based on the correspondence received from the portfolio companies, management
concluded that the portfolio companies were adequately addressing the Year 2000
problem. Subsequent to December 31, 1999, the Company is not aware of any Year
2000 related problems at any of its portfolio companies.

The total cost of the Company's Year 2000 project was approximately $100.
The Company does not expect to incur any further cost related to the Year 2000
issue. 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.

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.

INTEREST RATE RISK

Because the Company funds a portion of its investments with borrowings
under its debt funding facility, the Company's net operating income is affected
by the spread between the rate at which it invests and the rate at which it
borrows. At December 31, 1999, approximately 75% of the Company's interest
bearing assets provided fixed rate returns and approximately 25% of the
company's interest bearing assets provided floating rate returns. All of the
Company's outstanding debt at December 31, 1999 has a variable rate of interest
based on LIBOR. A change in the floating interest rate would have the following
annual impact on the investment portfolio at December 31, 1999:

<TABLE>
<CAPTION>
INCREASE (DECREASE) IN
------------------------------------------------------
CHANGE IN FLOATING NET OPERATING
INTEREST RATE INTEREST INCOME INTEREST EXPENSE INCOME
- ------------------- --------------- ---------------- -------------
<S> <C> <C> <C>
+ 2% $ 1,442 $ 1,571 $(129)
+ 1% 721 785 (64)
- 1% (721) (785) 64
- 2% (1,442) (1,571) 129
</TABLE>

In order to maintain the low sensitivity to changes in interest rates
evidenced above, the Company also enters into interest rate basis swap
agreements. At December 31, 1999, the Company had entered into in 4 interest
rate basis swap agreements with a total notional amount of $61,325. The Company
intends to use derivative instruments for non-trading and non-speculative
purposes only.

24
<PAGE>
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 ACFS, 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 December 31, 1999, the
Company invested $347 million in debt and equity securities of middle market
companies including over $16 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 $25 million in each
transaction and through its subsidiary, ACFS, 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 $5 million to $25
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 December 31, 1999, the weighted average effective
yield on the Company's investments was 13.9%.

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
December 31, 1999, the Company had board seats on 25 out of 33 businesses and
had board observation rights on 4 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 December 31, 1999, the Company had a weighted average ownership interest
of 25% 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

25
<PAGE>
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 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 ACFS. 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 ACFS 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 ACFS are continuing the relationships with the
referral network and the Company utilizes the referral network and ACFS's client
base as its primary sources of investment opportunities.

The Company's executive offices are located at 2 Bethesda Metro Center,
14th Floor, 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. These sites have provided
numerous investment leads to the Company and through December 31, 1999,
investments in two portfolio companies aggregating $29 million had sources
through these web sites. 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 Portal For Middle Market Companies. In the third quarter of 1999, the
Company commenced operation of a portal website designed for middle
market business to learn about corporate finance, value their business
and build financial models. In addition, the portal website provides
access to potential sources of capital including the Company. In December
1999, the portal site was renamed

26
<PAGE>
'Capital.com' and the assets conveyed to a new portfolio company known as
Capital.com, Inc. ('Capital.com'). Contemporaneously with these events, a
subsidiary of First Union Corporation invested $15 million for a 15% to
20% equity interest in Capital.com. The Company expects this site to
generate additional opportunities to provide financing to middle market
companies.

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 its 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.

27
<PAGE>
OPERATIONS

Marketing and Origination Process. The Company and ACFS have 24
professionals responsible for originating loans and investments and providing
financial assistance to middle market companies. 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.

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.

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

28
<PAGE>
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.

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 December 31, 1999, the Company and ACFS had a total of 39 employees,
24 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 ACFS) 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

29
<PAGE>
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 stockholders will be characterized as
ordinary income (to the extent of the Company's current and accumulated earnings
and profits).

Our wholly-owned subsidiary, ACFS, 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

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<PAGE>
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 '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
ACFS) 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 (i) 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 or (ii) underwrite securities to be
distributed to or purchased by stockholders of the Company in connection with
offerings of securities by companies in which the Company is a stockholder); (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. (At the annual meeting of stockholders of the Company to
be held on May 3, 2000, the stockholders will consider on amendment to clause
(a) of the preceding sentence so as to permit the Company to act as an
underwriter of securities of portfolio companies in connection with purchases of
such securities by the Company's stockholders.) 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 December 31, 1999,
regarding each portfolio company in which the Company currently has a debt or
equity investment. All such debt and equity investments have been made in
accordance with the Company's investment policies and procedures.
<TABLE>
<CAPTION>
VALUE OF
% OF CLASS INVESTMENT
OWNED ON A COST OR INITIAL AS OF
NAME AND ADDRESS OF NATURE OF FULLY VALUE OF DECEMBER 31,
PORTFOLIO COMPANY BUSINESS TYPE OF SECURITY DILUTED BASIS(1) INVESTMENT 1999(2)
- -------------------------------- ---------------- ------------------------ ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
A.H. Harris & Sons, Inc. ....... Contruction Subordinated Debt....... -- $ 4,733 $ 4,733
321 Ellis Street Material Common Stock Warrants... 3.5% 267 267
New Britain, CT 06050 Distribution
ACS Equities, L.P. ............. Investment LP Interest............. 90% 3,655 --
2 Bethesda Metro Ctr. Partnership
Bethesda, MD 20814
Aeriform Corporation ........... Packaged Subordinated Debt....... -- 7,774 7,774
8350 Mosley Industrial
Houston, TX 77068 Gases
AUXI Health, Inc. .............. Home Health Care Subordinated Debt....... -- 10,136 10,136
810 Crescent Common Stock Warrants... 20% 2,599 1,856
Center Drive
Franklin, TN 37067
BIW Connector Systems, Inc. .... Specialty Senior Debt............. -- 3,404 3,404
500 Tesconi Circle Connectors Subordinated Debt....... -- 6,829 6,829
Santa Rosa, CA 95401 Member Interest 8% 652 451
Warrants................
Capital.com Inc. ............... Business Finance Common Stock............ 85% 1,492 72,500
2 Bethesda Metro Center Internet
Bethesda, MD 20814 Portal
Caswell-Massey Holdings
Corp. ......................... Toiletries Senior Debt............. -- 2,000 2,000
121 Fieldcrest Avenue Subordinated Debt....... -- 1,670 1,670
Edison, NJ 08837 Common Stock Warrants... 24% 552 552
Centennial Broadcasting, LLC ... Radio Stations Subordinated Debt....... -- 16,975 16,975
3825 Forrestgate Drive
Winston-Salem, NC 27103
Chance Coach, Inc. ............. Bus Manufacturer Senior Debt............. -- 1,071 1,071
2811 North Ohio Street Subordinated Debt....... -- 7,520 7,520
Wichita, KS 67219 Convertible Preferred 20% 2,000 2,793
Stock................... 43.2% 4,041 5,950
Common Stock Warrants... 20.5% 1,896 2,793
Common Stock............
Clear Communication Group
Co. ........................... Communications Subordinated Debt....... -- 10,348 10,348
440 Interstate North Parkway Networks Common Stock Warrants... 11.5% 2,698 2,698
Atlanta, GA 30339
Confluence Holdings Corp. ...... Kayak and Canoe Subordinated Debt....... -- 8,812 8,812
3761 Old Glenola Road Manufacturing Common Stock Warrants... 18.0% 1,319 1,217
Trinity, NC 27370 Common Stock............ 0.7% 45 17
Crosman Corporation ............ Small Arms Subordinated Debt....... -- 3,702 3,702
Routes 5 & 20 Manufacturing Common Stock Warrants... 3.5% 330 330
East Bloomfield, NY 14443
Cycle Gear, Inc. ............... Motorcycle Parts Senior Debt............. -- 750 750
303 43rd Street and Accessories Subordinated Debt....... -- 2,262 2,262
Richmond, CA 94805 Common Stock Warrants... 27.6% 374 374
Decorative Surfaces ............ Decorative Paper Subordinated Debt....... -- 5,606 5,606
International, Inc. and Vinyl Convertible Preferred 2.9% 728 728
1280 N. Grant Avenue Manufacturing Stock................... 42.3% 4,571 4,394
Columbus, OH 43201 Common Stock Warrants...
Dixie Trucking Company, Inc. ... Overnight Subordinated Debt....... -- 4,064 4,064
3606 N. Graham St. Shorthaul Common Stock Warrants... 32% 141 141
Charlotte, NC 28206 Delivery
Electrolux, LLC ................ Consumer Subordinated Debt....... -- 7,849 7,849
5956 Sherry Lane Appliances Member Interest......... 2.5% 246 1,144
Dallas, TX 75225 Manufacturing
Erie County Plastics Corp. ..... Injection Subordinated Debt....... -- 8,858 8,858
One Plastic Road Molded Common Stock Warrants... 8% 1,170 1,170
Corry, PA 16407 Packaging
Euro-Caribe Packing ............ Meat Processing Senior Debt............. -- 6,276 6,276
Company, Inc. Subordinated Debt....... -- 8,971 8,971
PO Box 3146 Common Stock Warrants... 37.1% 1,110 1,046
Zona Industrial Sabana Abajo
Carolina (San Juan),
PR 00984
IGI, Inc. ...................... Veterinary Subordinated Debt....... -- 5,037 5,037
Wheat Rd. & Lincoln Avenue Vaccines Common Stock Warrants... 16.3% 2,003 2,587
Buena, NJ 08310
The Inca Group ................. Manufacturing Subordinated Debt....... -- 11,177 11,177
501 East Purnell of Rack Shelving Common Stock Warrants... 66.5% 3,060 3,060
Lewisville, TX 75067 and Steel Tubes Common Stock............ 18.5% 850 850
</TABLE>

32
<PAGE>
<TABLE>
<CAPTION>
VALUE OF
% OF CLASS INVESTMENT
OWNED ON A COST OR INITIAL AS OF
NAME AND ADDRESS OF NATURE OF FULLY VALUE OF DECEMBER 31,
PORTFOLIO COMPANY BUSINESS TYPE OF SECURITY DILUTED BASIS(1) INVESTMENT 1999(2)
- -------------------------------- ---------------- ------------------------ ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
JAG Industries, Inc. ........... Diversified Senior Debt............. -- 1,200 1,200
2201 Aisquith Street Manufacturing Subordinated Debt....... -- 2,385 2,385
Baltimore, MD 21218 Common Stock Warrants... 75.0% 505 --
The LA Studios, Inc. ........... Audio Production Subordinated Debt....... -- 2,466 2,466
3453 Cahuenga Blvd., West Common Stock Warrants... 17.0% 902 902
Hollywood, CA 90068
Lion Brewery, Inc. ............. Malt Beverages Subordinated Debt....... -- 5,975 5,975
700 N. Pennsylvania Ave. Common Stock Warrants... 54.0% 675 1,863
Wilkes-Barre, PA 18705
MBT International, Inc. ........ Musical Senior Debt............. -- 4,200 4,200
620 Dobbin Road Instrument Subordinated Debt....... -- 6,439 6,439
Charleston, SC 29414 Distributor Preferred Stock......... 53.1% 2,250 2,250
Common Stock Warrants... 30.6% 1,214 1,214
The New Piper Aircraft, Inc. ... Aircraft Subordinated Debt....... -- 18,023 18,023
2926 Piper Drive Common Stock Warrants... 4.0% 2,231 2,884
Vero Beach, FL 32960
Parts Plus, Inc. ............... Auto Parts Subordinated Debt....... -- 4,119 4,119
1041 Glassboro Road Suite F1 Preferred Stock......... 1.9% 556 556
Williamstown, NJ 08094 Distributor Common Stock Warrants... 2.4% 333 333
Patriot Medical ................ Repair Services Senior Debt............. -- 3,250 3,250
Technologies, Inc. Subordinated Debt....... -- 2,487 2,487
210 Twenty-Fifth Avenue Preferred Stock......... 16.9% 1,020 1,020
Nashville, TN 37203 Common Stock Warrants... 14.9% 612 612
Starcom Holdings, Inc. ......... Electrical Subordinated Debt....... -- 18,929 18,929
(f/k/a ConStar Holdings, Inc.) Common Stock Warrants... 17.5% 3,914 3,914
661 Pleasant Street Common Stock............ 2.8% 616 616
Norwood, MA 02062
Transcore Holdings, Inc. ....... Transportation Subordinated Debt....... -- 5,656 5,656
7611 Derry Street Info. Mgt. Preferred Stock......... 0.7% 306 306
Harrisburg, PA 17111 Services Common Stock Warrants... 6.6% 1,694 1,694
Tube City Olympic of Ohio,
Inc. .......................... Mill Services Senior Debt............. -- 9,700 9,700
12 Monongahela Avenue
Glassport, PA 15045
Tube City, Inc. ................ Mill Services Subordinated Debt....... -- 6,017 6,017
12 Monongahela Avenue Common Stock Warrants... 14.75% 2,523 2,523
Glassport, PA 15045
Warner Power, LLC .............. Power Systems Senior Debt............. -- 4,610 4,610
40 Depot Street and Electric Subordinated Debt....... -- 3,871 3,871
Warner, NH 03278 Ballasts Member Interest 53.1% 1,629 1,629
Warrants................ 2,984
Westwind Holdings, Inc. ........ Restaurant Subordinated Debt....... -- 2,984 244
12555 High Bluff Drive Common Stock Warrants... 5.0% 350
San Diego, CA 92130 104
Wrenchead.com .................. Internet-based Common Stock............ 1.0% --
108 Corporate Drive Auto Parts
White Plains, NY 10604 Distributor
</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 Company makes available significant managerial assistance to its
portfolio companies by closely monitoring the operations of the companies,
assisting in the hiring of additional senior management, if needed, being
available for consultations with officers, developing the business plan and
participating on the board of directors. As of December 31, 1999, the Company
had board seats on 25 out of 33 businesses in its portfolio and had board
observation rights on 4 of the remaining businesses. Additionally, ACFS has
investment banking agreements with a limited number of portfolio companies.

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 December 31, 1999 appearing elsewhere in this Prospectus.

33
<PAGE>
Capital.Com. Capital.com primarily operates an Internet portal website
designed for small and middle market business to learn about corporate finance
and provides access to potential sources of capital. Additionally, the website
helps small and middle market businesses value their business and build
financial models. Capital.com also operates various services to advise and
support users of the website. Capital.com is currently enhancing its website and
adding capital and service providers to allow it to more fully meet its
objective of servicing small and middle market businesses. Capital.com and its
predecessor websites have generated $29 million of investment originations for
the Company. Capital.com intends to initiate a marketing campaign during 2000 to
begin to establish branding in its marketplace.

The business of Capital.com was launched by the Company in July 1999 under
the name of AmericanCapitalOnline.com. In December 1999, the website was renamed
'Capital.com' and the assets related to the operation were conveyed to a new
portfolio company. Contemporaneously with these events, an affiliate of First
Union Corporation invested $15 million for 15% of the stock of Capital.com and
the right to purchase an additional 5% for nominal consideration under certain
circumstances, depending on future valuations of the business. The Company owns
the remaining outstanding stock of Capital.com.

Capital.com's business is in the developmental stages and it operates in a
dynamic and rapidly evolving competitive environment. It has not yet generated
material revenues. It competes against traditional capital providers, such as
investment banking and financing advisory firms, as well as emerging Internet
capital and business service providers. As is typical of many Internet-based
businesses, there are relatively few technological, financial or legal barriers
to entry in Capital.com's business and it can be expected that competition will
remain vigorous and diverse.

Malon Wilkus, Adam Blumenthal and John Erickson, the Chairman, President
and Chief Financial Officer, respectively, of the Company have similar positions
with and serve as members of the Board of Directors of Capital.com. Capital.com
employs Mark Opel as Chief Operating Officer. In addition, the Company and
Capital.com are parties to a services agreement whereby the Company provides
certain administrative, logistical and related services to Capital.com.

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 December
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.

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.

34
<PAGE>
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.

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.

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.

35
<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.

36
<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 2001, a second class holds office initially for a
term expiring at the annual meeting of stockholders to be held in 2002 and a
third class holds office initially for a term expiring at the annual meeting of
stockholders to be held in 2003. Each director holds office for the term to
which he or she is elected and until his or her successor is duly elected and
qualified. Messrs. Gladstone, Allbritton and Puryear have terms expiring in
2001, Messrs. Blumenthal, Hahl and Lundine have terms expiring in 2002 and
Messrs. Wilkus, Harper and Walko have terms expiring in 2003. 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 ('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)............... 48 Chief Executive Officer and Chairman of the Board of Directors(2)
David Gladstone (1997)............ 57 Vice Chairman of the Board of Directors(2)
Adam Blumenthal (1993)............ 38 President, Chief Operating Officer, Secretary and Director(2)

EXECUTIVE OFFICERS:
John Erickson..................... 40 Vice President and Chief Financial Officer
Stephen L. Hester................. 63 Vice President
Roland Cline...................... 52 Vice President

DIRECTORS:
Robert L. Allbritton (1997)....... 31 Director
Neil M. Hahl (1997)............... 51 Director
Philip R. Harper (1997)........... 56 Director
Stan Lundine (1997)............... 61 Director
Alvin N. Puryear (1998)........... 62 Director
Stephen P. Walko (1997)........... 49 Director(2)
</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 1986 and has served as the
Company's Chief Executive Officer since that time. From 1986 to 1999, he was
also President. 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 Chairman of Capital.com, Inc., an internet
financial services company. Mr. Wilkus is 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. He has previously served on the
boards of directors of ten employee-owned corporations.

37
<PAGE>
David Gladstone. Mr. Gladstone has served as Vice Chairman of the Board of
the Company since 1998 and as Chairman from 1997 to 1998. From 1974 to 1997, Mr.
Gladstone held various positions, including Chairman and Chief Executive
Officer, with Allied Capital Corporation, a specialty finance company, and
certain of its predecessor companies. He is a trustee of Capital Automotive
REIT, a real estate investment trust. From 1992 to 1997, Mr. Gladstone served as
a Director and President and Chief Executive Officer of Business Mortgage
Investors, a Real Estate 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 Emeritus
of The George Washington University. Mr. Gladstone is a Member Emeritus 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 also an advisor to the Women's Growth
Fund, a venture capital fund that invests in women-owned businesses.

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

John Erickson. Mr. Erickson has served as Vice President and Chief
Financial Officer of the Company since 1998 and as Secretary since 1999. He is a
member of the Board of Directors of Capital.com, Inc. From 1990 to 1996, he
served as Chief Financial Officer of Storage USA, Inc., an operator of
self-storage facilities. From 1996 to 1998, he served as President of Storage
USA Franchise Corp., a subsidiary of Storage USA, Inc.

Ronald H. Cline. Mr. Cline has been a Vice President of the Company since
1988.

Stephen L. Hester. Mr. Hester has served as a Vice President of the
Company since 1994. From 1994 to 1998, he was also General Counsel of the
Company.

Robert L. Allbritton. Mr. Allbritton has served as Director since 1992, as
Executive Vice President from 1994 to 1998, and as President since 1998 of
Allbritton Communications Company, an owner of nine 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 programming company), and
Allbritton Jacksonville, Inc. (owner of a television station). He is also a
director or an officer of eight subsidiary companies of Perpetual Corporation or
Albrittron Communications Company. Mr. Allbritton also serves as a trustee of
The Albritton 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, the general partner
of Buckeye Partners, L.P.

Philip R. Harper. Mr. Harper has served as Chairman, Chief Executive
Officer and President, of US Investigations Services, Inc., a private
investigations company, 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 Unit. 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 and as Executive Director of the Foundation for
Enterprise Development since 1997. 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. John Ullmun & Associates, Inc., and National Forge
Company. From 1976 to 1986, Mr. Lundine served as a member of the U.S. House of
Representatives.

Alvin N. Puryear. Dr. Puryear is the Lawrence N. Field Professor of
Entrepreneurship at Baruch College of the City University of New York and has
been on the faculty there since 1970. He is a Director of the GreenPoint Bank,
the GreenPoint Financial Corporation, the Bank of Tokyo-Mitsubishi Trust
Company, the Presbyterian Church (U.S.A.) Investment and Loan Corporation, and
the Interracial Council for Business Opportunity. Dr. Puryear is also a Trustee
of the Pittsburgh Theological Seminary.

38
<PAGE>
Stephen P. Walko. Mr. Walko has been President, Chief Executive Officer
and a Director of Decorative Surfaces International, Inc., a manufacturer of
wall coverings and laminates, since 1998. From 1990 to 1998, he was President
and a Director of Textileather Corporation, a manufacturer of vinyl. Mr. Walko
is a Director of Bliss Salem Steel Corp. and Mobile Tool International, Inc.

EMPLOYMENT AGREEMENTS

The Company has employment agreements with each of the Executive Officers.
Each of the agreements, except Mr. Erickson's, 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. Mr.
Erickson's agreement provides for a one year term that renews so that there is
always one year remaining.

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 employment
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, and has adjusted the base salaries of Messrs. Wilkus, Blumenthal,
Erickson, and Cline to $220,000, $200,000, $175,000 and $155,000, respectively.
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 each agreement, the Executive is contractually entitled to
participate in the Company's Employee Option Plan, although the Company has now
fulfilled its obligations with regard to the grant of options to each Executive
Officer under the 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, the Executive Officer's unvested
options that would have vested within one year of the disability termination
would vest. Vested options would expire unless exercised within 18 months of the
termination date. If the Company should terminate an Executive Officer's
employment for any reason other than a disability or misconduct, the Executive
Officer would be entitled to receive his base salary and bonus for two years
(Mr. Erickson would receive a $60,000 severance payment), although each
Executive Officer (other than Mr. Erickson) 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 (other than
Mr. Erickson)resigned with good reason, which generally includes conduct by the
Company materially and adversely changing the executive's responsibilities and
duties, a material breach by the Company of the employment agreement or a change
in control of the Company. Mr. Gladstone's contract also defines good reason as
determination by him of a material difference with the Board of Directors.
Additionally, an Executive Officer's unvested stock options would generally vest
if his employment were terminated for any reason other than a disability or
misconduct or if he resigned with good reason.

The employment agreements of Messrs. Blumenthal, Cline and Gladstone
contain certain additional rights in the event of employment termination, other
than as a result of death or the Executive Officer's misconduct, and if the
Executive Officer either has a purchase note outstanding under an Option
Exercise Agreement or, as described below, an unamortized premium payment under
a Split Dollar Agreement. In such circumstances, at the election of the
Executive Officer, the Executive Officer and the Company would enter into a
supplemental employment agreement providing for continued employment with the
Company for nominal consideration and with limited duties, which would be
continued through the term of any such purchase note and Split Dollar Agreement.

Under the employment agreements of each of the Executive Officers, 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

39
<PAGE>
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.

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 Mr. Erickson voluntarily terminates his employment or any other 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 90 days to exercise any unexercised options.

Upon termination of employment, an Executive Officer would be subject to
certain non-compete covenants. These covenants would generally apply for the
longer of one year and the period the Executive Officer is receiving severance
payments. However, as noted above, during periods when Executive Officers (other
than Mr. Erickson) are receiving severance payments from the Company, they may
terminate covenants prohibiting competition by foregoing such payments.

Messrs. Blumenthal, Cline and Gladstone have also entered into 'Split
Dollar Agreements' entitling them to participate in a split dollar life
insurance program. Under the program, the Company has paid or will pay the
premium of a life insurance policy on the life of the Executive Officer, with
the Executive Officer being deemed to receive income each year generally equal
to a level amortization or the premium over a ten-year period. While the
Executive Officer of his designee is the owner of the policy, the Company will
retain an interest in the policy equal to the unamortized amount of the premium.
Upon termination of employment, the Executive Officer will generally have an
obligation to pay to the Company the unamortized premium amount. In addition,
for so long as the Executive Officer remains an employee of the Company, the
Company will purchase a term life insurance policy in the amount of the
unamortized premium payment due on the split dollar policy. The total premiums
paid or to be paid on the split dollar policies of Messrs. Blumenthal, Cline and
Gladstone are $1,825,000, $504,000, and $481,575, respectively. As noted below,
each of the Executive Officers has pledged the split dollar insurance policies
and benefits payable thereunder as collateral for certain loans extended to them
by the Company.

The Company has entered into a series of loan transactions with each of the
Executive Officers pertaining to the exercise of options under the Employee
Option Plan. As of June 7, 1999, the Company entered into Option Exercise
Agreements ('Option Exercise Agreements') with each of Messrs. Wilkus,
Blumenthal, Cline and Erickson providing for such loans and pertaining to the
exercise of options to purchase 117,428, 312,788, 181,032 and 25,000 shares of
Common Stock, respectively. As of August 6, 1999, and November 9, 1998, the
Company entered into Option Exercise Agreements with Messrs. Gladstone and
Hester, respectively, pertaining to the exercise of options to purchase 608,782
and 20,000 shares of Common Stock, respectively.

In each case, the Company lent to the Executive Officer the full option
exercise price of $15.00 per share of Common Stock plus, in the case of
individuals other than Mr. Hester, additional sums for the payment of taxes
associated with the exercise of the options. The total amounts lent were
$1,870,357.61 to Mr. Wilkus, $5,104,214.72 to Mr. Blumenthal, $2,944,711.90 to
Mr. Cline, $411,783.09 to Mr. Erickson, $9,466,232.91 to Mr. Gladstone and
$300,000.00 to Mr. Hester. Each loan provides for the quarterly payment of
interest with the full principal amount due at maturity, which is nine years
from the date of each loan, except that the maturity of Mr. Gladstone's loan is
three years from the date of the loan. The interest rate charged on each such
loan was set at the Applicable Federal Rate for loans having a maturity of such
loan as of the date of such loan. The interest rate charged on the loans to
Messrs. Wilkus, Erickson, Cline and Blumenthal is 5.27% per annum. The interest
rate on Mr. Gladstone's loan is 4.89% per annum and on Mr. Hester's loan is
4.56% per annum. Each loan is collateralized by a pledge of the shares of Common
Stock purchased with the loan. In addition, the loans to Messrs. Blumenthal,
Cline and Gladstone are secured by the pledge of certain split dollar life
insurance policies described above. The Company has full recourse to each
Executive Officer for all amounts due under his loan. As required by the 1940
Act, each loan must be fully collateralized and will be due 60 days following
termination of the Executive Officer's employment with the Company.

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<PAGE>
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.

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 Employee Option Plan. Members of the Compensation Committee
are Messrs. Hahl, Harper and Puryear.

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<PAGE>
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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<PAGE>
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'). In December 1999,
the Company repurchased Underwriters Warrants representing 393,675 shares of
Common Stock from one of the Underwriters. 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.

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<PAGE>
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.

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

44
<PAGE>
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').

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.

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<PAGE>
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 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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<PAGE>
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. In 1999, the Company repurchased
Underwriters Warrants for 393,675 shares of 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

47
<PAGE>
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.

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 Riggs
Bank, N.A. The address of the custodian is 808 17th St. NW, Washington, D.C.
20004. 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, 1999 and 1998, and for the years ended
December 31, 1999 and 1998, the three months ended December 31, 1997, and the
nine months ended September 30, 1997 and financial highlights for the years
ended December 31, 1999 and 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.

48
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
LOCATION
PAGE IN THE OF RELATED
STATEMENT DISCLOSURE IN
OF ADDITIONAL THE
INFORMATION PROSPECTUS
------------- ----------------
<S> <C> <C>
General Information and History.................................................... SAI-1 1, 25
Investment Objective and Policies.................................................. SAI-1 30
Management......................................................................... SAI-2 37
Compensation of Executive Officers and Directors................................... SAI-2 39
Compensation of Directors.......................................................... SAI-3 39
Stock Option Awards................................................................ SAI-4 --
Committees of the Board of Directors............................................... -- 41
Control Persons and Principal Holders of Securities................................ SAI-4 --
Investment Advisory Services....................................................... SAI-6 --
Safekeeping, Transfer and Dividend Paying Agent and Registrar...................... SAI-6 48
Financial Statements............................................................... SAI-6 50, F1
Brokerage Allocation and Other Practices........................................... SAI-6 --
Tax Status......................................................................... SAI-6 29
</TABLE>

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

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<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, 1999 and 1998.......................................................... F-3
Schedules of Investments as of December 31, 1999 and 1998................................................ F-4
Statements of Operations for the years ended December 31, 1999 and 1998, the three months ended December
31, 1997, and the nine months ended September 30, 1997................................................ F-9
Statements of Shareholders' Equity for the years ended December 31, 1999 and 1998, the three months ended
December 31, 1997, and the nine months ended September 30, 1997....................................... F-10
Statements of Cash Flows for the years ended December 31, 1999 and 1998, the three months ended December
31, 1997, and the nine months ended September 30, 1997................................................ F-11
Financial Highlights for the years ended December 31, 1999 and 1998 and the three months ended December
31, 1997.............................................................................................. F-12
Notes to Financial Statements............................................................................ F-13
</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,
1999 and 1998, the related statements of operations, shareholders' equity and
cash flows for the years ended December 31, 1999 and 1998, the three months
ended December 31, 1997, and the nine months ended September 30, 1997, and the
financial highlights for the years ended December 31, 1999 and 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit 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, 1999 and 1998, and the results of its operations and its
cash flows for the years ended December 31, 1999 and 1998, the three months
ended December 31, 1997, and the nine months ended September 30, 1997, and the
financial highlights for the years ended December 31, 1999 and 1998, and the
three months ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States.

/S/ ERNST & YOUNG LLP

McLean, Virginia
February 2, 2000

F-2
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
ASSETS 1999 1998
------------ ------------

<S> <C> <C>
Cash and cash equivalents......................................................... $ 2,037 $ 6,149
Investments at fair value (cost of $305,264 and $252,718, respectively)........... 377,554 254,983
Investment in unconsolidated operating subsidiary................................. 4,893 6,386
Due from unconsolidated operating subsidiary...................................... 2,331 778
Interest receivable............................................................... 2,417 1,561
Other............................................................................. 6,140 162
------------ ------------
Total assets............................................................ $395,372 $270,019
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable..................................................................... $ -- $ 85,948
Revolving credit facility......................................................... 78,545 30,000
Accrued dividends payable......................................................... 547 1,222
Other............................................................................. 4,535 126
------------ ------------
Total liabilities....................................................... 83,627 117,296
Shareholders' equity:
Undesignated preferred stock, $0.01 par value, 5,000 shares authorized, 0 issued
and outstanding.............................................................. -- --
Common stock, $.01 par value, 70,000 shares authorized, and 18,252 and 11,081
issued and outstanding, respectively......................................... 183 111
Capital in excess of par value.................................................. 255,922 145,245
Notes receivable from sale of common stock...................................... (23,052) (300)
Undistributed (distributions in excess of) net realized earnings................ 1,080 (116)
Unrealized appreciation of investments.......................................... 77,612 7,783
------------ ------------
Total shareholders' equity.............................................. 311,745 152,723
------------ ------------
Total liabilities and shareholders' equity.............................. $395,372 $270,019
------------ ------------
------------ ------------
</TABLE>

See accompanying notes.

F-3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SENIOR DEBT--9.53% INDUSTRY COST FAIR VALUE
- ------------------ -------- ---- ----------
<S> <C> <C> <C>
BIW Connector Systems, LLC.......................... Manufacturing......................... $ 3,404 $ 3,404
JAG Industries, Inc.(2)............................. Manufacturing......................... 1,200 1,200
Chance Coach, Inc.(2)............................... Bus Manufacturer...................... 1,071 1,071
Cycle Gear, Inc..................................... Motor Cycle Accessories............... 750 750
EuroCaribe Packing Company, Inc.(2)................. Meat Processing....................... 6,276 6,276
Patriot Medical Technologies, Inc.(2)............... Repair Services....................... 3,250 3,250
Tube City Olympic of Ohio, Inc...................... Mill Services......................... 9,700 9,700
MBT International Inc.(2)........................... Musical Instrument Distributor........ 4,200 4,200
Caswell-Massey Holdings Corp........................ Toiletries............................ 2,000 2,000
Warner Power, LLC................................... Power Systems and Electric
Ballasts............................ 4,610 4,610
-------- ----------
Subtotal............................................................................... 36,461 36,461
<CAPTION>
SUBORDINATED DEBT--55.35%
- -------------------------
<S> <C> <C> <C>
BIW Connector Systems, LLC.......................... Manufacturing......................... 6,829 6,829
Westwind Group Holdings, Inc........................ Restaurant............................ 2,984 2,984
JAG Industries, Inc.(2)............................. Manufacturing......................... 2,385 2,385
Chance Coach, Inc.(2)............................... Bus Manufacturer...................... 7,520 7,520
The L.A. Studios, Inc............................... Audio Production...................... 2,466 2,466
Decorative Surfaces International, Inc.(2).......... Decorative Paper & Vinyl Mfg.......... 5,606 5,606
New Piper Aircraft, Inc............................. Aircraft Manufacturing................ 18,023 18,023
Electrolux, LLC..................................... Vacuum Cleaners....................... 7,849 7,849
Cycle Gear, Inc..................................... Motor Cycle Accessories............... 2,262 2,262
Confluence Holdings Corp............................ Canoes & Kayaks....................... 8,812 8,812
EuroCaribe Packing Company, Inc.(2)................. Meat Processing....................... 8,971 8,971
Starcom Holdings, Inc............................... Electrical Contractor................. 18,929 18,929
Centennial Broadcasting, Inc........................ Radio Stations........................ 16,975 16,975
Lion Brewery, Inc.(2)............................... Malt Beverages........................ 5,975 5,975
Auxi-Health, Inc.................................... Home Health Care...................... 10,136 10,136
Patriot Medical Technologies, Inc.(2)............... Repair Services....................... 2,487 2,487
Tube City, Inc...................................... Mill Services......................... 6,017 6,017
Erie County Plastics Corporation.................... Molded Plastic Manufacturing.......... 8,858 8,858
Aeriform Corporation................................ Packaged Industrial Gas............... 7,774 7,774
MBT International, Inc.(2).......................... Musical Instrument Distributor........ 6,439 6,439
Dixie Trucking Company, Inc.(2)..................... Overnight Shorthaul Delivery.......... 4,064 4,064
Caswell-Massey Holdings Corp........................ Toiletries............................ 1,670 1,670
Transcore Holdings, Inc............................. Transportation Info. Mgmt.
Services............................ 5,656 5,656
The Inca Group(2)................................... Manufacturing......................... 11,177 11,177
Crosman Corporation................................. Small Arms............................ 3,702 3,702
Parts Plus Group.................................... Auto Parts Distributor................ 4,119 4,119
IGI, Inc............................................ Veterinary vaccines................... 5,037 5,037
Clear Communications Group.......................... Communications Networks............... 10,348 10,348
Warner Power, LLC................................... Power Systems and Electric
Ballasts............................ 3,871 3,871
A.H. Harris & Sons, Inc............................. Construction Material Distribution.... 4,733 4,733
-------- ----------
Subtotal............................................................................... 211,674 211,674
</TABLE>

See accompanying notes.

F-4
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK--2.00% INDUSTRY COST FAIR VALUE
- ---------------------------------- -------- ---- ----------
<S> <C> <C> <C>
Chance Coach, Inc.(2) 12% dividend convertible into
20% of Co........................................ Bus Manufacturer...................... $ 2,000 $ 2,793
Decorative Surfaces International, Inc.(2) prime
rate plus 4% dividend convertible into 2.9% of
Co............................................... Decorative Paper & Vinyl Mfg.......... 728 728
Patriot Medical Technologies, Inc.(2) 8% dividend
convertible into 16.9% of Co..................... Repair Services....................... 1,020 1,020
MBT International, Inc.(1)(2) convertible into
53.1% of Co...................................... Musical Instrument Distribution....... 2,250 2,250
Transcore Holdings, Inc.(2) 8% dividend convertible
into 0.7% of Co.................................. Transportation Service................ 306 306
Parts Plus Group(1) convertible into 1.9% of Co.... Auto Parts Distributor................ 556 556
-------- ----------
Subtotal.............................................................................. 6,860 7,653

COMMON STOCK AND MEMBERSHIP INTEREST WARRANTS(1)--11.48%
- --------------------------------------------------------
BIW Connector Systems, LLC 8% of LLC............... Manufacturing 652 451
Westwind Group Holdings, Inc. 5% of Co............. Restaurant............................ 350 244
JAG Industries, Inc.(2) 75% of Co.................. Manufacturing......................... 505 --
Chance Coach, Inc.(2) 43.2% of Co.................. Bus Manufacturer...................... 4,041 5,950
The L.A. Studios, Inc. 17% of Co................... Audio Production...................... 902 902
Decorative Surfaces International, Inc.(2) 42.3% of
Co............................................... Decorative Paper & Vinyl Mfg.......... 4,571 4,394
New Piper Aircraft, Inc. 4% of Co.................. Aircraft Manufacturing................ 2,231 2,884
Cycle Gear, Inc. 27.6% of Co....................... Motor Cycle Accessories............... 374 374
Confluence Holdings Corp. 18% of Co................ Canoes & Kayaks....................... 1,319 1,217
EuroCaribe Packing Company, Inc.(2) 37.1% of Co.... Meat Processing....................... 1,110 1,046
Starcom Holdings, Inc. 17.5% of Co................. Electrical Contractor................. 3,914 3,914
Lion Brewery, Inc.(2) 54% of Co.................... Malt Beverages........................ 675 1,863
Auxi Health, Inc. 20% of Co........................ Home Health Care...................... 2,599 1,856
Patriot Medical Technologies, Inc.(2) 14.9% of
Co............................................... Repair Services....................... 612 612
Tube City, Inc. 14.75% of Co....................... Mill Services......................... 2,523 2,523
Erie County Plastics Corporation 8% of Co.......... Molded Plastic Manufacturing.......... 1,170 1,170
MBT International, Inc.(2) 30.6% of Co............. Musical Instrument Distributor........ 1,214 1,214
Dixie Trucking Company, Inc.(2) 32% of Co.......... Overnight Shorthaul Delivery.......... 141 141
Caswell-Massey Holdings Corp. 24% of Co............ Toiletries............................ 552 552
Transcore Holdings, Inc. 6.6% of Co................ Transportation Info. Mgmt.
Services............................ 1,694 1,694
The Inca Group(2) 66.5% of Co...................... Manufacturing......................... 3,060 3,060
Crosman Corporation 3.5% of Co..................... Small Arms............................ 330 330
Parts Plus Group 2.4% of Co........................ Auto Parts Distributor................ 333 333
IGI, Inc. 16.7% of Co.............................. Veterinary Vaccines................... 2,003 2,587
Clear Communications Group 11.5% of Co............. Communications Networks............... 2,698 2,698
Warner Power, LLC(2) 53.1% of LLC.................. Power Systems and Electric............ 1,629 1,629
A.H. Harris & Sons, Inc. 3.5% of Co................ Construction Material................. 267 267
-------- ----------
Subtotal.............................................................................. 41,469 43,905
</TABLE>

See accompanying notes.

F-5
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK AND MEMBERSHIP INTERESTS(1)--20.40%
- ------------------------------------------------
<S> <C> <C> <C>
Chance Coach, Inc.(2) 20.5% of Co.................. Bus Manufacturer...................... $ 1,896 $ 2,793
Electrolux, LLC 2.5% of Co......................... Vacuum Cleaners....................... 246 1,144
Confluence Holdings Corp. 0.7% of Co............... Canoes & Kayaks....................... 45 17
Starcom Holdings, Inc. 2.8% of Co.................. Electrical Contractor................. 616 616
The Inca Group(2) 18.5% of Co...................... Manufacturing......................... 850 850
Capital.com, Inc.(2) 85% of Co..................... Internet-based Financial Portal....... 1,492 72,500
Wrenchead.com, Inc. 1% of Co....................... Internet-based Auto Parts
Distributor......................... -- 104
ACS Equities, LP(2) 90% of LP...................... Investment partnership................ 3,655 --
-------- ----------
Subtotal.............................................................................. 8,800 78,024
-------- ----------
305,264 377,717
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE BASIS SWAP AGREEMENTS--(0.04)%
NO. OF NOTIONAL EXPIRATION RECEIVE
CONTRACTS AMOUNT DATE RATE PAY RATE
- ---------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
4 $61,325 4/10/04 Floating Floating......................................... -- (163)
-------- ----------
Total Investments..................... 305,264 377,554
-------- ----------
-------- ----------

INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--1.28%
- --------------------------------------------------------
American Capital Financial Services(1)(2) 100% of Co........... Investment Banking.................... 403 4,893
-------- ----------
Totals............................................................................................ $305,667 $ 382,447
-------- ----------
-------- ----------
</TABLE>

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

See accompanying notes.

F-6
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SENIOR DEBT--9.47% INDUSTRY COST FAIR VALUE
- ------------------ -------- ---- ----------
<S> <C> <C> <C>
Four S Baking Company(2)........................... Baking................................ $ 1,266 $ 1,266
BIW Connector Systems, LLC......................... Manufacturing......................... 3,404 3,404
Chance Coach, Inc.(2).............................. Bus Manufacturer...................... 1,286 1,286
JAG Industries, Inc.(2)............................ Manufacturing......................... 1,200 1,200
Confluence Holdings Corp........................... Canoes & Kayaks....................... 9,675 9,675
Cycle Gear, Inc.................................... Motor Cycle Accessories............... 750 750
EuroCaribe Packing Company, Inc.(2)................ Meat Processing....................... 7,181 7,181
-------- ----------
Subtotal.............................................................................. 24,762 24,762

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

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

COMMON STOCK AND MEMBERSHIP INTERESTS WARRANTS(1)--8.43%
- --------------------------------------------------------
Four S Baking Company(2) 3.26% of Co............... Baking................................ 462 600
BIW Connector Systems, LLC 8% of LLC............... Manufacturing......................... 652 540
Westwind Group Holdings, Inc. 5% of Co............. Restaurant............................ 350 421
JAG Industries, Inc.(2) 75% of Co.................. Manufacturing......................... 505 465
Specialty Transportation Services, Inc.(2) Up to
39.1%............................................ Waste Hauler.......................... 694 784
</TABLE>

See accompanying notes.

F-7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK AND MEMBERSHIP
- ---------------------------
INTERESTS WARRANTS(1)--8.43%--(CONTINUED) INDUSTRY COST FAIR VALUE
- ---------------------------- -------- ---- ----------
<S> <C> <C> <C>
Chance Coach, Inc.(2) 43.7% of Co.................. Bus Manufacturer...................... $ 4,041 $ 4,543
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
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 Packing Company, Inc.(2) 37% of Co...... Meat Processing....................... 1,110 1,110
Starcom Holdings, Inc. 17.5% of Co................. Electrical Contractor................. 3,171 3,171
-------- ----------
Subtotal.............................................................................. 20,382 22,011

COMMON STOCK AND MEMBERSHIP INTERESTS(1)--1.78%
- -----------------------------------------------
Four-S Baking Company(2) 5.5% of Co................ Baking................................ 966 1,004
Specialty Transportation Services, Inc.(2) 9.1% of
Co............................................... Waste Hauler.......................... 500 784
Chance Coach, Inc.(2) 18.3% of Co.................. Bus Manufacturer...................... 1,896 2,131
Electrolux, LLC 2.5% of Co......................... Vacuum Cleaners....................... 246 246
Starcom Holdings, Inc. 2.8%........................ Electrical Contractor................. 500 500
-------- ----------
Subtotal.............................................................................. 4,108 4,665
Subtotal--non-publicly traded securities--63.15%...................................... 162,770 165,035

GOVERNMENT SECURITIES--34.41%
- -----------------------------
FHLB Discount Note due 1/4/99.............................................................. 89,948 89,948
-------- ----------
Total Investments..................................................................... 252,718 254,983

INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--2.44%
- --------------------------------------------------------
American Capital Financial Services(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-8
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS || NINE MONTHS ENDED
YEAR ENDED YEAR ENDED ENDED || SEPTEMBER 30,
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 || 1997
----------------- ----------------- ----------------- || -----------------
<S> <C> <C> <C> <C>
Operating income: ||
Interest and dividend income................ $30,833 $14,430 $ 2,123 || $ 553
Loan fees................................... 2,572 2,549 654 || --
Financial advisory and performance fees..... -- -- -- || 1,920
Other....................................... -- -- 20 || 428
-------- -------- -------- || -------
Total operating income.................... 33,405 16,979 2,797 || 2,901
Operating expenses: ||
Salaries and benefits....................... 1,045 843 243 || 1,221
General and administrative.................. 1,490 809 308 || 1,514
Interest.................................... 4,716 57 -- || 60
Other....................................... -- -- -- || (144)
-------- -------- -------- || -------
Total operating expenses.................. 7,251 1,709 551 || 2,651
-------- -------- -------- || -------
Operating income before equity in (loss) ||
earnings of unconsolidated operating ||
subsidiary.................................. 26,154 15,270 2,246 || 250
Equity in (loss) earnings of unconsolidated ||
operating subsidiary........................ (1,493) (482) 24 || --
-------- -------- -------- || -------
Net operating income.......................... 24,661 -- -- || 250
Net realized gain on investments.............. 2,711 -- -- || --
Increase in unrealized appreciation of ||
investments................................. 69,829 2,127 167 || 5,321
-------- -------- -------- || -------
Income before income taxes.................... 97,201 16,915 2,437 || 5,571
Provision for income taxes.................... -- -- -- || 2,128
-------- -------- -------- || -------
Net increase in shareholders' equity ||
resulting from operations................... $97,201 $16,915 $ 2,437 || $ 3,443
-------- -------- -------- || -------
-------- -------- -------- || -------
Net operating income per share: ||
Basic....................................... $ 1.79 $ 1.34 $ 0.21 ||
Diluted..................................... $ 1.73 $ 1.29 $ 0.20 ||
Earnings per common share: ||
Basic....................................... $ 7.07 $ 1.53 $ 0.22 ||
Diluted..................................... $ 6.80 $ 1.48 $ 0.21 ||
Weighted average shares of common stock ||
outstanding ||
Basic....................................... 13,744 11,068 11,069 ||
Diluted..................................... 14,294 11,424 11,405 ||
</TABLE>

See accompanying notes.

F-9
<PAGE>
AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES
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,
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)
--------- -------- ------- ------ ---------- -------- ------------ -------------
--------- -------- ------- ------ ---------- -------- ------------ -------------
Issuance of common
stock............... -- -- 5,605 57 89,151 -- -- --
Issuance of common
stock under stock
option plans........ -- -- 1,520 15 22,832 -- (22,752) --
Issue of common stock
under the Dividend
Reinvestment Plan... -- -- 36 -- 693 -- -- --
Repurchase of common
stock warrants...... -- -- -- -- (2,165) -- -- --
Issuance of restricted
shares.............. -- -- 10 -- 166 -- -- --
Net increase in
shareholders' equity
resulting from
operations.......... -- -- -- -- -- -- -- 27,372
Distributions......... -- -- -- -- -- -- -- (26,176)
--------- -------- ------- ------ ---------- -------- ------------ -------------
Balance at December 31,
1999.................. $ -- $ -- 18,252 $183 $ 255,922 $ -- $(23,052) $ 1,080
--------- -------- ------- ------ ---------- -------- ------------ -------------
--------- -------- ------- ------ ---------- -------- ------------ -------------

<CAPTION>
UNREALIZED TOTAL
APPRECIATION SHAREHOLDERS'
OF INVESTMENTS EQUITY
-------------- -------------
<S> <C> <C>
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
------- -------------
------- -------------
Issuance of common
stock............... -- 89,208
Issuance of common
stock under stock
option plans........ -- 95
Issue of common stock
under the Dividend
Reinvestment Plan... -- 693
Repurchase of common
stock warrants...... -- (2,165)
Issuance of restricted
shares.............. -- 166
Net increase in
shareholders' equity
resulting from
operations.......... 69,829 97,201
Distributions......... -- (26,176)
------- -------------
Balance at December 31,
1999.................. $ 77,612 $ 311,745
------- -------------
------- -------------
</TABLE>

See accompanying notes.

F-10
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
|| NINE MONTHS ENDED
YEAR ENDED YEAR ENDED THREE MONTHS ENDED || SEPTEMBER 30,
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 || 1997
----------------- ----------------- ------------------ || -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES ||
Net increase in shareholders' equity ||
resulting from operations................. $ 97,201 $ 16,915 $ 2,437 || $ 3,443
Adjustments to reconcile net increase in ||
shareholders' equity resulting from ||
operations to net cash provided by ||
operating activities: ||
Depreciation and amortization............. -- -- -- || 33
Unrealized appreciation of investments.... (69,829) (2,127) (167) || (5,321)
Realized gain on investments.............. (2,711) -- -- || --
Net amortization of securities............ -- (1,336) (1,234) || (337)
Amortization of loan discounts............ (2,049) (913) -- || --
Amortization of deferred finance costs.... 854 -- -- || 3
Provision for deferred income taxes....... -- -- -- || 2,102
Contribution of stock to ESOP............. -- -- -- || 117
Increase in interest receivable........... (856) (917) (207) || (122)
Provision for doubtful accounts........... -- -- -- || (177)
Increase in accrued payment-in-kind ||
dividends and interest.................. (3,038) (478) -- || --
(Increase) decrease in due from ||
unconsolidated subsidiary............... (1,553) 83 (526) || --
Decrease in accounts receivable........... -- -- -- || 486
Decrease in income taxes receivable....... -- -- -- || 24
(Increase) decrease in other assets....... (3,065) (71) 62 || (113)
Increase (decrease) in other ||
liabilities............................. 4,409 73 (328) || 28
Loss (earnings) of unconsolidated operating ||
subsidiary................................ 1,493 482 (24) || --
----------------- ----------------- -------- || -----------------
Net cash provided by operating activities... 20,856 11,711 13 || 266
INVESTING ACTIVITIES ||
Proceeds from sale or maturity of ||
investments............................. 27,823 231,580 35,000 || 60
Principal repayments...................... 30,731 1,719 93 || --
Purchases of investments.................. (171,595) (142,865) (20,622) || (483)
Purchases of securities................... (12,900) (207,146) (16,593) || (129,896)
Increase in other assets.................. (1,273) -- -- || --
Purchases of property and equipment, net ||
of disposals............................ -- -- -- || (29)
----------------- ----------------- -------- || -----------------
Net cash used in investing activities....... (127,214) (116,712) (2,122) || (130,348)
FINANCING ACTIVITIES ||
(Repayments of) proceeds from short term ||
notes payable, net...................... (5,000) 85,948 -- || (430)
Drawings on revolving credit facilities, ||
net..................................... 48,545 30,000 -- || --
Increase in deferred financing costs...... (2,427) (37) -- || --
Decrease in due to related parties, net... -- -- -- || (78)
Repurchase of common stock................ -- (219) -- || --
Issuance of common stock.................. 89,451 224 -- || 143,608
Repurchase of common stock warrants....... (2,165) -- -- || --
Distributions paid........................ (26,158) (13,628) (2,325) || --
----------------- ----------------- -------- || -----------------
Net cash provided by (used in) financing ||
activities................................ 102,246 102,288 (2,325) || 143,100
----------------- ----------------- -------- || -----------------
Net (decrease) increase in cash and cash ||
equivalents............................... (4,112) (2,713) (4,434) || 13,018
Cash and cash equivalents at beginning of ||
period.................................... 6,149 8,862 13,296 || 323
----------------- ----------------- -------- || -----------------
Cash and cash equivalents at end of ||
period.................................... $ 2,037 $ 6,149 $ 8,862 || $ 13,341
----------------- ----------------- -------- || -----------------
----------------- ----------------- -------- || -----------------
Non-cash financing activities: ||
Issuance of common stock in conjunction ||
with dividend reinvestment.............. $ 693 $ 128 $ -- || $ --
Notes receivable issued in exchange for ||
common stock............................ $ 22,752 $ 300 $ -- || $ --
Net repayment of notes payable............ $ 80,948 $ -- $ -- || $ --
</TABLE>

See accompanying notes.

F-11
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Per Share Data(1)
Net asset value at beginning of the period.......... $ 13.80 $ 13.61 $ 13.60
Net operating income................................ 1.79 1.34 0.21
Realized gain on investments........................ 0.20 -- --
Increase in unrealized appreciation on
investments...................................... 5.08 0.19 0.01
----------------- ----------------- ------------------
Net increase in shareholders' equity resulting from
operations....................................... $ 7.07 $ 1.53 $ 0.22
Issuace of common stock............................. 0.71 -- --
Dilutive effect of stock option loans............... (2.76) -- --
Distribution of net investment income............... (1.74) (1.34) (0.21)
----------------- ----------------- ------------------
Net asset value at end of period.................... $ 17.08 $ 13.80 $ 13.61
Per share market value at end of period............. $ 22.75 $ 17.25 $ 18.125
Total return(2)....................................... 41.97% 2.57% 22.23%
Shares outstanding at end of period................... 18,252 11,081 11,069

Ratio/Supplemental Data
Net assets at end of period......................... $ 311,745 $ 152,723 $150,652
Ratio of operating expenses to average net
assets(3)........................................ 3.81% 1.13% 1.46%
Ratio of net operating income to average net
assets(3)........................................ 12.94% 9.74% 6.03%
</TABLE>

- ------------------
(1) Basic per share data.

(2) Amounts were not annualized for the results of the three month period ended
December 31, 1997.

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

See accompanying notes.

F-12
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 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 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. In addition to being a lender to and investor in middle market
companies, in 1999 the Company launched Capital.com, an Internet financial
portal (see Note 4). 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 American Capital Financial Services ('ACFS'), formerly 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. The Company's reportable
segments are its investing operations as a business development company and the
financial advisory operations of its wholly-owned subsidiary, ACFS (see Note 5).
The Company has no foreign operations.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and for periods commencing with the
Company's election to be treated as a RIC, in accordance with Article 6 of
Regulation S-X of the Code of Federal Regulations. For the nine months ended
September 30, 1997, the financial statements are prepared on a consolidated
basis with the accounts of ACFS, the Company's wholly owned subsidiary. All
intercompany transactions and balances were eliminated. Effective October 1,
1997, pursuant to RIC accounting requirements, ACFS was deconsolidated, and, as
a result, for the years ended December 31, 1999 and 1998 and the three months
ended December 31, 1997 the Company accounted for its investment in ACFS under
the equity method. In connection with this change, the Company contributed the
following assets and liabilities to ACFS:

Investment in Erie Forge and Steel................................... $ 2,736
Other assets......................................................... 791
Other liabilities.................................................... 69
Deferred tax liability............................................... 3,333

As a result of these changes, the Company's statement of operations for the
nine months ended September 30, 1997 ('pre-RIC') is not comparable with the
statements of operations for periods commencing after October 1, 1997
('post-RIC').

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

(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

VALUATION OF INVESTMENTS

Investments are carried at fair value, as determined by the Board of
Directors. Securities which are publicly traded are valued at the closing bid
price on the valuation date. Debt and equity securities which are not publicly
traded are valued at fair value as determined in good faith by the Board of
Directors. In making such determination, the Board of Directors will value
non-convertible debt securities at cost plus amortized original issue discount,
if any, unless adverse factors lead to a determination of a lesser valuation. In
valuing convertible debt, equity or other securities, the Board of Directors
determines the fair value based on the collateral, the issuer's ability to make
payments, the earnings of the issuer, sales to third parties of similar
securities, the comparison to publicly traded securities and other pertinent
factors. Due to the uncertainty inherent in the valuation process, such
estimates of fair value may differ significantly from the values that would have
been used had a ready market for the securities existed, and the differences
could be material (see Note 4).

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
ACFS.

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, ACFS, as income on the closing date of the related loan. Prepayment
penalties are booked as revenue as they are received.

REALIZED GAIN OR LOSS AND UNREALIZED APPRECIATION OR DEPRECIATION OF 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.

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

(IN THOUSANDS, EXCEPT PER SHARE DATA)

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

DISTRIBUTIONS TO SHAREHOLDERS

Distributions to shareholders are recorded on the ex-dividend date.

FEDERAL INCOME TAXES

The Company operates so as to qualify to be taxed as a RIC under the
Internal Revenue Code. Generally, a RIC is entitled to deduct dividends it pays
to its shareholders from its income to determine 'taxable income.' The Company
has distributed and currently intends to distribute sufficient dividends to
eliminate taxable income. Therefore, the statement of operations contains no
provision for income taxes for the years ended December 31, 1999 and 1998 and
the three months ended December 31, 1997.

During the pre-RIC periods, the Company operated under Subchapter C of the
Internal Revenue Code and calculated its tax provision pursuant to Statement of
Financial Accounting Standards No. 109. Deferred income taxes were determined
based on the differences between financial reporting and tax basis of assets and
liabilities.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosure of contingent assets and liabilities. Actual results
could differ from those estimates (see Note 4).

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

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 was to be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999,
FASB issued SFAS No. 137, 'Accounting for Derivative Instruments and Hedging
Activities-- Deferral of the Effective Date of FASB Statement No. 133,' which
extended the effective date of SFAS 133 to fiscal years beginning after June 15,
2000. Adoption of SFAS 133 is not expected to have a material impact on the
Company's financial statements or disclosures.

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

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3. INVESTMENTS

Investments consists primarily of securities issued by publicly and
privately-held companies which have been valued at $377,554 as of December 31,
1999. These securities consist of senior debt, subordinated debt with equity
warrants, convertible preferred stock and common stock. The debt securities have
effective interest rates ranging from 9.75% to 28.26% 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 do not produce current income. The net unrealized
appreciation in investments for Federal income tax purposes is the same as for
book purposes and none of the Company's investments are on non-accrual status.

NOTE 4. CAPITAL.COM

o The valuation of comparable public company entities;

o The very early development stage of Capital.com;

o An estimated value for the warrants issued to First Union and the
uncertainty of a subsequent valuation of Capital.com affecting the
number of shares for which such warrants could be exercised.

Based on all these factors and others that were considered, the Board of
Directors valued the investment in Capital.com at $72,500 at December 31, 1999.
This investment represents 18% of total assets and 23% of total shareholders'
equity at December 31, 1999 and the change in unrealized appreciation represents
73% of the net increase in shareholders' equity resulting from operations for
1999. Realization of this valuation in subsequent periods is subject to a high
degree of uncertainty including the ability of Capital.com to attract and retain
financial and service providers, develop and maintain a significant customer
base that will support the on going investment and capital needs of the
business, attract additional investors in the business, and develop and execute
an exit strategy for investors. The outcome of these matters is highly
uncertain. Inability to achieve these or other factors could negatively impact
future valuations of Capital.com and such differences could be material.

NOTE 5. INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY

As discussed in Note 2, ACFS is an operating subsidiary of the Company and
is accounted for under the equity method effective October 1, 1997.

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

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 5. INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--(CONTINUED)

Condensed financial information for ACFS is as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Assets
Investments in ACS Equities, LP and portfolio companies, at
fair value (See Note 15).................................... $10,365 $10,837
Other assets, net.............................................. 3,572 1,359
----------------- -----------------
Total assets..................................................... $13,937 $12,196
----------------- -----------------
----------------- -----------------

Liabilities and Shareholder's Equity
Deferred income taxes.......................................... $ 2,007 $ 2,921
Due to parent.................................................. 2,331 778
Other liabilities.............................................. 4,706 2,111
Shareholder's equity........................................... 4,893 6,386
----------------- -----------------
Total liabilities and shareholder's equity....................... $13,937 $12,196
----------------- -----------------
----------------- -----------------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Operating income............................ $ 6,030 $ 5,227 $ 532
Operating expense........................... 9,114 6,451 1,084
-------- -------- -------
Net operating loss.......................... (3,084) (1,224) (552)
Realized gain on investments................ 925 -- --
(Decrease) increase in unrealized
appreciation of investments............... (246) 481 605
Other....................................... 912 261 (29)
-------- -------- -------
Net (loss) income........................... $(1,493) $ (482) $ 24
-------- -------- -------
-------- -------- -------
</TABLE>

NOTE 6. 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 the time the 1997 Stock Option Plan (the
1997 Plan) was established by the Company. The 1997 Plan provided 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, 1999, there are 16
shares available to be granted under the 1997 Plan.

On November 6, 1997, the Board of Directors authorized the establishment of
a stock option plan for the non-employee directors (the 'Director Plan'). The
Director Plan was approved by shareholders at the annual meeting held on May 14,
1998. The Company received approval of the plan from the Securities and Exchange
Commission (SEC) on May 14, 1999. The Company has issued 15 options to each of
the six non-employee directors for a total grant of 90 options. At December 31,
1999, there are 60 shares available for grant under the Director Plan.

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

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 6. STOCK OPTION PLAN--(CONTINUED)

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;
options granted under the Director Plan are nonstatuatory stock options. Only
employees of the Company and its subsidiaries are eligible to receive incentive
stock options under the 1997 Plan. Options under both the 1997 Plan and the
Director Plan 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
and the Director 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 both plans may
be exercised for a period of no more than ten years from the date of grant.

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net operating income
As reported............................ $24,661 $14,788 $2,270
Pro forma.............................. $22,643 $13,609 $2,030
Net increase in shareholders' equity
resulting from operations
As reported............................ $97,201 $16,915 $2,437
Pro forma.............................. $95,183 $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, 1999, the Company
estimated a fair value per option on the date of grant of $6.12 using a
Black-Scholes option pricing model and the following assumptions: dividend yield
7.7%, risk free interest rate 6.4%, expected volatility factor .32, and expected
lives of the options of 7 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-18
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 6. STOCK OPTION PLAN--(CONTINUED)

A summary of the status of the Company's stock option plans as of and for
the years ended December 31, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
----------------------------- -----------------------------
WEIGHTED- WEIGHTED-
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year.......... 1,633 $14.96 1,297 $15.00
Granted......................................... 303 $19.01 692 $18.42
Exercised....................................... (1,520) $15.00 (28) $15.00
Canceled........................................ (62) $17.76 (328) $22.38
------ ------- ------ -------
Options outstanding, end of year................ 354 $17.60 1,633 $14.96
------ ------- ------ -------
------ ------- ------ -------
Options exercisable at year end................. 354 1,633
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ------------------------------------------
NUMBER WEIGHTED- WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1999 CONTRACTUAL LIFE PRICE 1999 PRICE
- ---------------------------------------- -------------- ---------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
$15.00 to $17.00........................ 116 8.5 Years $15.00 116 $15.00
$17.01 to $18.00........................ 5 9.7 Years $17.31 5 $17.31
$18.00 to $18.74........................ 85 8.4 Years $18.63 85 $18.63
$18.74 to $19.05........................ 100 9.4 Years $18.75 100 $18.75
$19.06 to $19.75........................ 48 9.4 Years $19.71 48 $19.71
--- ---------------- ---------- --- ----------
$15.00 to $19.75........................ 354 8.9 Years $17.60 354 $17.60
--- ---------------- ---------- --- ----------
--- ---------------- ---------- --- ----------
</TABLE>

During 1999, the Company issued 1,520 shares of common stock to employees
of the Company, pursuant to option exercises, in exchange for notes receivable
totaling $22,752. 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.
These transactions were 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. Certain of the loans are also secured by
pledges of life insurance policies. Interest is charged and paid on such loans
at the Applicable Federal Rate as defined in the Internal Revenue Code. See Note
15 for further discussion of the note receivable issued for common stock.

NOTE 7. BORROWINGS

On March 31, 1999, the Company closed a maximum $100,000 debt funding
facility; this facility was increased to a $125,000 on June 17, 1999 and to
$225,000 on December 10, 1999. 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. The Company
subsequently contributed an additional $100,000 in loans to the Trust. Subject
to certain conditions precedent, 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 and interest on borrowings had been charged at LIBOR (6.47% at December
31, 1999) plus

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

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 7. BORROWINGS--(CONTINUED)

2.50%; the interest rate was decreased to LIBOR plus 1.50% on December 10, 1999.
The full amount of principal is due 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 have been 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.' As of
December 31, 1999, the Company has $78,545 of borrowings outstanding under this
facility.

During December, 1998, the Company borrowed $5 million from a corporation.
Interest was accrued and paid monthly at 7.75% and the principal of the note was
repaid in March 1999.

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 in January 1999.

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

During the years ended December 31, 1999 and 1998, and the nine months
ended September 30, 1997 the cash paid for interest was approximately $4,385,
$56, and $88, respectively. The weighted average interest rates, including
amortization of deferred finance costs, for the years ended December 31, 1999
and 1998 were 9.7% and 5.9%.

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

NOTE 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 shareholders from its income to determine taxable income. The Company has
distributed and currently intends to distribute sufficient dividends to
eliminate taxable income. Therefore, the statement of operations contains no
provision for income taxes for the years ended December 31, 1999 and 1998, and
the three months ended December 31, 1997.

During the pre-RIC periods, the Company operated under Subchapter C of the
Internal Revenue Code and calculated its tax provision pursuant to Statement of
Financial Accounting Standards No. 109.

The aggregate gross unrealized appreciation over the cost for Federal
income tax purposes was $77,833, $2,310, and $7,414 as of December 31, 1999,
1998, and 1997, respectively. The net unrealized appreciation over cost was
$72,305, 2,265 and 7,414, respectively, for the same periods. The aggregate cost
of securities for Federal income tax purposes was $305,264, $252,718, and
$132,870 as of December 31, 1999, 1998 and 1997, respectively.

The Company obtained a ruling in April 1998 from the IRS which the Company
had requested to clarify the tax consequences of the conversion from taxation
under subchapter C to subchapter M in order for the Company to avoid incurring a
tax liability associated with the unrealized appreciation of assets whose fair
market value exceeded their basis immediately prior to conversion. Under the
terms of the ruling the Company elected 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 deferring recognition of the
built-in gain. If the Company were to divest

F-20
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 8. INCOME TAXES--(CONTINUED)

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 tax on its
built-in gain.

During 1999, the Company paid federal income taxes of $309 on retained
realized gains recorded during the tax year ended September 30, 1999. The
payment was treated as a deemed distribution because taxes were paid on behalf
of the Company's shareholders. As a result, the Company did not record income
tax expense.

NOTE 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
years ended December 31, 1999 and 1998, the three months ended December 31,
1997, and the nine months ended September 30, 1997 was approximately $113, $60,
$73, and $97, respectively.

Future minimum lease payments under non-cancelable operating leases at
December 31, 1999 were as follows:

2000............................................................... $ 798
2001............................................................... 801
2002............................................................... 773
2003............................................................... 673
2004 and thereafter................................................ 3,322
---------
Total............................................................ $ 6,367
---------
---------

In addition, at December 31, 1999, the Company had commitments under loan
agreements to fund up to $16,683 to five portfolio companies. These commitments
are composed of four 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.

NOTE 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, ACFS.
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 years ended December 31,
1999 and 1998, the Company and ACFS contributed $88 and $97 to the ESOP,
respectively, 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.

NOTE 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

F-21
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 11. CAPITAL STOCK--(CONTINUED)

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. During May, 1999, the authorized shares of common stock were increased
to 70,000.

On August 27, 1997, the Company declared a stock split effective August 29,
1997, effected in the form of a stock dividend pursuant to which each
outstanding share of common stock was effectively converted into 29.859 shares.
Outstanding shares and per share amounts for all periods presented have been
restated to reflect this stock split.

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. During December, 1999, the Company repurchased 394 of these
Warrants at a price of $5.50 per warrant.

In 1998, in accordance with regulations governing RIC's, the Company
notified shareholders 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 during 1998.

In August 1999 the Company sold 5,605 shares of common stock in a follow-on
equity offering. The net proceeds of the offering of approximately $90 million
were used to repay outstanding borrowings under the debt funding facility and to
fund investments.

The Company declared dividends of $25,867, and $14,849, or $1.74 and $1.34
per share for the years ended December 31, 1999 and 1998; at December 31, 1999,
$547 remained accrued and undistributed to shareholders. For the three months
ended December 31, 1997, the Company distributed $2,324, or $0.21 per share, to
its shareholders. For Federal income tax purposes, the distributions were 100%
from ordinary income.

NOTE 12. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 1999 and 1998, and the three
months ended December 31, 1997. For all other periods,

F-22
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 12. EARNINGS PER SHARE--(CONTINUED)

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 YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per
share..................................... $97,201 $16,915 $ 2,437
Denominator for basic weighted average
shares.................................... 13,744 11,068 11,069
Employee stock options...................... 167 269 251
Contingently issuable shares................ 303 -- --
Warrants.................................... 80 87 85
----------------- ----------------- ----------
Dilutive potential shares................... 550 356 336
----------------- ----------------- ----------
Denominator for diluted weighted average
shares.................................... 14,294 11,424 11,405
----------------- ----------------- ----------
Basic earnings per share.................... $ 7.07 $ 1.53 $ 0.22
Diluted earnings per share.................. $ 6.80 $ 1.48 $ 0.21
</TABLE>

NOTE 13. REALIZED GAIN ON INVESTMENTS

During March, 1999, the Company sold its investment in Four-S Baking
Company ('Four-S'). The Company's investment included senior debt, subordinated
debt, preferred stock, common stock and common stock warrants. The Company
received $7.2 million 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, the Company also recorded $177 of unrealized depreciation to
reverse previously recorded unrealized appreciation.

During June, 1999, the Company received a prepayment of subordinated debt
from Specialty Transportation Services, Inc. ('STS') in the amount of $7,500. In
conjunction with the repayment, the Company received prepayment fees of $225 and
recognized a realized gain of $551 from the realization of unamortized original
issue discount. In October, 1999, the Company received a prepayment of the
remaining balance of its subordinated debt investment in STS of $515, including
prepayment penalties. In addition, STS repurchased from the Company the common
stock and common stock purchase warrants owned by the Company for total
consideration of $3,000. The Company recorded $1,844 of realized gains and
reversed $1,806 of previously unrealized gains on the sale of the subordinated
debt, common stock and common stock purchase warrants. In addition, STS paid a
$1,000 fee to ACFS to cancel an investment banking contract between ACFS and
STS.

NOTE 14. INTEREST RATE RISK MANAGEMENT

The Company enters into interest rate swap agreements with financial
institutions as part of its strategy to manage interest rate risks and to
fulfill its obligation under the terms of its debt funding facility. The Company
uses interest rate swap agreements for hedging and risk management only and not
for speculative purposes. During the year ended December 31, 1999, the Company
entered into four interest rate basis swap agreements with an aggregate notional
amount of $61,325. Pursuant to these swap agreements, the Company pays a
variable rate equal to the prime lending rate (8.75% at December 31, 1999) and
receives a weighted average rate of the 30-day LIBOR (6.47% at December 31,
1999) plus 2.70%. The swaps have a remaining

F-23
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 14. INTEREST RATE RISK MANAGEMENT--(CONTINUED)

weighted average maturity of approximately four and one half years. At December
31, 1999, the fair value of the interest rate basis swap agreements represented
a liability of $163.

NOTE 15. RELATED PARTY TRANSACTIONS

The Company has provided loans to employees for the exercise of options
under the 1997 Stock Option Plan. The loans require the current payment of
interest at the Applicable Federal Rate of interest in effect at the date of
issue, have varying terms not exceeding nine years and have been recorded as a
reduction of shareholders' equity. The loans are evidenced by full recourse
notes that are due upon maturity or 60 days following termination of employment,
and the shares of common stock purchased with the proceeds of the loan are
posted as collateral. During the year ended December 31, 1999, the Company
issued $24,025 in loans to 18 employees for the exercise of options and related
taxes. The Company recognized interest income from these loans of $623 during
the year ended December 31, 1999.

In connection with the issuance of these notes, the Company entered into
agreements to purchase split dollar life insurance for three executive officers.
The aggregate cost of the split dollar life insurance of $2,811 is being
amortized over a ten year period 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
additional 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, such individual must reimburse the company the unamortized cost of
his policy. For the year ended December 31, 1999, the Company recorded $67 of
amortization expense.

During 1999, the Company formed ACS Equities, LP, along with ACFS. Upon
formation, ACFS contributed all of its equity investments held as of September
30, 1999 at fair value; the Company contributed $50,000 of capital. The
investments contributed by ACFS consisted of the following common stock
investments:

<TABLE>
<CAPTION>
FAIR VALUE AT FAIR VALUE AT
SEPTEMBER 30, 1999 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Biddeford Textile Corporation.......................... $ 5,687 $ 2,173
Erie Forge & Steel, Inc................................ 2,694 2,553
Mobile Tool International, Inc......................... 1,984 1,984
---------- -------
$ 10,365 $ 6,710
---------- -------
---------- -------
</TABLE>

Under the terms of the partnership agreement, the Company has guaranteed
the fair value of the assets contributed by ACFS. The Company will share in 90%
of the income and losses of the partnership; however, if the losses of the
partnership reduce the capital below the original basis, the Company will be
responsible for 100% of all losses below the original basis. ACFS will receive
10% of investment income and losses to the extent that its original capital
account basis is not impaired. In the event that investment losses cause the
capital of the partnership to decrease below the original basis, ACFS will not
be responsible for any losses. For the year ended December 31, 1999, the Company
recorded unrealized depreciation of 3,655 on its investment in ACS Equities, LP;
a corresponding liability to ACS Equities, LP of $3,655 is included in other
liabilities.

F-24
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 16. SELECTED QUARTERLY DATA (UNAUDITED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------
QTR 1 QTR 2 QTR 3 QTR 4
------ ------ ------- -------
<S> <C> <C> <C> <C>
Total operating income.................................................. $6,520 $7,155 $ 9,143 $10,587
Net operating income.................................................... 4,727 5,084 6,664 8,186
Net increase in shareholders' equity resulting from operations.......... 7,024 6,161 10,234 73,782
Basic earnings per common share......................................... 0.63 0.55 0.69 4.14
Diluted earnings per common share....................................... 0.62 0.53 0.66 4.02
</TABLE>

F-25