AMERICAN CAPITAL STRATEGIES LTD, N-2/A, 2000-04-13

AMERICAN CAPITAL STRATEGIES LTD
N-2/A, 2000-04-13

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2000

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

1933 Act
File No. 333-79377

FORM N-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. | |
Post-Effective Amendment No. 1 |X|

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

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

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

John R. Erickson
Chief Financial Officer
Bethesda Metro Center
14th Floor
Bethesda, MD 20814
---------------------------------------
(Name and address of agent for service)

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

COPIES TO:

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

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

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

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

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

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
==========================================================================================================
Proposed
Maximum Amount of
Title of Securities Amount Being Aggregate Registration
Being Registered Registered Offering Price Fee
---------------- ---------- -------------- ------------
<S> <C> <C> <C>
Common Stock, $0.01 par value per share;
Preferred Stock, $0.01 par value per share;
and Debt Securities... $400,000,000 $400,000,000 $109,100*
==========================================================================================================
</TABLE>

* Fee of $69,500 paid May 27, 1999 in connection with original filing of this
Registration Statement. Additional fee of $39,600 paid herewith in connection
with increase of amount of securities being registered by $150,000,000.
<PAGE>

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

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

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

<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted without delivery of a final Prospectus
Supplement and accompanying Prospectus.

SUBJECT TO COMPLETION, DATED APRIL 13, 2000.

<PAGE>

TABLE OF CONTENTS

PAGE
----

<S> <C>

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........................................................................... 37
Management................................................................................................. 38
Dividend Reinvestment Plan................................................................................. 44
Description of the Securities.............................................................................. 44
Certain Provisions of the Second Amended and Restated Certificate of Incorporation, as Amended,
and the Second Amended and Restated Bylaws............................................................... 45
Regulation................................................................................................. 46
Share Repurchases.......................................................................................... 48
Plan of Distribution....................................................................................... 48
Safekeeping, Transfer and Dividend Paying Agent and Registrar.............................................. 49
Legal Matters.............................................................................................. 49
Experts.................................................................................................... 49
Index to Financial Statements.............................................................................. F-1
Table of Contents of Statement of Additional Information................................................... SAI-1

</TABLE>

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S-3
<PAGE>

PROSPECTUS

[LOGO]

$400,000,000

COMMON STOCK
PREFERRED STOCK
DEBT SECURITIES

We may offer, from time to time, up to $400 million aggregate initial
offering price of our common stock, $0.01 par value per share (the 'Common
Stock'), preferred stock, or debt securities (collectively, the 'Securities') in
one or more offerings. The Securities may be offered at prices and on terms to
be set forth in one or more supplements to this Prospectus (each a 'Prospectus
Supplement'). In the case of our Common Stock, the offering price per share less
any underwriting commissions or discounts will not be less than the net asset
value per share of our Common Stock at the time we make the offering. You should
read this Prospectus and the applicable Prospectus Supplement carefully before
you invest in our Securities.

Our Securities may be offered directly to one or more purchasers, through
agents designated from time to time by us, or to or through underwriters or
dealers. The Prospectus Supplement relating to the offering will identify any
agents or underwriters involved in the sale of our Securities, and will set
forth any applicable purchase price, fee, commission or discount arrangement
between us and our agents or underwriters or among our underwriters or the basis
upon which such amount may be calculated. See 'Plan of Distribution.' We may not
sell any of our Securities through agents, underwriters or dealers without
delivery of a Prospectus Supplement describing the method and terms of the
offering of our Securities. Our Common Stock is traded on the Nasdaq National
Market under the symbol 'ACAS.' As of April 10, 2000, the last reported sales
price for our Common Stock was $25.50.

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 APRIL 13, 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 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. As of December 31, 1999, the weighted average effective yield on
our investments was 13.9%. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'

We generally acquire equity interests in the companies from which we have
purchased debt securities with the goal of enhancing our overall return. As of
December 31, 2000 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.'

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

1
<PAGE>
Prior to August 1997, when we restructured our business activities, we had
established ourselves as a leading firm in structuring and obtaining third party
funding for management and employee buyouts of subsidiaries, divisions and
product lines being divested by larger corporations through the use of an ESOP.
The companies for whom we helped raise financing included companies who
purchased businesses from Sunbeam Corporation, the U.S. Office of Personnel
Management, American Premier Underwriters, Inc. (formerly Penn Central
Corporation), Campbell Soup Company, Union Carbide Corporation, National Forge
Company, Inc., Air Products Company, Ampco-Pittsburgh Corporation and British
Petroleum Company. In most of the ESOP transactions structured by us, the
employees agreed to restructure their wages and benefits so that overall cash
compensation is reduced while contributions of stock are made to an ESOP. The
resulting company was structured so that the fair market value of stock
contributed to the ESOP could be deducted from corporate income before paying
taxes. Restructuring employee compensation together with the ESOP tax advantages
has the effect of improving the cash flow of the ESOP company. We are a leading
firm in structuring and implementing ESOP employee buyouts. We believe that our
ESOP knowledge and experience and our ability to fund transactions positions us
favorably in the market place. See 'Business.'

THE OFFERING

We may offer, from time to time, up to $400 million of our Securities, on
terms to be determined at the time of the offering. Our Securities may be
offered at prices and on terms to be set forth in one or more Prospectus
Supplements. In the case of the offering of our Common Stock, the offering price
per share less any underwriting commissions or discounts will not be less than
the net asset value per share of our Common Stock.

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

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

2
<PAGE>

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

FEES AND EXPENSES

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

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

3
<PAGE>

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
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
------------
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>

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

(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.

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

6
<PAGE>
RISK FACTORS

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

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

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

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

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

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

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

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

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

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

7
<PAGE>
Often, a deterioration in a borrower's financial condition and prospects is
accompanied by a deterioration in the value of the collateral securing its loan.
In certain cases, our involvement in the management of our portfolio companies
may subject us to additional defenses and claims from borrowers and third
parties. These conditions may make it difficult for us to obtain repayment of
our loans.

THERE IS UNCERTAINTY REGARDING THE VALUE OF OUR PRIVATELY HELD SECURITIES

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

WE MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENTS

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

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

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

WE HAVE INVESTED IN A LIMITED NUMBER OF PORTFOLIO COMPANIES

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

WE HAVE LIMITED INFORMATION REGARDING THE COMPANIES IN WHICH WE INVEST

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

OUR PORTFOLIO COMPANIES MAY BE HIGHLY LEVERAGED

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

OUR BUSINESS IS DEPENDENT ON EXTERNAL FINANCING

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

8
<PAGE>
Senior Securities. We have issued, and intend to continue to issue, debt
securities and other evidences of indebtedness, up to the maximum amount
permitted by the 1940 Act, which currently permits us, as a BDC, to issue debt
securities and preferred stock (collectively, 'Senior Securities') in amounts
such that our asset coverage, as defined in the 1940 Act, is at least 200% after
each issuance of Senior Securities. As a result, we are exposed to the risks of
leverage. We have also retained the right to issue preferred stock. As permitted
by the 1940 Act, we may, in addition, borrow amounts up to five percent (5%) of
our total assets for temporary purposes.

CP Conduit Securitization. We depend in part on the CP Conduit Facility to
generate cash for funding our investments. As of 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 pledged to our lenders under our commercial paper conduit
securitization facility (the 'CP Conduit Facility') were sold to a separate
business trust prior to such pledge. While we own a beneficial interest in this
trust, these assets are property of the trust, available to satisfy the debts of
the trust, and would only become available for distribution to our stockholders
to the extent specifically permitted under the agreements governing the CP
Conduit Facility. See 'Risk Factors--Our CP Conduit Facility imposes certain
limitations on us.'

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

9
<PAGE>
equal to at least twice our indebtedness. If the value of our assets decline, we
might be unable to satisfy that test. If this happens, we may be required to
sell some of our investments and repay a portion of our indebtedness at a time
when a sale may be disadvantageous. See 'Assumed Return on the Company's
Portfolio.'

A CHANGE IN INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY

A portion of our income will depend upon the difference between the rate at
which we borrow funds and the rate at which we loan these funds. We anticipate
using a combination of equity and long-term and short-term borrowings to finance
our lending activities. Certain of our borrowings may be at fixed rates and
others at variable rates. As of 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 amounts outstanding under that facility and the disruption of all or a
portion of the business financed by that facility. This could reduce our
revenues and, by delaying any cash payment allowed to us under facility until
the lender has been paid in full, reduce our liquidity and cash flow.

WE MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS

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

10
<PAGE>
WE MAY FAIL TO CONTINUE TO QUALIFY FOR OUR PASS-THROUGH TAX TREATMENT

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

THERE IS A RISK THAT YOU MAY NOT RECEIVE DIVIDENDS

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

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

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

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

We are dependent for the final selection, structuring, closing and
monitoring of our investments on the diligence and skill of our senior
management and other management members. Our future success depends to a
significant extent on the continued service and coordination of our senior
management team, particularly Malon Wilkus, our 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 would be a default of the
servicing provisions under our CP Conduit Facility. We do not maintain key man
life insurance on any of our officers or employees.

WE OPERATE IN A HIGHLY COMPETITIVE MARKET FOR INVESTMENT OPPORTUNITIES

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

11
<PAGE>
competition, we may not be able to take advantage of attractive investment
opportunities from time to time and there can be no assurance that we will be
able to identify and make investments that satisfy our investment objectives or
that we will be able to fully invest our available capital.

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

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

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

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

12
<PAGE>

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

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 April 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................................. -- $26.81 $20.88 $ 0.45 -- --
Second Quarter (Through April 10, 2000)....... -- $27.75 $22.38 -- -- --
</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>
<S> <C> <C> <C> <C> <C>
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
------------ ------------ ------------ || ------------- ------------
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% ||

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

(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.

16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
(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 traded securities, excluding
government securities, at December 31, 1999 and 1998 at cost and fair value are
shown in the following table:

COST December 31, 1999 December 31, 1998
- ---- ----------------- -----------------

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

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%

<PAGE>

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:

COST December 31, 1999 December 31, 1998
- ---- ----------------- -----------------

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

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%

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 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.

<PAGE>
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, 1999 December 31, 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 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.

<PAGE>

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.

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.

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.

<PAGE>

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.

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:

Nine Months Ended
September 30,
1997
----

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
=========

<PAGE>

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 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:

December 31, 1999 December 31, 1998
----------------- -----------------
Percentage of Percentage of
Investments at Total Investments at Total
Grade Fair Value Portfolio Fair Value Portfolio
----- ---------- --------- ---------- ---------
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%

<PAGE>

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 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:

Increase (decrease) in
------------------------------------------------------
Change in floating Net operating
Interest Rate Interest income Interest expense Income
------------- --------------- ---------------- -----------
+ 2% $ 1,442 $ 1,571 $ (129)
+ 1% 721 785 (64)
- 1% (721) (785) 64
- 2% (1,442) (1,571) 129

<PAGE>

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.

<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 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

25
<PAGE>
corporations through the use of an ESOP. The selling entities have included
Sunbeam Corporation, the U.S. Office of Personnel Management, American Premier
Underwriters, Inc. (formerly Penn Central Corporation), Campbell Soup Company,
Union Carbide Corporation, National Forge Company, Inc., Air Products Company,
Ampco-Pittsburgh Corporation and British Petroleum Company. In most of the ESOP
transactions structured by the Company, the employees agree to restructure their
wages and benefits so that overall cash compensation is reduced while
contributions of stock are made to an ESOP. The resulting company is structured
so that the fair market value of stock contributed to the ESOP can be deducted
from corporate income before paying taxes. Restructuring employee compensation
together with the ESOP tax advantages has the effect of improving the cash flow
of the ESOP company. The Company is a leading firm in structuring and
implementing ESOP employee buyouts. The Company believes that its ESOP knowledge
and experience and its ability to fund transactions positions the Company
favorably in the market place.

The Company provides financial advisory services and structuring of
transactions through its wholly-owned subsidiary 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 CIC 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 Financial Portal For Middle Market Companies. In the third quarter
of 1999, the Company commenced operation of a financial portal
website designed for middle market business to learn about
corporate finance, value their business, build financial models,
develop financing memoranda, find professionals to assist in the
financing process, find sources of capital and research financing
terms, criteria and the availability of a variety of financing
options, including financing by the Company. In December 1999, the
portal site was renamed "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.

26
<PAGE>

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

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.

27
<PAGE>

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 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.

28
<PAGE>
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 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

29
<PAGE>
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 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

30
<PAGE>
'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 be deemed an 'underwriter' of
securities purchased by it that must be registered under the 1933 Act before
they may be offered or sold to the public); (b) purchase or sell real estate or
interests in real estate or real estate investment trusts (except that the
Company may purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments and may own the
securities of companies or participate in a partnership or partnerships that are
in the business of buying, selling or developing real estate); (c) sell
securities short; (d) purchase securities on margin (except to the extent that
it may purchase securities with borrowed money); (e) write or buy put or call
options (except to the extent of warrants or conversion privileges in connection
with its acquisition financing or other investments, and rights to require the
issuers of such investments or their affiliates to repurchase them under certain
circumstances); (f) engage in the purchase or sale of commodities or commodity
contracts, including futures contracts (except where necessary in working out
distressed loan or investment situations); or (g) acquire more than 3% of the
voting stock of, or invest more than 5% of its total assets in any securities
issued by, any other investment company, except as they may be acquired as part
of a merger, consolidation or acquisition of assets. (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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<PAGE>
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>
% OF CLASS COST OR VALUE OF
OWNED ON A INITIAL INVESTMENT
NAME AND ADDRESS OF NATURE OF FULLY VALUE OF AS OF
PORTFOLIO COMPANY BUSINESS TYPE OF SECURITY DILUTED BASIS(1) INVESTMENT DECEMBER 31, 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
Stock.................. 20% 2,000 2,793
Common Stock Warrants.. 43.2% 4,041 5,950
Common Stock........... 20.5% 1,896 2,793
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
1280 N. Grant Avenue Manufacturing Preferred Stock........ 2.9% 728 728
Columbus, OH 43201 Common Stock Warrants.. 42.3% 4,571 4,394
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
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 --
</TABLE>

<PAGE>

Westwind Holdings, Inc. ........ Restaurant Subordinated Debt....... -- 2,984 2,984
12555 High Bluff Drive Common Stock Warrants... 5.0% 350 244
San Diego, CA 92130
Wrenchead.com................... Internet-based Common Stock........... 1.0% -- 104
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.

32
<PAGE>

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.

Capital.Com. Capital.com primarily operates an Internet financial portal
website designed for small and middle market business to learn about corporate
finance and find sources of capital. Additionally, the website helps small and
middle market businesses value their business, build financial models, develop
financing memoranda, find professionals to assist in the financial process, and
research financing terms, criteria and the availability of a variety of
financing options. 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 and business service
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.

33
<PAGE>
In the 1980's, product liability lawsuits created a crisis in the general
aviation sector and led to a sharp decline in sales across the industry. An
oversupply of high quality, used aircraft and escalating product liability
awards led to structural changes in the aircraft industry. In July 1991, Piper
Aircraft Corp. ('Old Piper') declared bankruptcy as a result of these conditions
and, in 1995 Piper was formed upon the purchase of certain assets of Old Piper.
Tort reform and the fact that the average age of used aircraft is 30 years has
led to a mild resurgence in this industry, but it is not expected that overall
deliveries for the industry will reach the historical highs of the late 1970's.
In 1994, Congress passed the General Aviation Revitalization Act that limited
general aviation aircraft manufacturers' liability. Consequently, this
legislation reduced the Piper's pool of potential liability.

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

<PAGE>

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.

35
<PAGE>
The radio broadcasting industry is competitive within Centennial's markets.
Centennial competes with other national radio broadcasters including, but not
limited to, Clear Channel Communications, Infinity Broadcasting and Sinclair
Broadcasting. Centennial's stations compete with numerous other stations in each
of its markets. It is possible that external market factors and increased
competition could reduce Centennial's market share in any of their local
markets. In addition, the format modifications instituted by Centennial at any
time may not be successful. Failure to compete effectively in any of their
markets could have a material adverse effect on Centennial's results of
operations.

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

36
<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.

37
<PAGE>
MANAGEMENT

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

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

EXECUTIVE OFFICERS AND DIRECTORS

The persons that are executive officers ("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.

38
<PAGE>

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.

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.

39
<PAGE>

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.

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.

<PAGE>

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

<PAGE>

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 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 the Executive Officer voluntary terminates his employment for other than
good reason, all unvested stock options would be forfeited and the Executive
Officer would have no more than 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 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.

<PAGE>

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.

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.

43
<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.

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.

44
<PAGE>
CERTAIN PROVISIONS OF THE SECOND AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION, AS AMENDED, AND THE SECOND AMENDED AND RESTATED BYLAWS

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

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

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

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

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

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

Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals. The Second Amended and Restated Bylaws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of stockholders of
the Company (the 'Stockholder Notice Procedure').
45
<PAGE>
The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting at which directors are to
be elected, will be eligible for election as directors of the Company and (ii)
at an annual meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Board of Directors or by a
stockholder who has given timely written notice to the Secretary of the Company
of such stockholder's intention to bring such business before the meeting.
Except for stockholder proposals submitted in accordance with the Federal proxy
rules as to which the requirements specified therein shall control, notice of
stockholder nominations or business to be conducted at a meeting must be
received by the Company not less than 60 days or more than 90 days prior to the
first anniversary of the previous year's annual meeting if the notice is to be
submitted at an annual stockholders meeting or no later than 10 days following
the day on which notice of the date of a special meeting of stockholders was
given if the notice is to be submitted at a special stockholders meeting.

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

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

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

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

REGULATION

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

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

46
<PAGE>
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.

47
<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 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.

48
<PAGE>
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agents to
solicit offers by certain institutions to purchase the Securities from the
Company pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
the Securities shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject. The underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts. Such contracts will be subject only to those
conditions set forth in the Prospectus Supplement, and the Prospectus Supplement
will set forth the commission payable for solicitation of such contracts.

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

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

The Company's securities are held under a custodian agreement by 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.

49
<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 38
Compensation of Executive Officers and Directors...................................... SAI-2 41
Compensation of Directors............................................................. SAI-3 41
Stock Option Awards................................................................... SAI-4 --
Committees of the Board of Directors.................................................. -- 43
Control Persons and Principal Holders of Securities................................... SAI-4 --
Investment Advisory Services.......................................................... SAI-5 --
Safekeeping, Transfer and Dividend Paying Agent and Registrar......................... SAI-5 49
Accounting Services................................................................... SAI-5 49
Brokerage Allocation and Other Practices.............................................. SAI-6 --
Tax Status............................................................................ SAI-6 29
</TABLE>

50
<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-7
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-8
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-9
Financial Highlights for the years ended December 31, 1999 and 1998 and the three months ended
December 31, 1997..................................................................................... F-10
Notes to Financial Statements............................................................................ F-11
</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, December 31,
1999 1998
------------- ---------
<S> <C> <C>
Assets

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>
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 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

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 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

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 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
</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>
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
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

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 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

Interest Rate Basis Swap Agreements--(0.04)%
- --------------------------------------------
No. of Notional Expiration Receive
Contracts Amount Date Rate Pay Rate
- --------- ------ ---- ---- --------
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-5

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
December 31, 1998
(In thousands except per share data)

<TABLE>
<CAPTION>
Industry Cost Fair Value
-------- ---- ----------
<S> <C> <C> <C>
Senior Debt--9.47%
- ------------------
Four S Baking Company (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 Baking 2,756 2,756
10.89 of Co. Bus Manufacturer 2,000 2,079
Chance Coach, Inc. (2) 12% dividend convertible into 20% of Co. Decorative Paper & Vinyl Mfg. 646 646
Decorative Surfaces International, Inc. (2) prime rate ------------- -------------
plus 4% divided convertible into 2.9% of Co.

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
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-6

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(In thousands except per share data)

<TABLE>
<CAPTION>
Year Year Three Months || Nine Months
Ended Ended Ended || Ended
December 31, December 31, December 31, || September 30,
1999 1998 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 Basic 13,744 11,068 11,069 ||
Common stock outstanding Diluted 14,294 11,424 11,405 ||
</TABLE>

See accompanying notes.

F-7

<PAGE>

AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except per share data)

<TABLE>
<CAPTION>
Notes
Unearned Capital in Receivable
Preferred ESOP Common Stock Excess of Retained From Sale of
Stock Shares Shares Amount Par Value Earnings Common Stock
----- ------ ------ ------ --------- -------- ------------
<S> <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 -- -- -- -- -- 3,443 --
operations
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 -- -- -- -- -- -- --
Distributions -- -- -- -- -- -- --
------------ --------- ----------- --------- --------- --------- -----------

Balance at December 31, 1997 $ -- $ -- 11,069 $ 111 $ 144,940 $ -- $ --
============ ========= =========== ========= ========= ========= ===========

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 -- -- -- -- -- -- --
Distributions -- -- -- -- -- -- --
------------ --------- ----------- --------- --------- --------- -----------

Balance at December 31, 1998 $ -- $ -- 11,081 $ 111 $ 145,245 $ -- $ (300)
============ ========= =========== ========= ========= ========= ===========

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 -- --
Re-purchase of common stock
warrants -- -- -- -- (2,165) -- --
Issuance of restricted shares -- -- 10 -- 166 -- --
Net increase in shareholders'
equity resulting from
operations -- -- -- -- -- -- --
Distributions -- -- -- -- -- -- --
------------ --------- ----------- --------- --------- --------- -----------

Balance at December 31, 1999 $ -- $ -- 18,252 $ 183 $ 255,922 $ -- $ (23,052)
============ ========= =========== ========= ========= ========= ===========

Undistributed Unrealized Total
Net Realized Appreciation Shareholders'
Earnings of Investments Equity
-------- -------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 -- -- $ 3,372

Net increase in shareholders'
equity resulting from -- -- 3,443
operations
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 2,269 167 2,436
Distributions (2,324) -- (2,324)
---------- ------------ -----------

Balance at December 31, 1997 $ (55) $ 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 14,788 2,127 16,915)
Distributions (14,849) -- (14,849)
---------- ------------ -----------

Balance at December 31, 1998 $ (116) $ 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
Re-purchase of common stock
warrants -- -- (2,165)
Issuance of restricted shares -- -- 166
Net increase in shareholders'
equity resulting from
operations 27,372 69,829 97,201
Distributions (26,176) -- (26,176)
---------- ------------ -----------

Balance at December 31, 1999 $ 1,080 $ 77,612 $ 311,745
========== ============ ===========
</TABLE>

See accompanying notes.

F-8

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(In thousands except per share data)

<TABLE>
<CAPTION>
Three Months || Nine Months
Year Ended Year Ended Ended || Ended
December 31, December 31, December 31, || September 30,
1999 1998 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) || 128
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
Re-purchase 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-9

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(In thousands except per share data)

<TABLE>
<CAPTION>
Year Ended Year Ended December Three Months Ended
December 31, 1999 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-10

<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").

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

F-11

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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.

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).

F-12

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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.

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

F-13

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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.

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.

F-14

<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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.

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.

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, Year Ended December 31,
1999 1998
---------------------------- --------------------------------
Weighted-Average Weighted-Average
Exercise 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>

F-15
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-Average Weighted Weighted
Number Outstanding Remaining Average Number Exercisable Average
Range of Exercise Prices at December 31, 1999 Contractual Life Exercise Price at December 31, 1999 Exercise 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 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,m including
amortization of deferred finance costs, for the years ended December 31, 1999
and 1998 were 9.7% and 5.9%.

F-16

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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 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

F-17

<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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 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, earnings per share is not
presented since it is not considered meaningful due to the IPO and
reorganization of the Company as a RIC.

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>

F-18
<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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 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.

F-19

<PAGE>

AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(In thousands except per share data)

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:

Fair Value at Fair Value at
September 30, 1999 December 31, 1999
------------------ -----------------
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
============ ============

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.

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-20
<PAGE>
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.

APRIL 13, 2000.

AMERICAN CAPITAL STRATEGIES, LTD.

STATEMENT OF ADDITIONAL INFORMATION APRIL 13, 2000

This Statement of Additional Information ('SAI') is not a prospectus, and
should be read in conjunction with the Prospectus dated April 13, 2000
relating to this offering (the 'Prospectus') and the accompanying prospectus
supplement, if any. A copy of the Prospectus and the relevant accompanying
prospectus supplement, if any, may be obtained by calling American Capital
Strategies, Ltd. at (301) 951-6122 and asking for Shareholder Relations. Terms
not defined herein have the same meaning as given to them in the Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE IN THE LOCATION
STATEMENT OF RELATED
OF ADDITIONAL DISCLOSURE IN
INFORMATION THE PROSPECTUS
-------------- ---------------
<S> <C> <C>
General Information and History........................................... SAI-1 1, 25
Investment Objectives and Policies........................................ SAI-1 30
Management................................................................ SAI-2 38
Control Persons and Principal Holders of Common Stock..................... SAI-4 --
Investment Advisory Services.............................................. SAI-5 --
Safekeeping, Transfer and Dividend Paying Agent and Registrar............. SAI-5 49
Financial Statements...................................................... SAI-6 F-1
Brokerage Allocation and Other Practices.................................. SAI-6 --
Tax Status................................................................ SAI-6 29
</TABLE>

GENERAL INFORMATION AND HISTORY

This SAI contains information with respect to American Capital Strategies,
Ltd. (the 'Company'). The Company, a Delaware corporation, was incorporated in
1986 to provide financial advisory services to and invest in middle market
companies. On August 29, 1997, the Company completed an initial public offering
('IPO') of 10,382,437 shares of its common stock ('Common Stock') and became a
non-diversified, closed end investment company that has elected to be treated as
a business development company ('BDC') under the Investment Company Act of 1940,
as amended ('1940 Act'). On October 1, 1997, the Company began operations so as
to qualify to be taxed as a regulated investment company ('RIC') as defined in
Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986
as amended (the 'Code').

INVESTMENT OBJECTIVES AND POLICIES

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

SAI-1
<PAGE>

Company's investment portfolio totaled $382 million. A discussion of the
selected financial data, supplementary financial information and management's
discussion and analysis of financial condition and results of operations is
included in the Prospectus. In addition to its core lending business, the
Company also provides financial advisory services to businesses through 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.

MANAGEMENT

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

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

The following table sets forth certain details of the aggregate
compensation paid to each of the three highest paid executive officers of the
Company during 1999, as well as to each of the Company's executive officers who
was also a director. For the aggregate compensation received by each
non-employee director, see 'Director Compensation.'

COMPENSATION TABLE

SUMMARY COMPENSATION TABLE

1999 COMPENSATION TABLE

PENSION OR RETIREMENT
AGGREGATE BENEFITS ACCRUED AS SECURITIES
COMPENSATION PART OF COMPANY UNDERLYING
NAME OF PERSON, POSITION FROM COMPANY(1) EXPENSE(2) OPTIONS/SARS
- ------------------------ --------------- ---------- ------------
<S> <C> <C> <C>
Malon Wilkus
Chief Executive Officer
and Chairman of the Board of
Directors.......................... $ 422,746 $ 4,800 18,200(3)
David Gladstone
Vice Chairman of the Board of
Directors.......................... $ 422,746 $ 4,800 --
Adam Blumenthal
President,
Chief Operating Officer
and Director....................... $ 475,589 $ 4,800 15,100(3)
</TABLE>

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

(1) The aggregate compensation from the Company for Messrs. Wilkus, Gladstone
and Blumenthal includes salary in the amount of $150,000, $150,000 and
$168,750, respectively, and bonus in the amount of $272,746, $272,746 and
$306,839, respectively. See "Employment Agreements." It excludes amounts
reported as compensation to taxing authorities as a result of options
exercised under the Company's 1997 Stock Option Plan. See "LONG TERM
INCENTIVE PLANS."
(2) Represents the value of the Company's Common Stock allocated in 1999 to the
Executive Officer's account in the Company's Employee Investment and Stock
Ownership Plan (the "ESOP").
(3) In June 1999, Messrs. Wilkus and Blumenthal were granted options to
purchase 18,200 and 15,100 shares of Common Stock, respectively, contingent
on the authorization of additional shares of Common Stock for the grant of
options. The Board of Directors has approved the establishment of the
Company's 2000 Employee Stock Option Plan (the "2000 Plan") and submitted
the 2000 Plan to the stockholders of the Company for their approval at the
annual meeting of stockholders, to be held on May 3, 2000. If the 2000 Plan
is so approved, options to purchase such number of shares will be granted
to Messrs. Wilkus and Blumenthal, respectively, as of May 3, 2000, and such
options shall have an exercise price equal to the Common Stock's closing
price on such date on the Nasdaq Stock Market.

NOTE: The named Executive Officers' estimated annual benefits under the ESOP
upon retirement are not determinable.

SAI-2
<PAGE>

DIRECTOR COMPENSATION

During 1999, each non-employee director received an annual retainer fee of
$10,000 and a fee of $1,000 for each meeting of the Board of Directors or each
separate committee meeting attended. For 2000, each non-employee director will
be paid an annual retainer of $10,000 and a fee of $1,000 for each meeting of
the Board of Directors or each separate committee meeting attended. Directors
are reimbursed for out-of-pocket expenses incurred in connection with Board and
committee meetings. Directors who are employees of the Company do not receive
additional compensation for service as a member of the Board of Directors.

The following table sets forth the compensation received by each
non-employee director during 1999:

NAME 1999 COMPENSATION
---- -----------------
Robert L. Allbritton $ 15,000
Neil M. Hahl $ 40,000
Philip R. Harper $ 39,000
Stan Lundine $ 32,000
Alvin N. Puryear $ 41,000
Stephen P. Walko $ 32,000

LONG TERM INCENTIVE PLANS

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

ESOP. The Company maintains the ESOP for the benefit of its employees and
enables them to share in the growth of the Company. The ESOP is a profit sharing
plan, qualified under section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), designed to be invested primarily in Common Stock. The
ESOP provides that participants will receive allocations of Common Stock at
least equal to 3% of their annual compensation, up to certain statutory
maximums. The Company has the ability to make additional contributions also
subject to certain statutory maximums. Each ESOP participant vests in his or her
Common Stock ESOP account over a five-year period beginning on the date of first
employment. The ESOP also allows participants to make elective deferrals of a
portion of their income as contribution to a Section 401(k) profit sharing plan.
The Company does not match or otherwise make contributions to the profit sharing
plan.

Employee Option Plan. The Company established the Company's 1997 Stock
Option Plan (the "Employee Option Plan") for the purpose of attracting and
retaining executive officers and other key employees. Non-employee Directors may
not participate. Options for a maximum of 1,828,252 shares of Common Stock were
subject to issuance under the Employee Option Plan. Of such amount, options for
269,048 shares of Common Stock are outstanding and options for 1,543,300 shares
of Common Stock have been exercised. The Compensation Committee administers the
Employee Option Plan and may grant options for a maximum of 608,782 shares to
any single participant. The Compensation Committee uses such criteria as it
deems important to determine who will receive awards and the number of awarded
options. The Compensation Committee has the authority to set the exercise price
for options and to adjust the exercise price following the occurrence of events
such as stock splits, dividends, distribution and recapitalizations. Options may
be exercised during a period of no more ten years following the date of grant.
The Compensation Committee has the discretion to set the vesting period for
options and to permit the acceleration of vesting under certain circumstances.
Vesting is automatically accelerated upon the occurrence of specified change of
control transactions.

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

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

SAI-3
<PAGE>

The following table shows for each of the named executive officers of
the Company ("Executive Officers") (1) the number of options that were granted
during 1999 under the Employee Option Plan, (2) out of the total number of
options granted to all employees, the percentage granted to the named Executive
Officer, (3) the exercise price, (4) the expiration date, and (5) the potential
realizable value of the options, assuming that the market price of the
underlying securities appreciates in value from the date of grant to the end of
the option term, at a 5% and 10% annualized rate.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES IN OR BASE EXPIRATION FOR OPTION TERM
OPTIONS GRANTED FISCAL YEAR PRICE DATE (2) 5% ($) 10% ($)
--------------- ----------- ----- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Malon Wilkus.......... 18,403(1) 8.6% N/A N/A N/A N/A
David Gladstone....... -- -- -- --
Adam Blumenthal....... 15,200(1) 7.1% N/A N/A N/A N/A
Roland Cline.......... 8,900 4.2% $ 18.75 6/8/2009 $104,947 $265,956
John Erickson......... 13,700 6.4% $ 18.75 6/8/2009 $161,547 $409,393
Stephen Hester........ 4,800 2.3% $ 18.75 6/8/2009 $ 56,601 $143,437
</TABLE>
- ------------------

(1) Represents a grant of stock options that is conditioned on the approval by
the stockholders of the Company of the Company's 2000 Employee Stock Option
Plan, to be considered at the Company's annual meeting of stockholders to
be held on May 3, 2000. If such option plan is not approved by the
stockholders, this grant will not be effective.

N/A - Cannot be determined until options that have been conditionally granted
become fully effective. See Note (1).

CONTROL PERSONS AND PRINCIPAL HOLDERS OF COMMON STOCK

The following table sets forth, as of February 29, 2000 (unless otherwise
indicated), the beneficial ownership of each director, each of the Executive
Officers, the Executive Officers and directors as a group and each stockholder
known to management of the Company to own beneficially more than 5% of the
outstanding shares of Common Stock of the Company. Unless otherwise indicated,
the Company believes that the beneficial owner set forth in the table has sole
voting and investment power.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
- -------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
Ballentine Capital Management, Inc............................ 1,050,000(2) 5.8%
10 Avon Meadow Lane
Avon, CT 06001
Directors and Executive Officers
Malon Wilkus.................................................. 834,625(3) 4.6%
2 Bethesda Metro Center, 14th Floor
Bethesda, Maryland 20814
David Gladstone............................................... 684,333(4) 3.7%
2 Bethesda Metro Center, 14th Floor
Bethesda, Maryland 20814
Adam Blumenthal............................................... 348,839(5) 1.9%
Roland Cline.................................................. 226,840(6) 1.2%
John Erickson................................................. 46,377(7) *
Stephen L. Hester............................................. 94,695(8) *
Robert L. Allbritton.......................................... 15,969(9) *
Neil M. Hahl.................................................. 12,388(9) *
Philip R. Harper.............................................. 13,689(10) *
Stan Lundine.................................................. 11,000(9) *
Alvin N. Puryear.............................................. 8,000(10) *
Stephen P. Walko.............................................. 15,300(9) *
Executive Officers and directors.............................. 2,312,054 12.7%
as a group (12 persons)
</TABLE>
- ------------------
* Less than one percent.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock subject to options held by directors and Executive Officers of
the Company that are exercisable within 60 days of March 21, 2000, are
deemed outstanding for the purposes of computing such director's or
executive officer's beneficial ownership.
(2) Ballentine Capital Management, Inc. ("Ballentine"), a registered investment
adviser, is deemed to have beneficial ownership of and has the sole power
to vote or direct the vote of 1,050,000 shares of Common Stock as a result
of acting as investment adviser to certain managed accounts, with respect
to the shares of Common Stock directly owned by such managed accounts. Each
of the clients of Ballentine has the power to direct the receipt of
dividends from, and the proceeds from the sale of, such Common Stock. The
information in this footnote was obtained from Schedule 13-G filed with the
Securities and Exchange Commission by Ballentine for calendar year 1999.
(3) Includes 44,433 shares allocated to the account of Mr. Wilkus as a
participant in the American Capital Strategies, Ltd. Employee Investment
and Stock Ownership Plan (the "ESOP") over which Mr. Wilkus has voting
power under the terms of the ESOP.
(4) Includes 3,866 shares allocated to the account of Mr. Gladstone as a
participant in the Company's ESOP over which Mr. Gladstone has voting power
under terms of the ESOP.
(5) Includes 36,051 shares allocated to the account of Mr. Blumenthal as a
participant in the ESOP over which Mr. Blumenthal has voting power under
terms of the ESOP.
(6) Includes 36,908 shares allocated to the account of Mr. Cline as a
participant in the ESOP over which Mr. Cline has voting power under terms
of the ESOP and 8,900 shares issuable upon the exercise of options.

SAI-4
<PAGE>

(7) Includes 677 shares allocated to the account of Mr. Erickson as a
participant in the ESOP over which Mr. Erickson has voting power and 13,700
shares issuable upon the exercise of options, but does not include other
shares owned by the ESOP for which Mr. Erickson is the Trustee.
(8) Includes 10,928 shares allocated to the account of Mr. Hester as a
participant in the ESOP over which Mr. Hester has voting power, 12,548
shares issuable upon the exercise of options and 1,000 shares owned by Mr.
Hester's wife.
(9) Includes 10,000 shares issuable upon the exercise of stock options.
(10) Includes 5,000 shares issuable upon the exercise of stock options.

INVESTMENT ADVISORY SERVICES

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

SAFEKEEPING, TRANSFER AND DIVIDEND PAYING AGENT AND REGISTRAR

The Company's securities are held under a custodian agreement by Riggs
Bank, N.A. The address of the custodian is 808 17th Street, 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 will act as the Company's
transfer and dividend paying agent and registrar. The principal business address
of State Street Bank and Trust Company is c/o EquiServe, L.P., 150 Royall
Street, mail stop 45-02-62, Canton, MA 02021.

FINANCIAL STATEMENTS

The Company has included its financial statements at December 31, 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, 1998, and the three months
ended December 31, 1997, in the Prospectus and elsewhere in the Registration
Statement.

SAI-5
<PAGE>
BROKERAGE ALLOCATION AND OTHER PRACTICES

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

TAX STATUS

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

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

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

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

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

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

SAI-6
<PAGE>
distribution requirements, the Company may make such dispositions at times
which, from an investment standpoint, are not advantageous.

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

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

SAI-7
<PAGE>

PART C - OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

1. Financial Statements:

Included in Parts A and B of the Registration Statement:

AMERICAN CAPITAL STRATEGIES, LTD.

INDEX TO 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-7
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-8
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-9
Financial Highlights for the years ended December 31, 1999 and 1998 and the three months ended December 31, 1997.. F-10
Notes to Financial Statements..................................................................................... F-11

</TABLE>

2. Exhibits:

* 2.a. Second Amended and Restated Certificate of Incorporation,
incorporated herein by reference to Exhibit 2.a of the Amendment No. 1 to the
Form N-2 filed by the Company, filed on August 12, 1997 (Commission File No.
333-29943) as amended by a certain Amendment No. 1, incorporated herein by
reference to Exhibit 3.1 of Form 10-K for the year ended December 31, 1999,
filed March 29, 2000.

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

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

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

* 2.e. Dividend Reinvestment Plan, incorporated herein by reference to
Post-Effective Amendment Number 1 to the Registration Statement on Form S-8
filed on March 29, 1999 (Commission File No. 333-68991).

2.h. Underwriting Agreements, to be filed by amendment.

* 2.i.1. Second Amended and Restated Employment Agreement between the
Company and David Gladstone, dated as of August 6, 1999, incorporated herein by
reference to Exhibit 10.1 on Form 10-Q for the quarter ended September 30, 1999,
filed on November 15, 1999.

* 2.i.2. Amended and Restated Employment Agreement between the Company and
Adam Blumenthal, dated June 7, 1999, incorporated herein by reference Exhibit
10.6 of the Pre-Effective Amendment Number 1 to the Registration Statement on
Form N-2 (File No. 333- 79377), filed August 5, 1999.

C-1

<PAGE>

* 2.i.3. Amended and Restated Employment Agreement between the Company and
Roland Cline, dated June 7, 1999, incorporated herein by reference Exhibit 10.7
of the Pre-Effective Amendment Number 1 to the Registration Statement on Form
N-2 (File No. 333- 79377), filed August 5, 1999.

* 2.i.4. Stock Option Exercise Agreement between the Company and Adam
Blumenthal, dated June 7, 1999, incorporated herein by reference Exhibit 10.8 of
the Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2
(File No. 333- 79377), filed August 5, 1999.

* 2.i.5. Stock Option Exercise Agreement between the Company and Roland
Cline, dated June 7, 1999, incorporated herein by reference Exhibit 10.9 of the
Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2
(File No. 333- 79377), filed August 5, 1999.

* 2.i.6. Stock Option Exercise Agreement between the Company and Malon
Wilkus, dated June 7, 1999, incorporated herein by reference Exhibit 10.10 of
the Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2
(File No. 333- 79377), filed August 5, 1999.

* 2.i.7. Stock Option Exercise Agreement between the Company and John
Erickson, dated June 7, 1999, incorporated herein by reference Exhibit 10.11 of
the Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2
(File No. 333- 79377), filed August 5, 1999.

* 2.i.8. Stock Option Exercise Agreement between the Company and David J.
Gladstone, dated September 6, 1999, incorporated herein by reference to Exhibit
10.2 of Form 10-Q for the quarter ending September 30, 1999, filed November 15,
1999.

* 2.i.9. Letter Agreement Regarding the Exercise of Options between the
Company and David Gladstone, dated as of July 8, 1999, incorporated herein by
reference Exhibit 10.13 of the Pre-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377), filed August 5, 1999.

* 2.i.10. Purchase Note by Adam Blumenthal in favor of the Company, dated
as of June 7, 1999, incorporated herein by reference Exhibit 10.14 of the
Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333- 79377), filed August 5, 1999.

* 2.i.11. Purchase Note by Roland Cline in favor of the Company, dated as
of June 7, 1999, incorporated herein by reference Exhibit 10.15 of the
Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333- 79377), filed August 5, 1999.

* 2.i.12. Purchase Note by Malon Wilkus in favor of the Company, dated as
of June 7, 1999, incorporated herein by reference Exhibit 10.16 of the
Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333- 79377), filed August 5, 1999.

* 2.i.13. Purchase Note by John Erickson in favor of the Company, dated as
of June 7, 1999, incorporated herein by reference Exhibit 10.17 of the
Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333- 79377), filed August 5, 1999.

* 2.i.14. Purchase Note by David J. Gladstone in favor of the Company,
dated as of September 6, 1999, incorporated herein by reference to Exhibit 10.3
of Form 10-Q for the quarter ending September 30, 1999, filed November 15, 1999.

* 2.i.15. Split Dollar Agreement between the Company and Adam Blumenthal
dated as of September 7, 1999, incorporated herein by reference to Exhibit 10.15
of Form 10-K for the year ended December 31, 1999, filed March 29, 2000.

* 2.i.16. Split Dollar Agreement between the Company and Roland Cline dated
as of September 7, 1999, incorporated herein by reference to Exhibit 10.16 of
Form 10-K for the year ended December 31, 1999, filed March 29, 2000.

* 2.i.17. Split Dollar Agreement dated as of September 7, 1999, among the
Company David J. Gladstone and the David J. Gladstone Irrevocable Insurance
Trust, Lorna Gladstone, Trustee, incorporated herein by reference to Exhibit
10.4 of Form 10-Q for the quarter ended September 30, 1999, filed November 15,
1999.

* 2.i.18. Form of American Capital Strategies, Ltd. Employee Investment and
Stock Ownership Plan, incorporated herein by reference to the Registration
Statement on Form S-8 (File No. 333-34352) filed on April 7, 2000.

* 2.i.19. Form of American Capital Strategies, Ltd. 1997 Stock Option Plan,
incorporated herein by reference to Exhibit i.2 of the Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-2 (File No. 333-29943), as
amended, filed on August 12, 1997, as amended by Amendment No. 1 incorporated
herein by reference to Attachment II to Schedule 14A for 1998 Annual Meeting
filed April 15, 1998 (File No. 814-00149).

* 2.i.20. Form of American Capital Strategies, Ltd. 1997 Disinterested
Director Stock Option Plan, incorporated herein by reference to Attachment I to
Schedule 14A for 1998 Annual Meeting filed April 15, 1998 (File No. 814-00149).

* 2.j. Custodial Agreement between the Company and Riggs Bank, N.A.,
incorporated herein by reference to Exhibit j.2 of the Pre-Effective Amendment
Number 2 to the Registration Statement on Form N-2 (File No. 333-29943) filed
August 29, 1997.

* 2.k.1. Purchase and Sale Agreement between ACS Funding Trust I and
American Capital Strategies, Ltd., dated as of March 31, 1999, incorporated
herein by reference to Exhibit 10.1 of Form 10-Q for the quarter ended March 31,
1999, filed May 17, 1999.

C-2

<PAGE>

* 2.k.2. Loan Funding and Servicing Agreement among ACS Funding Trust I,
American Capital Strategies, Ltd., Variable Funding Capital Corporation, First
Union Capital Markets Corp., First Union National Bank, Norwest Bank Minnesota,
N.A. and certain investors named therein, together with all exhibits thereto,
dated as of March 31, 1999, incorporated herein by reference to Exhibit 10.2 of
Form 10-Q for the quarter ended March 31, 1999, filed May 17, 1999, as amended
by a certain Amendment No. 1 dated as of June 30, 1999, an Amendment No. 2 dated
as of September 24, 1999 and an Amendment No. 3 dated as of December 14, 1999,
incorporated herein by reference to Exhibit 10.19 of Form 10-K for the year
ended December 31, 1999, filed March 29, 2000.

* 2.k.3. Amended, Restated and Substituted Investor Note in the amount of
$225,000,000 made by ACS Funding Trust I in favor of certain Investors specified
therein, dated as of March 31, 1999, incorporated herein by reference to Exhibit
10.20 of Form 10-K for the year ended December 31, 1999, filed March 29, 2000.

* 2.k.4. Amended, Restated and Substituted VFCC Note in the principal
amount of $225,000,000 made by ACS Funding Trust I in favor of First Union
Securities, Inc., dated as of March 31, 1999, incorporated herein by reference
to Exhibit 10.21 of Form 10-K for the year ended December 31, 1999, filed March
29, 2000.

* 2.k.5. Amended, Restated and Substituted FUNB Note in the aggregate
principal amount of $10,000,000 made by ACS Funding Trust I in favor of First
Union National Bank, dated as of March 31, 1999, incorporated herein by
reference to Exhibit 10.22 of Form 10-K for the year ended December 31, 1999,
filed March 29, 2000.

* 2.k.6. Pledge and Security Agreement among American Capital Strategies,
Ltd., ACS Funding Trust I and Norwest Bank Minnesota, N.A., dated as of March
31, 1999, incorporated herein by reference to Exhibit 10.6 on Form 10-Q for the
quarter ended March 31, 1999, filed May 17, 1999.

* 2.k.7. Escrow Agreement between American Capital Strategies, Ltd. and
Norwest Bank Minnesota, N.A., dated as of March 31, 1999, incorporated herein by
reference to Exhibit 10.7 of Form 10-Q for the quarter ended March 31, 1999,
filed May 17, 1999.

* 2.k.8. Lock-Box Agreement between ACS Funding Trust I and LaSalle
National Bank, dated as of March 31, 1999, incorporated herein by reference to
Exhibit 10.8 of Form 10-Q for the quarter ended March 31, 1999, filed May 17,
1999.

* 2.k.9. Certificate of Trust of ACS Funding Trust I, dated as of March 26,
1999, incorporated herein by reference to Exhibit 10.9 of Form 10-Q for the
quarter ended March 31, 1999, filed May 17, 1999.

* 2.k.10. Trust Agreement among American Capital Strategies, Ltd., as
grantor and owner, Malon Wilkus, as beneficiary trustee, and Evelyne Steward and
William Holloran, as independent trustees, dated as of March 26, 1999,
incorporated herein by reference to Exhibit 10.10 of Form 10-Q for the quarter
ended March 31, 1999, filed May 17, 1999.

* 2.k.11. Form of Referral Agreement between the Company and Riggs Bank,
N.A., incorporated herein by reference to Exhibit k.1 of the Pre-Effective
Amendment Number 1 to the Registration Statement on Form N-2 (File No.
333-29943) filed August 12, 1997.

* 2.k.12. Form of Referral Agreement between the Company and NCB
Development Corporation, incorporated herein by reference to Exhibit k.2 of the
Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File
No. 333-29943) filed August 12, 1997.

2.l. Opinion and consent of Arnold & Porter, filed herewith

2.n. Consent of Ernst & Young LLP, filed herewith

2.p. Financial Data Schedule, see Exhibit 27.

24. Powers of Attorneys of directors and officers, filed herewith

27. Financial Data Schedule, filed herewith

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

C-3
<PAGE>

ITEM 25. MARKETING ARRANGEMENTS

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

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

SEC Registration Fee.......................................$ 70,000
NASD Fee................................................... 20,000
Nasdaq additional listing fee.............................. 100,000
Blue Sky fees and expenses................................. 10,000
Accounting fees and expenses............................... 100,000
Legal fees and expenses.................................... 250,000
Printing and engraving..................................... 200,000
Registrar and transfer agent's fees........................ 10,000
Miscellaneous fees and expenses............................ 10,000
--------
Total......................................................$770,000

Note: All listed amounts are estimates.

ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

1) American Capital Financial Services, Inc, a Delaware corporation
("ACFS"); 100% of stock owned by the Company.

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

Note: Both of the subsidiaries above are included in the Company's consolidated
financial statements.

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

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

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

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

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

8) Employee Acquisition Corporation - 23, a Delaware corporation; 100%
of stock owned by CIC.

NOTE: Financial statements for the affiliates listed above as items
(3)-(8) have not been filed or included in the Company's consolidated financial
statements because such affiliates are not active, do not have any operations
and have no assets other than their respective stated capital.

ITEM 28. NUMBER OF HOLDERS OF SECURITIES

The following table sets forth the number of record holders of the
Company's securities at March 21, 2000.

Number of
TITLE OF CLASS Record Holders
- -------------- --------------
Common Stock, par value
$0.01 per share 268

Preferred Stock, par value
$0.01 per share 0

Warrants 1

Debt Securities 2

ITEM 29. INDEMNIFICATION

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

C-4

<PAGE>

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

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

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Not applicable.

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

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

ITEM 32. MANAGEMENT SERVICES

Not applicable

ITEM 33. UNDERTAKINGS

The Registrant hereby undertakes:

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

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

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

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

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

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

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

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

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

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

C-5

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bethesda and State of Maryland, on the 13th day
of April, 2000.

AMERICAN CAPITAL STRATEGIES, LTD.

By: /s/ John R. Erickson
---------------------------------------

John R. Erickson

Vice President, Chief Financial Officer
and Secretary

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

<TABLE>
<CAPTION>
Name Title Date
---- ----- ----

*
- ------------------------ Chairman and Chief Executive Officer April 13, 2000
Malon Wilkus

- ------------------------ Vice Chairman and Director April 13, 2000
David Gladstone

- ------------------------ President, Chief Operating Officer, and April 13, 2000
Adam Blumenthal Director

/s/ John R. Erickson
- ------------------------ Vice President and Chief Financial Officer April 13, 2000
John R. Erickson (Principal Financial and Accounting Officer)

*
- ------------------------ Director April 13, 2000
Robert L. Allbritton

*
- ------------------------ Director April 13, 2000
Alvin N. Puryear

*
- ------------------------ Director April 13, 2000
Neil M. Hahl

- ------------------------ Director April 13, 2000
Philip R. Harper

- ------------------------ Director April 13, 2000
Stan Lundine

*
- ------------------------ Director
Steven P. Walko

*By: /s/ John R. Erickson
--------------------
John R. Erickson
Attorney-in-fact

</TABLE>

C-6

<PAGE>

Exhibit List
- ------------

2.l. Opinion and Consent of Arnold & Porter
2.n. Consent of Ernst & Young
24. Power of Attorneys of Directors and Officers, filed herewith
27. Financial Data Schedule

Exhibit 2.1

NEW YORK

DENVER

LOS ANGELES

LONDON
A R N O L D & P O R T E R
555 TWELFTH STREET, N.W.
WASHINGTON, D.C. 20004-1206

(202) 942-5000
FACSIMILE: (202) 942-5999

April 13, 2000

Board of Directors
American Capital Strategies, Ltd.
2 Bethesda Metro Center, 14th Floor
Bethesda, Maryland 20814

Re: Post-Effective Amendment No. 1 to
Registration Statement on Form N-2
File No. 333-79377

Gentlemen:

We have acted as special counsel to American Capital Strategies, Ltd.
(the "Company") in connection with the Company's registration of up to $400
million aggregate initial offering price of its common stock, $0.01 par value
per share (the "Common Stock"), preferred stock, $0.01 par value per share (the
"Preferred Stock"), and/or debt securities (the "Debt Securities" and together
with the Common Stock and the Preferred Stock, the "Securities") on Form N-2, as
amended by Post-Effective Amendment No. 1 thereto (as amended, the "Registration
Statement"), to be filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The Securities may be offered in separate
series, in amounts, at prices, and on terms to be set forth in the prospectus
and one or more supplements to the prospectus constituting a part of the
Registration Statement.

In connection with rendering the opinions set forth in this letter, we
have examined such corporate records of the Company, including the Company's
Second Amended and Restated Certificate of Incorporation, as amended, its Second
Amended and Restated By-Laws and resolutions of the Board of Directors, as well
as made such investigation of matters of fact and law and examined such other
documents as we deem necessary for rendering the opinions hereinafter expressed.

The opinions set forth herein are subject to the following
qualifications, which are in addition to any other qualifications contained
herein:

A. We have assumed without verification the genuineness of all
signatures on all documents, the authority of the parties (other than the
Company) executing such documents, the authenticity of all documents submitted
to us as originals, and the conformity to original documents of all documents
submitted to us as copies.

B. The opinions set forth herein are based on existing laws,
ordinances, rules, regulations, court and administrative decisions as they
presently have been interpreted and we can give no assurances that our opinions
would not be different after any change in any of the foregoing occurring after
the date hereof.

C. We have assumed without verification that, with respect to the
minutes of any meetings of the Board of Directors or any committees thereof of
the Company that we have examined, due notice of the meetings was given or duly
waived, the minutes accurately and completely reflect all actions taken at the
meetings and a quorum was present and acting throughout the meetings.

D. We have assumed without verification the accuracy and completeness
of all corporate records made available to us by the Company.

E. We express no opinion as to the effect or application of any laws or
regulations other than the general corporate law of the State of Delaware and
the federal laws of the United States. As to the matters governed by the laws

<PAGE>

Board of Directors
American Capital Strategies, Ltd.
April 13, 2000
Page 2

specified in the foregoing sentence, we have relied exclusively on the latest
standard compilations of such statutes and laws as reproduced in commonly
accepted unofficial publications available to us.

F. As part of the corporate action taken and to be taken in connection
with the issuance of the Securities (the "Corporate Proceedings"), the Company's
Board of Directors or a committee thereof will, before they are issued,
authorize the issuance thereof, and certain terms of the Securities to be issued
by the Company from time to time will be approved by the Board of Directors or
committee thereof or certain authorized officers of the Company.

Based on the foregoing, upon the assumptions that there will be no
material changes in the documents we have examined and the matters investigated
referred to above, we are of the opinion, when issued and delivered in the
manner and on the terms described in the Registration Statement (after the same
is declared effective), that:

1. Upon the completion of all required Corporate Proceedings relating
to the issuance of Common Stock, the Common Stock will be validly
issued, fully paid and nonassessable.

2. Upon the completion of all required Corporate Proceedings relating
to the issuance of Preferred Stock, the Preferred Stock will be
validly issued, fully paid and nonassessable.

3. Upon the completion of all required Corporate Proceedings relating
to the issuance of Debt Securities, the Debt Securities will be
validly issued, duly executed and delivered.

This letter does not address any matters other than those expressly
addressed herein. This letter speaks only as of the date hereof. We undertake no
responsibility to update or supplement it after such date.

We hereby consent to your filing of this opinion as an exhibit to the
Registration Statement, and to reference our firm under the captions "Legal
Matters" contained in the Prospectus included therein. In giving such consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.

Very truly yours,

ARNOLD & PORTER

/s/ Samuel A. Flax

Exhibit 2.n

CONSENT OF INDEPENDENT AUDITORS

We consent to the references to our firm under the captions "Experts" and to the
use of our report dated February 2, 2000, in Post-Effective Amendment No. 1 to
the Registration Statement (Form N-2 No. 333-79377) and related Prospectus of
American Capital Strategies, Ltd. dated April 13, 2000.

/s/ Ernst & Young LLP

April 11, 2000
McLean, Virginia

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and
officers of American Capital Strategies, Ltd., a corporation organized under the
laws of the state of Delaware (the "Corporation"), hereby constitute and appoint
John R. Erickson and Samuel A. Flax, and each of them (with full power to each
of them to act alone), his true and lawful attorneys-in-fact and agents for him
and on his behalf and in his name, place and stead, in all cases with full power
of substitution and resubstitution, in any hand and all capacities, to sign,
execute and affix his seal to and file with the Securities and Exchange
Commission (or any other governmental or regulatory authority) a Registration
Statement on Form N-2 or any other appropriate form and all amendments or
supplements (including post-effective amendments) thereto with all exhibits and
any and all documents required to be filed with respect thereto, relating to the
registration of up to $250,000,000 of common stock, $0.01 par value per share,
preferred stock, $0.01 par value and/or debt securities and grants to each of
them full power and authority to do and to perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully and to all intents and purposes as he himself might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.

IN WITNESS HEREOF, each of the undersigned directors and/or officers
have hereunto set his hand and seal, as of the date specified.

AMERICAN CAPITAL STRATEGIES, LTD.

Dated: April 10, 2000. /s/ Malon Wilkus
--------------------------------------
Malon Wilkus
Chairman and Chief Executive Officer

<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

/s/ Malon Wilkus
- ------------------------ Director, Chairman and Chief April 10, 2000
Malon Wilkus Executive Officer (Principal
Executive Officer)

- ------------------------ Director and Vice Chairman April 10, 2000
David Gladstone

- ------------------------ President, Chief Operating April 10, 2000
Adam Blumenthal Officer and Director

/s/ John Erickson
- ------------------------ Vice President, Chief Financial April 10, 2000
John Erickson Officer and Secretary (Principal
Accounting and Financial Officer)

/s/ Robert L. Allbritton
- ------------------------ Director April 10, 2000
Robert L. Allbritton

/s/ Alvin N. Puryear
- ------------------------ Director April 10, 2000
Alvin N. Puryear

/s/ Neil M. Hahl
- ------------------------ Director April 10, 2000
Neil M. Hahl

- ------------------------ Director April 10, 2000
Philip R. Harper

- ------------------------ Director April 10, 2000
Stan Lundine

/s/ Stephen P. Walko
- ------------------------ Director
Stephen P. Walko

</TABLE>

<ARTICLE> 6
<CIK> 0000817473
<NAME> American Capital Strategies, Ltd.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.000
<INVESTMENTS-AT-COST> 305,264
<INVESTMENTS-AT-VALUE> 377,554
<RECEIVABLES> 4,748
<ASSETS-OTHER> 6,140
<OTHER-ITEMS-ASSETS> 6,930
<TOTAL-ASSETS> 395,372
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 78,545
<OTHER-ITEMS-LIABILITIES> 5,082
<TOTAL-LIABILITIES> 83,627
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<SHARES-COMMON-STOCK> 18,252
<SHARES-COMMON-PRIOR> 11,081
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<OVERDISTRIBUTION-GAINS> 2,711
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<DIVIDEND-INCOME> 311,745
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<OTHER-INCOME> 30,384
<EXPENSES-NET> 2,572
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<REALIZED-GAINS-CURRENT> 26,154
<APPREC-INCREASE-CURRENT> 2,711
<NET-CHANGE-FROM-OPS> 69,829
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 25,867
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 309
<NUMBER-OF-SHARES-SOLD> 7,135
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 36
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<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> (116)
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 4,716
<GROSS-EXPENSE> 7,251
<AVERAGE-NET-ASSETS> 190,530
<PER-SHARE-NAV-BEGIN> 5.08
<PER-SHARE-NII> 1.74
<PER-SHARE-GAIN-APPREC> 1.76
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 17.08
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</TABLE>