================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended March 31, 2000.
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 814-00149
AMERICAN CAPITAL STRATEGIES, LTD.
(Exact name of registrant as specified in its charter)
Delaware 52-145-1377
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
(Address of principal executive office)
(301) 951-6122
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|. No |_|.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of the issuer's Common Stock, $.01 par value, outstanding as of May 3, 2000 was
18,270,108.
================================================================================
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets as of March 31, 2000 and December 31, 1999....................................1
Schedules of Investments as of March 31, 2000 and December 31, 1999...........................2
Statements of Operations for the three months ended
March 31, 2000 and 1999.............................................................6
Statement of Shareholders' Equity for the three months ended
March 31, 2000 and March 31, 1999...................................................7
Statements of Cash Flows for the three months ended
March 31, 2000 and 1999.............................................................8
Financial Highlights for the three months ended
March 31, 2000 and 1999.............................................................9
Notes to Unaudited Financial Statements.......................................................10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Introduction..................................................................................13
Results of Operations.........................................................................15
Financial Condition, Liquidity and Capital Resources..........................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................19
Item 2. Changes in Securities.........................................................................19
Item 3. Defaults upon Senior Securities...............................................................19
Item 4. Submission of Matters to a Vote of Security Holders...........................................19
Item 5. Other Information.............................................................................19
Item 6. Exhibits and Reports on Form 8-K..............................................................19
Signature..............................................................................................20
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 4,577 $ 2,037
Investments at fair value (cost of $336,731 and $305,264, respectively) 419,788 377,554
Investment in unconsolidated operating subsidiary 4,335 4,893
Due from unconsolidated operating subsidiary 6,495 2,331
Interest receivable 3,761 2,417
Other 5,880 6,140
--------------- ---------------
Total assets $ 444,836 $ 395,372
=============== ===============
Liabilities and Shareholders' Equity
Revolving credit facility $ 117,212 78,545
Accrued dividends payable -- 547
Other 4,358 4,535
-------------- --------------
Total liabilities 121,570 83,627
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 18,270 and 18,252
issued and outstanding, respectively 183 183
Capital in excess of par value 256,297 255,922
Notes receivable from sale of common stock (23,003) (23,052)
Undistributed net realized earnings 1,409 1,080
Unrealized appreciation of investments 88,380 77,612
--------------- ---------------
Total shareholders' equity 323,266 311,745
--------------- ---------------
Total liabilities and shareholders' equity $ 444,836 $ 395,372
=============== ===============
</TABLE>
See accompanying notes.
1
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
MARCH 31, 2000
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Senior Debt--11.25%
- -------------------
BIW Connector Systems, LLC Manufacturing $ 3,191 $ 3,191
JAG Industries, Inc. (2) Manufacturing 1,177 1,177
Chance Coach, Inc. (2) Bus Manufacturer 1,018 1,018
Cycle Gear, Inc. Motor Cycle Accessories 750 750
EuroCaribe Packing Company, Inc. (2) Meat Processing 6,098 6,098
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 3,975 3,975
Distributor
Caswell-Massey Holdings Corp. Toiletries 2,000 2,000
Warner Power, LLC Power Systems and Electric 4,838 4,838
Ballasts
Fulton Bellows & Components, Inc. (2) Bellows Manufacturer 11,700 11,700
--------- --------
Subtotal 47,697 47,697
Subordinated Debt--53.20%
- -------------------------
BIW Connector Systems, LLC Manufacturing 6,630 6,630
Westwind Group Holdings, Inc. Restaurant 2,998 2,998
JAG Industries, Inc. (2) Manufacturing 2,399 2,399
Chance Coach, Inc. (2) Bus Manufacturer 7,661 7,661
The L.A. Studios, Inc. Audio Production 2,488 2,488
Decorative Surfaces International, Inc. (2) Decorative Paper & Vinyl Mfg. 5,640 5,640
New Piper Aircraft, Inc. Aircraft Manufacturing 18,067 18,067
Electrolux, LLC Vacuum Cleaners 8,054 8,054
Cycle Gear, Inc. Motor Cycle Accessories 3,119 3,119
Confluence Holdings Corp. Canoes & Kayaks 9,165 9,165
EuroCaribe Packing Company, Inc. (2) Meat Processing 8,989 8,989
Starcom Holdings, Inc. Electrical Contractor 18,992 18,992
Centennial Broadcasting, Inc. Radio Stations 17,402 17,402
Lion Brewery, Inc. (2) Malt Beverages 5,967 5,967
Auxi-Health, Inc. Home Health Care 10,169 10,169
Patriot Medical Technologies, Inc. (2) Repair Services 2,496 2,496
Tube City, Inc. Mill Services 6,120 6,120
Erie County Plastics Corporation Molded Plastic Manufacturing 8,873 8,873
Aeriform Corporation Packaged Industrial Gas 7,912 7,912
MBT International, Inc. (2) Musical Instrument 6,531 6,531
Distributor
Dixie Trucking Company, Inc. (2) Overnight Shorthaul Delivery 4,067 4,067
Caswell-Massey Holdings Corp. Toiletries 1,688 1,688
Transcore Holdings, Inc. Transportation Info. Mgmt. 5,248 5,248
Services
The Inca Group (2) Manufacturing 11,272 11,272
Crosman Corporation Small Arms 3,738 3,738
Parts Plus Group Auto Parts Distributor 4,131 4,131
IGI, Inc. Veterinary vaccines 5,099 5,099
Clear Communications Group Communications Networks 10,423 10,423
Warner Power, LLC Power Systems and Electric 3,892 3,892
Ballasts
A.H. Harris & Sons, Inc. Construction Material 4,739 4,739
Distribution
Fulton Bellows & Components, Inc. (2) Bellows Manufacturer 6,695 6,695
A&M Cleaning Products, Inc. Household Cleaning Products 4,970 4,970
--------- ---------
Subtotal 225,634 225,634
Convertible Preferred Stock--2.76%
- ----------------------------------
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. 751 751
Patriot Medical Technologies, Inc. (2) 8% dividend convertible into Repair Services 1,040 1,040
16.9% of Co.
MBT International, Inc. (1)(2) convertible into 53.1% of Co. Musical Instrument 2,250 2,250
Distributor
Transcore Holdings, Inc. (2) 8% dividend convertible into 0.7% of Co. Transportation Service 312 312
Parts Plus Group (1) convertible into 1.9% of Co. Auto Parts Distributor 556 556
Fulton Bellows & Components, Inc. (1)(2) convertible into 40% of Co. Bellows Manufacturer 3,000 3,000
A&M Cleaning Products, Inc. (1) convertible into 8.2% of Co. Household Cleaning Products 1,000 1,000
--------- ---------
Subtotal 10,909 11,702
</TABLE>
See accompanying notes.
2
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS -- CONTINUED
March 31, 2000
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Common Stock and Membership Interest Warrants(1)--13.35%
- --------------------------------------------------------
BIW Connector Systems, LLC 8% of LLC Manufacturing $ 652 $ 652
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 1,176
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 1,499 1,397
EuroCaribe Packing Company, Inc. (2) 37.1% of Co. Meat Processing 1,110 --
Starcom Holdings, Inc. 17.5% of Co. Electrical Contractor 3,914 5,597
Lion Brewery, Inc. (2) 54% of Co. Malt Beverages 675 2,395
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. 1,694 1,856
Services
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 3,338
Clear Communications Group 11.5% of Co. Communications Networks 2,698 10,327
Warner Power, LLC (2) 53.1% of LLC Power Systems and Electric 1,629 1,629
Ballasts
A.H. Harris & Sons, Inc. 3.5% of Co. Construction Material 267 267
Distribution
Fulton Bellows & Components, Inc. (2) 20% of Co. Bellows Manufacturer 1,305 1,305
A&M Cleaning Products, Inc. 13.7% of Co. Household Cleaning Products 1,030 1,030
--------- --------
Subtotal 43,984 56,606
Common Stock and Membership Interests(1)--18.46%
- ------------------------------------------------
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 616 896
The Inca Group (2) 18.5% of Co. Manufacturing 850 850
Capital.com, Inc. (2) 85% of Co. Internet-based Financial 1,492 72,500
Portal
Wrenchead.com, Inc. 1% of Co. Internet-based Auto Parts -- 104
Distributor
ACS Equities, LP (2) 90% of LP Investment Partnership 3,362 --
--------- --------
Subtotal 8,507 78,304
--------- --------
336,731 419,943
Interest Rate Basis Swap Agreements--(0.04)%
- --------------------------------------------
<CAPTION>
No. of Notional Notional Receive Pay
Contracts Amount Date Rate Rate
- --------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
4 $ 61,325 4/10/04 Floating Floating -- (155)
--------- --------
Total Investments 336,731 419,788
========= ========
Investment in Unconsolidated Operating Subsidiary--1.02%
- --------------------------------------------------------
American Capital Financial Services (1)(2) 100% of Co. Investment Banking 403 4,335
--------- --------
Totals $ 337,134 $424,123
========= ========
</TABLE>
(1) Non-income producing
(2) Affiliate
See accompanying notes.
3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Senior Debt--9.53%
- ------------------
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 4,200 4,200
Distributor
Caswell-Massey Holdings Corp. Toiletries 2,000 2,000
Warner Power, LLC Power Systems and Electric 4,610 4,610
--------- --------
Ballasts
Subtotal 36,461 36,461
Subordinated Debt--55.35%
- -------------------------
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 6,439 6,439
Distributor
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. 5,656 5,656
Services
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 3,871 3,871
Ballasts
A.H. Harris & Sons, Inc. Construction Material 4,733 4,733
Distribution --------- --------
Subtotal 211,674 211,674
Convertible Preferred Stock--2.00%
- ----------------------------------
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 Repair Services 1,020 1,020
16.9% of Co.
MBT International, Inc. (1)(2) convertible into 53.1% of Co. Musical Instrument Distributor 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
</TABLE>
See accompanying notes.
4
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS -- CONTINUED
December 31, 1999
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
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 1,214 1,214
Distributor
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. 1,694 1,694
Services
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
Ballasts
A.H. Harris & Sons, Inc. 3.5% of Co. Construction Material 267 267
Distribution --------- --------
Subtotal 41,469 43,905
Common Stock and Membership Interests(1)--20.40%
- ------------------------------------------------
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 1,492 72,500
Portal
Wrenchead.com, Inc. 1% of Co. Internet-based Auto Parts -- 104
Distributor
ACS Equities, LP (2) 90% of LP Investment Partnership 3,655 --
--------- --------
Subtotal 8,800 78,024
--------- --------
305,264 377,717
<CAPTION>
Interest Rate Basis Swap Agreements--(0.04)%
- --------------------------------------------
No. of Notional Notional Receive Pay
Contracts Amount Date Rate Rate
- --------- -------- -------- ------- -------
<S> <C> <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.
5
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Operating income:
Interest and dividend income $ 11,038 $ 5,854
Loan fees 480 666
------------- -------------
Total operating income
Operating expenses:
Salaries and benefits 164 310
General and administrative 471 294
Interest 1,779 794
------------- -------------
Total operating expenses
Operating income before equity in loss of unconsolidated operating
subsidiary 9,104 5,122
Equity in loss of unconsolidated operating subsidiary (558) (395)
------------- -------------
Net operating income 8,546 4,727
Net realized gain on investments -- 316
Increase in unrealized appreciation of investments 10,768 1,981
------------- -------------
Net increase in shareholders' equity resulting from operations $ 19,314 $ 7,024
============= =============
Net operating income per share:
Basic $ 0.48 $ 0.43
Diluted $ 0.47 $ 0.42
Earnings per common share:
Basic $ 1.08 $ 0.63
Diluted $ 1.05 $ 0.62
Weighted average shares of Basic 17,833 11,070
common stock outstanding Diluted 18,351 11,279
</TABLE>
See accompanying notes.
6
<PAGE>
AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Notes
Capital in Receivable Undistributed Unrealized Total
Common Stock Excess of From Sale of Net Realized Appreciation Shareholders'
Shares Amount Par Value Common Stock Earnings of Investments Equity
------ ------ --------- ------------ -------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 11,081 $ 111 $ 145,245 $ (300) $ (116) $ 7,783 $ 152,723
=========== ========= ========= =========== ========== ============ ===========
Issuance of common stock under
the 1997 Stock Option Plan 20 -- 280 -- -- -- 280
Issue of common stock under the
Dividend Reinvestment Plan 11 -- 188 -- -- -- 188
Issuance of restricted stock 10 -- 166 -- -- -- 166
Issuance of note receivable
from sale of common stock -- -- -- (280) -- -- (280)
Net increase in shareholders'
equity resulting from -- -- -- -- 5,043 1,981 7,024
operations
Distributions -- -- -- -- (4,555) -- (4,555)
----------- --------- --------- ----------- ---------- ------------ -----------
Balance at March 31, 1999 11,122 $ 111 $ 145,879 $ (580) $ 372 $ 9,764 $ 155,546
=========== ========= ========= =========== ========== ============ ===========
Balance at December 31, 1999 18,252 $ 183 $ 255,922 $ (23,052) $ 1,080 $ 77,612 $ 311,745
=========== ========= ========= =========== ========== ============ ===========
Issuance of common stock under
stock option plans 10 -- 187 (195) -- -- (8)
Issue of common stock under the
Dividend Reinvestment Plan 8 -- 188 -- -- -- 188
Termination of notes receivable
from sale of common stock -- -- -- 244 -- -- 244
Net increase in shareholders'
equity resulting from -- -- -- -- 8,546 10,768 19,314
operations
Distributions -- -- -- -- (8,217) -- (8,217)
----------- --------- --------- ----------- ---------- ------------ -----------
Balance at March 31, 2000 18,270 $ 183 $ 256,297 $ (23,003) $ 1,409 $ 88,380 $ 323,266
=========== ========= ========= =========== ========== ============ ===========
</TABLE>
See accompanying notes.
7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
2000 1999
------------- -------------
<S> <C> <C>
Operating activities
Net increase in shareholders' equity resulting from operations $ 19,314 $ 7,024
Adjustments to reconcile net increase in shareholders' equity resulting
from operations to net cash provided by operating activities:
Unrealized appreciation of investments (10,768) (1,981)
Net realized gain on investments -- (316)
Accretion of loan discounts (787) (408)
Amortization of deferred finance costs 255 25
Increase in interest receivable (1,344) (469)
Increase in accrued payment-in-kind dividends and interest (619) (380)
Increase in due from unconsolidated operating subsidiary (4,164) (1,040)
Increase in other assets 241 (90)
Increase in other liabilities 117 788
Loss of unconsolidated operating subsidiary 558 395
------------ -------------
Net cash provided by operating activities 2,803 3,548
Investing activities
Proceeds from sale or maturity of investments -- 15,774
Principal repayments 1,096 6,860
Purchase of investments (31,450) (28,012)
Purchase of securities -- (6,900)
------------ -------------
Net cash used in investing activities (30,354) (12,278)
Financing activities
Drawings on revolving credit facilities, net 38,667 10,000
Increase in deferred financing costs -- (599)
Issuance of common stock -- 188
Distributions paid (8,576) (5,777)
------------ -------------
Net cash provided by financing activities 30,091 3,812
------------ -------------
Net increase (decrease) in cash and cash equivalents 2,540 (4,918)
Cash and cash equivalents at beginning of period 2,037 6,149
------------ -------------
Cash and cash equivalents at end of period $ 4,577 $ 1,231
============ =============
Supplemental Disclosures:
- -------------------------
Cash paid for interest $ 1,548 $ 794
Non-cash financing activities:
- ------------------------------
Note receivable issued in exchange for common stock $ 195 $ 280
Net repayment of margin borrowings through sale of securities -- 18,857
Dividends reinvested 188 188
</TABLE>
See accompanying notes.
8
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Per Share Data (1)
Net asset value at beginning of the period $ 17.08 $ 13.80
Net operating income 0.48 0.43
Increase in unrealized appreciation on investments 0.60 0.20
------------- -------------
Net increase in shareholders' equity from operations $ 1.08 $ 0.63
Distribution of net investment income 0.45 0.41
Effect of dilution of contingently issuable shares 0.02 --
------------- ------------
Net asset value at end of period $ 17.69 $ 14.02
Per share market value at beginning of period $ 22.750 $ 17.250
Per share market value at end of period $ 25.375 $ 17.125
Total return (2) 13.52% 1.65%
Shares outstanding at end of period 18,270 11,122
Ratio/Supplemental Data
Net assets at end of period $ 323,266 $ 155,546
Ratio of operating expenses to average net assets 0.76% 0.91%
Ratio of net operating income to average net assets 2.69% 3.07%
</TABLE>
(1) Basic per share data.
(2) Amounts were not annualized for the results of the three month periods ended
March 31, 2000 and 1999.
See accompanying notes.
9
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
Note 1. Unaudited Interim Financial Statements
Interim financial statements of American Capital Strategies, Ltd. (the
"Company") are prepared in accordance with generally accepted accounting
principles ("GAAP") for the interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual financial statements
prepared in accordance with GAAP are omitted. In the opinion of management, all
adjustments, consisting solely of normal recurring accruals, necessary for the
fair presentation of financial statements for the interim periods have been
included. The current period's results of operations are not necessarily
indicative of results that ultimately may be achieved for the year. The interim
financial statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K, as
filed with the Securities and Exchange Commission.
Note 2. Organization
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), was incorporated in 1986 to provide financial advisory services to
and invest in middle market companies. On August 29, 1997, the Company completed
an initial public offering ("IPO") of 10,382,437 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. 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, Inc. ("ACFS"), 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 4). The Company has no foreign operations.
Note 3. Capital.com
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 and March 31, 2000, 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.
10
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
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 and March 31, 2000. As a result, no increase in unrealized appreciation was
recorded during the three months ended March 31, 2000. This investment
represents 16% of total assets and 22% of total shareholders' equity at March
31, 2000. 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 4. 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. The
investment in ACFS is carried at fair value as determined by the Board of
Directors.
Condensed financial information for ACFS is as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Assets
Investments in ACS Equities, LP, at fair value $ 10,365 $ 10,365
Other assets, net 4,331 3,572
-------------- ------------
Total assets $ 14,696 $ 13,937
============== ============
Liabilities and Shareholder's Equity
Deferred income taxes $ 1,665 $ 2,007
Due to parent 6,519 2,331
Other liabilities 2,225 4,706
Shareholder's equity 4,287 4,893
-------------- ------------
Total liabilities and shareholder's equity $ 14,696 $ 13,937
============== ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Operating income $ 550 $ 1,435
Operating expense 1,451 2,044
-------------- --------------
Net operating loss (901) (609)
Realized gains on investments -- 925
Change in unrealized appreciation of investments -- (954)
Other income 342 243
-------------- --------------
Net loss $ (559) $ (395)
============== ==============
</TABLE>
11
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
Note 5. Borrowings
As of March 31, 2000, the Company had $117,212 in borrowings
outstanding under a debt funding facility. The facility expires in April 2001,
at which time all outstanding principal is due and payable. Interest on
borrowings under this facility is charged at one month LIBOR (6.11% at March 31,
2000) plus 150 basis points. During the three months ended March 31, 2000, the
company had weighted average outstanding borrowings of $84,769 and the weighted
average interest rate, including amortization of deferred finance costs, was
8.4%.
Note 6. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Numerator for basic and diluted earnings per share $ 19,314 $ 7,024
Denominator for basic-weighted average shares 17,833 11,070
Employee stock options 80 196
Warrants 17 13
Contingently issuable shares 421 --
------------ ------------
Dilutive potential shares 518 209
Denominator for diluted weighted average shares 18,351 11,279
------------ ------------
Basic earnings per share $ 1.08 $ 0.63
Diluted earnings per share $ 1.05 $ 0.62
</TABLE>
Note 7. Interest Rate Risk Management
The Company enters into interest rate basis 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. The Company is a party in 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 (9.00% at March 31, 2000) and receives a rate of the one month
LIBOR (6.11% at March 31, 2000) plus a weighted average spread of 2.70%. The
swaps have a remaining weighted average maturity of approximately four years. At
March 31, 2000, the fair value of the interest rate basis swap agreements
represented a liability of $155.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Unaudited) (In thousands except per share data)
All statements contained herein that are not historical facts
including, but not limited to, statements regarding anticipated activity are
forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to differ materially are the following: changes in the economic
conditions in which the Company operates negatively impacting the financial
resources of the Company; certain of the Company's competitors with
substantially greater financial resources than the Company reducing the number
of suitable investment opportunities offered to the Company or reducing the
yield necessary to consummate the investment; increased costs related to
compliance with laws, including environmental laws; general business and
economic conditions and other risk factors described in the Company's 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 Note 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, American Capital Financial Services (ACFS), changed
from a consolidated basis to the equity method.
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 $419,788 and $377,554 at March 31, 2000 and December
31, 1999, respectively. During the three months ended March 31, 2000, the
Company originated investments totaling $32,000, including $1,800 in funds
committed but undrawn under credit facilities, and advanced $1,250 previously
committed under working capital facilities. The weighted average effective
interest rate on total capital invested as of March 31, 2000 was 13.8%.
Summaries of the composition of the Company's portfolio of publicly and
non-publicly traded securities, excluding government securities, at March 31,
2000 and December 31, 1999 at cost and fair value are shown in the following
table:
COST March 31, 2000 December 31, 1999
- ---- -------------- -----------------
Senior debt 14.2% 11.9%
Subordinated debt 67.0% 69.4%
Convertible preferred stock 3.2% 2.2%
Common stock warrants 13.1% 13.6%
Common stock 2.5% 2.9%
FAIR VALUE March 31, 2000 December 31, 1999
- ---------- -------------- -----------------
Senior debt 11.4% 9.7%
Subordinated debt 53.7% 56.0%
Convertible preferred stock 2.8% 2.0%
Common stock warrants 13.5% 11.6%
Common stock 18.6% 20.7%
On a fair value basis, the concentration of the portfolio in common
stock is due to the valuation of Capital.com. Capital.com, an Internet finance
portal, was launched in July 1999 under the name of AmericanCapitalOnline.com.
In
13
<PAGE>
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 and March 31, 2000, 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.
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 and March 31, 2000. As a result, no increase in unrealized appreciation was
recorded during the three months ended March 31, 2000. This investment
represents 16% of total assets and 22% of total shareholders' equity at March
31, 2000. 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 following table shows the portfolio composition by industry
grouping at cost and at fair value:
COST March 31, 2000 December 31, 1999
- ---- -------------- -----------------
Manufacturing 56.2% 56.6%
Wholesale & Retail 11.8% 11.5%
Construction 7.7% 7.7%
Healthcare 6.5% 6.5%
Media 5.7% 5.5%
Telecommunications 4.3% 4.3%
Service 3.5% 3.5%
Information Technology 2.4% 2.5%
Transportation 1.4% 1.4%
Internet 0.5% 0.5%
FAIR VALUE March 31, 2000 December 31, 1999
- ---------- -------------- -----------------
Manufacturing 48.8% 46.2%
Internet 17.3% 19.2%
Wholesale & Retail 8.6% 9.3%
Construction 6.1% 6.2%
Healthcare 4.9% 5.2%
Telecommunications 4.9% 3.5%
Media 4.1% 4.5%
Service 2.5% 2.8%
14
<PAGE>
Information Technology 1.8% 2.0%
Transportation 1.0% 1.1%
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, "Net
operating income," 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 "Increase 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 under the equity method effective
October 1, 1997.
15
<PAGE>
The operating results for the three months ended March 31, 2000 and
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999 March 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Operating income $ 11,518 $ 6,520 $ 3,292
Operating expenses 2,414 1,398 444
Equity in loss of unconsolidated operating subsidiary (558) (395) (101)
---------------- ---------------- -----------------
Net operating income 8,546 4,727 2,949
Realized gain on investments -- 316 --
Increase in unrealized appreciation of investments 10,768 1,981 28
--------------- --------------- ----------------
Net increase in shareholders' equity resulting from operations $ 19,314 $ 7,024 $ 2,977
=============== =============== ================
</TABLE>
Total operating income for the First Quarter 2000 increased 4,998, or
77%, compared to the three months ended March 31, 1999. The increase in
operating income is a result of the Company closing 22 investments in private
companies totaling $168 million between March 31, 1999 and March 31, 2000. For
the First Quarter 2000, operating income consisted of $10,564 in interest and
dividends on non-publicly traded securities, $480 in loan processing fees, and
$363 in interest on bank deposits, repurchase agreements, and shareholder loans.
For the First Quarter 1999, operating income consisted of $666 in loan fees,
$5,813 in interest and dividends on non-publicly traded securities and $41 in
interest on government agency securities, bank deposits and repurchase
agreements, and shareholder loans. The First Quarter 1999 loan processing fees
included $288 in prepayment fees collected as a result of the repayment of $5
million in subordinated debt and the sale of senior and subordinated debt of $3
million. The increase in interest and dividend income over the First Quarter
1999 is attributable to the increase in the total principal amount in the
Company's investment portfolio and the increase in the prime lending rate from
7.75% at March 31, 1999 to 9.00% at March 31, 2000. See discussion of interest
rate sensitivity below under Interest Rate Risk. As the Company increases its
investment portfolio of investments, the interest and dividends the Company
realizes on these securities will also increase.
Operating expenses for the First Quarter 2000 increased $1,016, or 73%,
over the same period in 1999. The increase is primarily due to the increase in
interest expense from $794 in the First Quarter 1999 to $1,779 in the First
Quarter 2000. Interest expense increased due to both an increase in weighted
average outstanding borrowings from $41,070 in First Quarter 1999 to $84,769 in
the First Quarter 2000 and an increase in the weighted average effective
borrowing rate from 7.73% during First Quarter 1999 to 8.4% in the First Quarter
2000. General and administrative expenses increased from $294 in the First
Quarter 1999 to $471 in the First Quarter 2000 due to higher costs related to
insurance, marketing and public reporting expenses. The increase in general and
administrative expenses was offset by a decrease in salaries and benefits from
$310 in the First Quarter 1999 to $164 in the First Quarter 2000; the decrease
is due to lower incentive compensation awarded in the First Quarter 2000.
Equity in loss of unconsolidated operating subsidiary, which represents
ACFS's results, for the First Quarter 2000 increased $163, or 41%, over the same
period in 1999. For the three months ended March 31, 2000, ACFS's results
included $550 of operating income, $1,451 of operating expenses and $342 in
other income. For the three months ended March 31, 1999, ACFS's results included
$1,435 of operating income, $2,044 of operating expenses, $925 of realized gains
on investments, $954 of unrealized depreciation of investments, and $243 in
other income. The decrease in ACFS's operating income was primarily due to the
low amount of investment banking fees generated during the quarter compared to
the First Quarter 1999. Operating expenses decreased due to lower salaries and
benefits expense resulting from lower incentive compensation awarded during the
First Quarter 2000. The lower operating income, offset by lower operating
expenses resulted in an $164 increase in ACFS's net loss in the First Quarter
2000 compared to the First Quarter 1999.
During the First Quarter 1999, the Company recorded a realized gain of
$316 on the sale of its investment of Four S Baking Company. Total proceeds from
the sale of securities, which included senior debt, subordinated debt, preferred
stock, common stock warrants, and common stock, were $7.1 million. The realized
gain is comprised of the realization of unamortized loan discounts. ACFS
recorded no realized or unrealized gains in First Quarter 2000.
The increase in unrealized appreciation of investments is based on
portfolio asset valuations determined by the Company's Board of Directors.
Unrealized appreciation of investments for the First
16
<PAGE>
Quarter 2000 increased $8,787 over the First Quarter 1999. The increase for
First Quarter 2000 was comprised of valuation increases of $11,806 at eight
portfolio companies, including a valuation increase of $7,630 in the Company's
common stock warrant investment in Clear Communications Group, valuation
increases of $8 on interest rate basis swaps, and valuation decreases of $1,046
at one portfolio company.
Financial Condition, Liquidity, and Capital Resources
At March 31, 2000, the Company had $4,577 in cash and cash equivalents.
In addition, the Company had outstanding debt secured by assets of the Company
of $117,212 under a $225,000 debt funding facility. During the three months
ended March 31, 2000, the Company funded investments using draws on the debt
funding facility.
As a RIC, the Company is required to distribute annually 90% or more of
its net operating income and net realized short-term capital gains to
shareholders. While the Company provides shareholders with the option of
reinvesting their distributions in the Company, the Company anticipates having
to issue debt or equity securities in addition to the above borrowings to expand
its investments in middle market companies. The terms of the future debt and
equity issuances can not be determined and there can be no assurances that the
debt or equity markets will be available to the Company on terms it deems
favorable.
Portfolio Credit Quality
The Company has implemented a system under which it grades all loans on
a scale of 1 to 4. This system is intended to reflect the performance of the
borrower's business, the collateral coverage of the loans and other factors
considered relevant.
Under this system, management believes that loans with a grade of 4
involve the least amount of risk in the Company's portfolio. The borrower is
performing above expectations and the trends and risk factors are generally
favorable. Management believes that loans graded 3 involve an acceptable level
of risk that is similar to the risk at the time of origination. The borrower is
performing as expected and the risk factors are neutral to favorable. All new
loans are initially graded 3. Loans graded 2 involve a borrower performing below
expectations and the loan risk has increased since origination. The borrower may
be out of compliance with debt covenants, however, loan payments are not more
than 120 days past due. For loans graded 2, the Company's management will
increase procedures to monitor the borrower and will write down the fair value
of the loan if it is deemed to be impaired. A loan grade of 1 indicates that the
borrower is performing materially below expectations and the loan risk has
substantially increased since origination. Some or all of the debt covenants are
out of compliance and payments are delinquent. Loans graded 1 are not
anticipated to be repaid in full and the Company will reduce the fair market
value of the loan to the amount it anticipates will be recovered.
To monitor and manage the investment portfolio risk, management tracks
the weighted average portfolio grade. The weighted average portfolio grade was
3.3 and 3.2 at March 31, 2000 and December 31, 1999, respectively. In addition,
all of the Company's outstanding loans are currently performing and paying as
agreed. At March 31, 2000 and December 31, 1999, the Company's portfolio was
graded as follows:
March 31, 2000 December 31, 1999
-------------- -----------------
Investments at Percentage of Investments at Percentage of Total
Grade Fair Value Total Portfolio Fair Value Portfolio
- ----- -------------- --------------- -------------- -------------------
4 $ 137,692 39.6% $ 65,638 21.5%
3 190,983 55.0% 223,898 73.4%
2 18,662 5.4% 15,577 5.1%
1 -- -- -- --
------------ ------- ------------ -------
347,337 100.0% 305,113 100.0%
The amounts at March 31, 2000, and 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.
17
<PAGE>
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 March 31, 2000, approximately 71% of the Company's interest bearing
assets provided fixed rate returns and approximately 29% 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 March 31, 2000:
<TABLE>
<CAPTION>
Increase (decrease) in
Change in floating Net operating
Interest Rate Interest income Interest expense Income
------------- --------------- ---------------- ---------------
<S> <C> <C> <C>
+ 2% $ 1,800 $ 2,344 $ (544)
+ 1% 900 1,172 (272)
- 1% (900) (1,172) 272
- 2% (1,800) (2,344) 544
</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 March 31, 2000, the Company had entered into four 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.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company, nor any of the Company's subsidiaries, is
currently subject to any material litigation nor, to the Company's knowledge, is
any material litigation threatened against the Company or any subsidiary, other
than routine litigation and administrative proceedings arising in the ordinary
course of business. Such proceedings are not expected to have a material adverse
effect on the business, financial conditions, or results of operation of the
Company or any subsidiary.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
(b) The registrant has not filed any reports on a Current Report on
Form 8-K during the quarter for which this report 10-Q is filed.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/ John R. Erickson
------------------------------
John R. Erickson
Vice President and
Chief Financial Officer
Date: May 15, 2000
20
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 817473
<NAME> American Capital Strategies, Ltd.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> DEC-31-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 336,731
<INVESTMENTS-AT-VALUE> 419,788
<RECEIVABLES> 11,529
<ASSETS-OTHER> 4,557
<OTHER-ITEMS-ASSETS> 4,335
<TOTAL-ASSETS> 444,836
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 117,212
<OTHER-ITEMS-LIABILITIES> 4,358
<TOTAL-LIABILITIES> 121,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,480
<SHARES-COMMON-STOCK> 18,270
<SHARES-COMMON-PRIOR> 18,252
<ACCUMULATED-NII-CURRENT> 1,409
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</TABLE>
