As filed with the Securities and Exchange Commission on March 29, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 814-00149
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AMERICAN CAPITAL STRATEGIES, LTD.
Delaware 52-1451377
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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2 Bethesda Metro Center
14th Floor
Bethesda, Maryland 20814
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(Address of principal executive offices)
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(301) 951-6122
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(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $0.01 par value per share NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter earlier period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|. No | |.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
On March 27, 2000, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was approximately
$450,638,000 based upon a closing price of the Registrant's common stock of
$24.69 per share as reported on the NASDAQ Stock Market on that date. (For this
computation, the registrant has excluded the market value of all shares of its
Common Stock reported as beneficially owned by executive officers and directors
of the registrant and certain other stockholders; such an exclusion shall not be
deemed to constitute an admission that any such person is an "affiliate" of the
registrant.) On March 27, 2000, there were 18,253,708 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. The Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 3, 2000 is
incorporated by reference into certain sections of Part III herein.
Certain exhibits previously filed with the Securities and Exchange
Commission are incorporated by reference into Part IV of this report.
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PART I
Item 1. Business of the Company
Background
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), was incorporated in 1986 to provide financial advisory services to
and invest in middle market companies. On August 29, 1997, the Company completed
an initial public offering ("IPO") of 10,382,437 shares of its 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 (the "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. On May 26, 1999, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the United States Securities and
Exchange Commission ("SEC") with respect to the Company's debt and equity
securities. The Shelf Registration Statement allows the Company to sell its
registered debt or equity securities on a delayed or continuous basis in an
amount up to $250 million. As of August 5, 1999, the Company completed the sale
of 5,605,000 shares of its Common Stock (including the over-allotment option
granted to the underwriters) through the Shelf Registration Statement (the
"Secondary Offering") in the amount of $95 million.
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, American Capital Financial
Services, Inc. ("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%. 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.
In most cases, the Company receives rights to require the business to
purchase the warrants and stock held by the Company ("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 its 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.
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Prior to the IPO, the Company established itself as a leading firm in
structuring and obtaining funding for management and employee buyouts of
subsidiaries, divisions and product lines being divested by larger corporations
through the use of an ESOP. The selling entities have included Sunbeam
Corporation, the U.S. Office of Personnel Management, American Premier
Underwriters, Inc. (formerly Penn Central Corporation), Campbell Soup Company,
Union Carbide Corporation, National Forge Company, Inc., Air Products Company,
Ampco-Pittsburgh Corporation and British Petroleum Company. In most of the ESOP
transactions structured by the Company, the employees agree to restructure their
wages and benefits so that overall cash compensation is reduced while
contributions of stock are made to an ESOP. The resulting company is structured
so that the fair market value of stock contributed to the ESOP can be deducted
from corporate income before paying taxes. Restructuring employee compensation
together with the ESOP tax advantages has the effect of improving the cash flow
of the ESOP company. The Company is a leading firm in structuring and
implementing ESOP employee buyouts. The Company believes that its ESOP knowledge
and experience and its ability to fund transactions positions the Company
favorably in the market place.
The Company provides financial advisory services and structuring of
transactions through its wholly-owned subsidiary, ACFS. The typical advisory
engagement includes a monthly retainer and a performance fee contingent upon
closing of the transaction or event which is the subject of the engagement.
Management believes that future growth of ACFS is attainable through adding
additional professionals, by gaining additional market share and by realizing
the benefits of what is expected to be an increasing client base, which should
expand as a result of its relationship with the Company.
The Company believes that, through the structuring and advisory
business, it has established an extensive referral network comprised of venture
capitalists, investment bankers, attorneys, accountants, commercial bankers,
unions, business and financial brokers, and existing ESOP companies. The Company
has also developed an extensive set of Internet sites that generates financing
requests and provides businesses an efficient tool for learning about the
Company and its capabilities.
The Company has a marketing department headed by a vice president of
marketing dedicated to maintaining contact with members of the referral network
and receiving opportunities for the Company to consider. During 1999, the vice
president of marketing received information concerning in excess of 2,500
transactions for consideration. Many of those transactions did not meet the
Company's criteria for initial consideration, but the opportunities that met
those criteria were sent to the Company's principals for further review and
consideration. The vice president of marketing and ACFS are continuing the
relationships with the referral network and the Company utilizes the referral
network and ACFS's client base as its primary sources of investment
opportunities.
The Company's executive offices are located at 2 Bethesda Metro Center,
14th Floor, Bethesda, MD 20814 and its telephone number is (301) 951-6122. In
addition to its executive offices, the Company maintains offices in New York,
Boston, Pittsburgh, San Francisco, Chicago and Dallas.
Internet Strategy
The Company believes that the Internet is a significant medium for
information and business commerce that provides numerous opportunities for the
Company. The Company has been active in developing a series of web sites
concerning the Company and its products specifically and finance generally.
These sites have provided numerous investment leads to the Company and through
December 31, 1999, investments in 2 portfolio companies aggregating $29 million
had been sourced 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.
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
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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 and intend to hire additional
professionals during the next twelve months. To discover potential financing
opportunities, the Company has a dedicated marketing department headed by a vice
president who manages an extensive referral network comprised of venture
capitalists, investment bankers, unions, attorneys, accountants, commercial
bankers, business and financial brokers and prospective or existing ESOP
companies. The Company also uses its Internet sites and those of its portfolio
company, Capital.com, Inc., to attract financing opportunities.
Approval Process. The Company's financial professionals review
informational packages in search of potential financing opportunities and
conduct a due diligence investigation of each applicant that passes an initial
screening process. This due diligence investigation generally includes one or
more on-site visits, a review of the target company's historical and prospective
financial information, interviews with management, employees, customers and
vendors of the applicant, and background checks and research on the applicant's
product, service or particular industry. The Company engages professionals such
as environmental consultants, accountants, lawyers, risk managers and management
consultants to perform elements of the due diligence review as it deems
appropriate. Upon completion of a due diligence investigation, one of the
Company's principals prepares an investment committee report summarizing the
target company's historical and projected financial statements, industry and
management team and analyzing
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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.
Employees
As of December 31, 1999, the Company had 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.
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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 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.
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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 that 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 herein,
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 "The Company's Operations
as a BDC and RIC." The Company believes that most of 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. 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.
Item 2. Properties
Neither the Company nor any of its subsidiaries owns any real estate or
other physical properties materially important to the operation of the Company
or any of its subsidiaries. The Company leases an aggregate of approximately
22,174 square feet of office space in four locations for terms ranging up to six
years.
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Item 3. Legal Proceedings
Although the Company may, from time to time, be involved in litigation
and claims arising out of its operations in the normal course of business, as of
December 31, 1999, the Company was not presently a party to any material pending
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended December 31, 1999,
there were no matters submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since the IPO, the Company has distributed, and currently intends to
continue to distribute in the form of dividends, a minimum of 90% 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.
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 March 27, 2000.
Sale Price
----------
Dividend
High Low Declared
---- --- --------
1997
Third Quarter (beginning August 29, 1997) $ 20.25 $ 18.50 $ 0.00
Fourth Quarter $ 20.75 $ 16.50 $ 0.21
1998
First Quarter $ 22.50 $ 17.25 $ 0.25
Second Quarter $ 24.63 $ 21.25 $ 0.29
Third Quarter $ 24.25 $ 10.13 $ 0.32
Fourth Quarter $ 18.44 $ 9.19 $ 0.48
1999
First Quarter $ 19.00 $ 14.00 $ 0.41
Second Quarter $ 21.25 $ 16.00 $ 0.43
Third Quarter $ 20.00 $ 16.25 $ 0.43
Fourth Quarter $ 23.13 $ 17.88 $ 0.47
2000
First Quarter (through March 27, 2000) $ 26.81 $ 20.88 $ 0.45
8
<PAGE>
Item 6. Selected Financial Data
AMERICAN CAPITAL STRATEGIES, LTD.
Selected Financial 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 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>
(In thousands except per share data)
Three Months || Nine Months
Year Ended Year Ended Ended || Ended Year Ended Year Ended
December 31, December 31, December 31, || September 30, December 31, December 31,
1999 1998 1997 || 1997 1996 1995
---------- ---------- ---------- || ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total operating income $ 33,405 $ 16,979 $ 2,797 || $ 2,901 $ 2,746 $ 2,706
Total operating expenses 7,251 1,709 551 || 2,651 2,862 2,928
---------- ---------- ---------- || ---------- ---------- ----------
||
Operating income (loss) before equity in ||
(loss) earnings of unconsolidated ||
operating subsidiary 26,154 15,270 2,246 || 250 (116) (222)
Equity in (loss) earnings of unconsolidated ||
operating subsidiary (1,493) (482) 24 || -- -- --
---------- ---------- ---------- || ---------- ---------- ----------
||
Net operating income (loss) 24,661 14,788 2,270 || 250 (116) (222)
Realized gain on investments 2,711 -- -- || -- -- 66
Increase in unrealized appreciation on ||
investments 69,829 2,127 167 || 5,321 484 371
---------- ---------- ---------- || ---------- ---------- ----------
||
Income before income taxes 97,201 16,915 2,437 || 5,571 368 215
Provision for income taxes -- -- -- || 2,128 159 57
---------- ---------- ---------- || ---------- ---------- ----------
||
Net increase in shareholders' equity ||
resulting from operations 97,201 16,915 2,437 || 3,443 209 158
========== ========== ========== || ========== ========== ==========
||
Per share data: ||
Net operating income: ||
Basic $ 1.79 $ 1.34 $ 0.21 ||
Diluted $ 1.73 $ 1.29 $ 0.20 ||
Net increase in shareholders' equity ||
resulting from operations: ||
Basic $ 7.07 $ 1.53 $ 0.22 ||
Diluted $ 6.80 $ 1.48 $ 0.21 ||
Cash dividends $ 1.74 $ 1.34 $ 0.21 ||
||
Balance Sheet Data: ||
Total assets $ 395,372 $ 270,019 $ 150,705 || $ 154,322 $ 5,432 $ 4,382
Total shareholders' equity 311,745 152,723 150,652 || 150,539 3,372 2,946
||
Other Data: ||
Number of portfolio companies at period
end 33 15 3 ||
Principal amount of loan originations $ 139,433 $ 116,864 $ 16,817 ||
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 13.9% 13.0% 12.2% ||
</TABLE>
(1) Amounts are annualized for the three months ended December 31, 1997.
(2) Return represents net increase in shareholders' equity resulting from
operations.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(In thousands except per share data)
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, American Capital Financial Services, Inc.
("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%
10
<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.
11
<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.
12
<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.
13
<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
=========
14
<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%
15
<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
16
<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.
Item 7a Qualitative and Quantitative Disclosures About Market Risk
Not applicable.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data
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
18
<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.
19
<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 728 728
Mfg.
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.
20
<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.
21
<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.
22
<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.
23
<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)
============ ========= =========== ========= ========= ========= ===========
<CAPTION>
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.
24
<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.
25
<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.
26
<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
27
<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).
28
<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
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
29
<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.
30
<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>
31
<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%.
32
<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
33
<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.
<TABLE>
<CAPTION>
Year Ended Year Ended Three Months Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Numerator for basic and diluted earnings per
share $ 97,201 $ 16,915 $ 2,437
Denominator for basic weighted average shares
13,744 11,068 11,069
Employee stock options 167 269 251
Contingently issuable shares 303 -- --
Warrants 80 87 85
------------ ------------ ------------
Dilutive potential shares 550 356 336
------------ ------------ ------------
Denominator for diluted weighted average shares 14,294 11,424 11,405
------------ ------------ ------------
Basic earnings per share $ 7.07 $ 1.53 $ 0.22
Diluted earnings per share $ 6.80 $ 1.48 $ 0.21
</TABLE>
34
<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.
35
<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>
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference to the
information provided in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held May 3, 2000 (the "2000 Proxy Statement") under the
headings "ELECTIONS OF DIRECTORS" and "SECTION (16) (a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE".
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to the
information provided in the 2000 Proxy Statement under the heading "COMPENSATION
OF EXECUTIVE OFFICERS" and "DIRECTOR COMPENSATION".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to the
information provided in the 2000 Proxy Statement under the heading "Security
Ownership of Management and Certain Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference to the
information provided in the 2000 Proxy Statement under the heading "Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following financial statements are filed herewith:
AMERICAN CAPITAL STRATEGIES, LTD.
Report of Independent Auditors
Balance Sheets as of December 31, 1999 and 1998
Schedules of Investments as of December 31, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1999
and 1998, the Three Months Ended December 31, 1997, and the
Nine Months September 30, 1997.
Statements of Shareholders' Equity for the Years Ended
December 31, 1999 and 1998, the Three Months Ended December
31, 1997, and the Nine Months September 30, 1997.
Statement 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.
Financial Highlights for the Years Ended December 31, 1999 and
1998, and the Three Months Ended December 31, 1997
37
<PAGE>
Notes to Financial Statements
(2) No financial statement schedules of the Company are filed
herewith because (i) such schedules are not required or (ii)
the information required has been presented in the
aforementioned financial statement
(3) The following exhibits are filed herewith or incorporated
herein by reference
Exhibit Description
- ------- -----------
*3.1 American Capital Strategies, Ltd. Second Amended and Restated
of Certificate of Incorporation, incorporated herein by
reference Exhibit a of the Pre-Effective Amendment Number 1 to
the Registration Statement on Form N-2 (File No. 333-29943)
filed August 12, 1997, as amended by a certain Amendment No. 1
filed herewith.
*3.2 American Capital Strategies, Ltd. Second Amended and Restated
Bylaws, incorporated herein by reference to Exhibit b of the
Pre-Effective Amendment Number 1 to the Registration Statement
Form N-2 (File No. 333-29943) filed on August 12, 1997.
*4.1. Instruments defining the rights of holders of securities: See
Article IV of the Company's Second Amended and Restated
Certificate of Incorporation, incorporated herein by reference
to Exhibit 2.a of the Amendment No. 1 to the Form N-2 filed by
the Company, filed on August 12, 1997 (Commission File No.
333-29943).
*4.2 Instruments defining the rights of holders of securities: See
Section I of the Company's Second Amended and Restated Bylaws,
incorporated herein by reference to Exhibit 2.b of the
Amendment No. 1 to the Form N-2 filed by the Company, filed on
August 12, 1997 (Commission File No. 333-29943).
*+10.1 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.
*+10.2 Amended and Restated Employment Agreement between the Company
and Adam Blumenthal, dated June 7, 1999, incorporated herein
by reference Exhibit 10.6 of the Post-Effective Amendment
Number 1 to the Registration Statement on Form N-2 (File No.
333- 79377), filed August 5, 1999.
*+10.3 Amended and Restated Employment Agreement between the Company
and Roland Cline, dated June 7, 1999, incorporated herein by
reference Exhibit 10.7 of the Post-Effective Amendment Number
1 to the Registration Statement on Form N-2 (File No. 333-
79377), filed August 5, 1999.
*+10.4 Stock Option Exercise Agreement between the Company and Adam
Blumenthal, dated June 7, 1999, incorporated herein by
reference Exhibit 10.8 of the Post-Effective Amendment Number
1 to the Registration Statement on Form N-2 (File No. 333-
79377), filed August 5, 1999.
*+10.5 Stock Option Exercise Agreement between the Company and Roland
Cline, dated June 7, 1999, incorporated herein by reference
Exhibit 10.9 of the Post-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377),
filed August 5, 1999.
*+10.6 Stock Option Exercise Agreement between the Company and Malon
Wilkus, dated June 7, 1999, incorporated herein by reference
Exhibit 10.10 of the Post-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377),
filed August 5, 1999.
*+10.7 Stock Option Exercise Agreement between the Company and John
Erickson, dated June 7, 1999, incorporated herein by reference
Exhibit 10.11 of the Post-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377),
filed August 5, 1999.
*+10.8 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.
38
<PAGE>
*+10.9 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
Post-Effective Amendment Number 1 to the Registration
Statement on Form N-2 (File No. 333- 79377), filed August 5,
1999.
*+10.10 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 Post-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377),
filed August 5, 1999.
*+10.11 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 Post-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377),
filed August 5, 1999.
*+10.12 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 Post-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377),
filed August 5, 1999.
*+10.13 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 Post-Effective Amendment Number 1 to the
Registration Statement on Form N-2 (File No. 333- 79377),
filed August 5, 1999.
*+10.14 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.
+10.15 Split Dollar Agreement between the Company and Adam Blumenthal
dated as of September 7, 1999, filed herewith.
+10.16 Split Dollar Agreement between the Company and Roland Cline
dated as of September 7, 1999, filed herewith.
*+10.17 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.
*10.18 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.
*10.19 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, each of which is filed herewith.
10.20 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, filed herewith.
10.21 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,
filed herewith.
10.22 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, filed herewith.
*10.23 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 Mach 31, 1999, filed May 17, 1999.
*10.24 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 Mach 31, 1999, filed May 17, 1999.
39
<PAGE>
*10.25 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 Mach 31, 1999, filed May 17, 1999.
*10.26 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 Mach 31, 1999, filed May 17,
1999.
*10.27 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 Mach 31,
1999, filed May 17, 1999.
*21 Subsidiaries of the Company and jurisdiction of incorporation,
incorporated herein by reference to Item 27 of the
Post-Effective Amendment Number 1 to the Registration
Statement on Form N-2 (File No. 333- 79377), filed August 5,
1999.
23 Consent of Ernst & Young LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
- -----------------
* Fully or partly previously filed
+ Management contract or compensatory plan
(b) Reports on Form 8-K
NONE
(c) Exhibits. See the exhibits filed herewith
(d) Additional financial statement schedules
NONE
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/ John R. Erickson
-----------------------
John R. Erickson
Vice President and
Chief Financial Officer
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Malon Wilkus
- ------------------------ Chairman and Chief Executive Officer March 28, 2000
Malon Wilkus
/s/ David Gladstone
- ------------------------ Vice Chairman and Director March 28, 2000
David Gladstone
/s/ Adam Blumenthal
- ------------------------ President, Chief Operating Officer, and March 28, 2000
Adam Blumenthal Director
/s/ John R. Erickson
- ------------------------ Vice President and Chief Financial Officer March 28, 2000
John R. Erickson (Principal Financial and Accounting Officer)
/s/ Robert L. Allbritton
- ------------------------ Director March 28, 2000
Robert L. Allbritton
/s/ Alvin N. Puryear
- ------------------------ Director March 28, 2000
Alvin N. Puryear
/s/ Neil M. Hahl
- ------------------------ Director March 28, 2000
Neil M. Hahl
/s/ Philip R. Harper
- ------------------------ Director March 28, 2000
Philip R. Harper
/s/ Stan Lundine
- ------------------------ Director March 28, 2000
Stan Lundine
- ------------------------ Director
Steven P. Walko
</TABLE>
41
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
AMERICAN CAPITAL STRATEGIES, LTD., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY AS FOLLOWS:
FIRST: The Board of Directors of the Corporation duly adopted
resolutions in accordance with Section 242 of the General
Corporation Law of the State of Delaware proposing, declaring
advisable and recommending this amendment (the "Certificate of
Amendment") to the Second Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") of the
Corporation. Accordingly, Section 4.1 of Article IV of the
Certificate of Incorporation is deleted in its entirety and
replaced as follows:
"Section 4.1. Total Number of Shares of
Capital Stock. The total number of shares of capital
stock of all classes that the Corporation shall have
authority to issue is 75,000,000 shares. The
authorized stock is divided into 5,000,000 shares of
preferred stock, with the par value of $0.01 each
(the "Preferred Stock"), and 70,000,000 shares of
voting common stock, with the par value of $0.01 each
(the "Common Stock")."
SECOND: That the annual meeting of the stockholders of the Corporation
was duly called and held upon notice in accordance with
Section 222 of the General Corporation Law of the State of
Delaware at which meeting the necessary number of shares was
voted in favor of said amendment.
THIRD: The aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware.
FOURTH: This Certificate of Amendment to the Certificate of
Incorporation is to become effective upon filing.
A:\Exh. 3.1.doc
<PAGE>
IN WITNESS WHEREOF, the undersigned, AMERICAN CAPITAL STRATEGIES, LTD.,
has caused this Certificate of Amendment to be executed on its behalf by its
President and attested to by its Secretary as of this 17th day of May, 1999.
AMERICAN CAPITAL STRATEGIES, LTD.
By:
------------------------------
Name: Malon Wilkus
Title: President
Attest:
-----------------------
Adam Blumenthal
Secretary
- 2 -
Exhibit 10.15
SPLIT DOLLAR AGREEMENT
This SPLIT DOLLAR AGREEMENT (this "Agreement") is entered into as of
September 7, 1999, by and between ADAM BLUMENTHAL (the "Owner") and AMERICAN
CAPITAL STRATEGIES, LTD., a Delaware corporation (the "Employer").
R E C I T A L S
WHEREAS, the Owner and the Employer have entered into a Stock Option
Exercise Agreement of event date herewith (the "Exercise Agreement") pursuant to
which they have agreed to enter into and consummate this Agreement; and
WHEREAS, Owner will be the owner and possessor of the Policy (as
defined herein) and will assign an interest in the Policy's death benefit and
cash value to the Employer as collateral to secure repayment of Employer's
premium payments with respect to the Policy pursuant to the Exercise Agreement;
and
WHEREAS, it is the intent of the Employer and Owner to define the
extent of the Employer's security interest in the Policy;
NOW, THEREFORE, the parties hereto, in consideration of the foregoing
and intending to be legally bound hereby, agree as follows:
1. Interests in the Policy. The Policy that is the subject of this
Split Dollar Agreement is Security Life of Denver Insurance Company (the
"Insurer") Policy Number 610014591 on the life of the Owner (the "Policy"). The
Employer's interest in the cash value and death benefits of the Policy (the
"Employer's Interest") as of any date, shall be equal to the Unamortized Premium
Payment (as defined herein) as of such date with interest accumulated at a rate
of 4.5% per annum. The Owner's interest in the cash value and death benefits of
A:\Exh. 10.15.doc
<PAGE>
the Policy (the "Owner's Interest") shall be equal to the remaining cash value
and death benefits of the Policy, if any, in excess of the Employer's Interest,
reduced by any distributions made to the Owner prior to such date.
2. Premium Payments. The Employer will, on or as of the date hereof and
on each of the first four anniversaries of the date hereof, make cash premium
payments on the Policy in the amount of $100,800 (each payment being an "Annual
Premium Payment" and collectively, the "Aggregate Premium Payments"). The Owner
shall have imputed income each year in an amount equal to (a) the annual cost of
current death benefit protection on the life of the Owner, measured by the lower
of (i) the PS 58 rate, as set forth in Revenue Ruling 55-747 (or the
corresponding applicable provision of any future Revenue Ruling), or (ii) the
Insurer's current published premium rate for annually renewable term insurance
for standard risks plus, without duplication, (b) one-tenth of the Aggregate
Premium Payments. The "Unamortized Premium Payment" as of any date shall be the
aggregate Annual Premium Payments made through such date reduced by 2.5% of the
Aggregate Premium Payments on each October 1, January 1, March 1 and July 1
during the term of this Agreement.
3. Death Benefit Amounts.
a. In the event of Owner's death prior to the termination of
this Agreement, the death benefit payable to the Employer (or the Employer's
designated beneficiaries) under this Agreement shall be equal to the Employer's
Interest in the Policy at the time of Owner's death.
b. In the event of the Owner's death prior to the termination
of this Agreement, the death benefit payable to the Owner (or the Owner's
- 2 -
<PAGE>
designated beneficiaries) shall be the excess of the total death proceeds under
the Policy less the amount payable to the Employer (or the Employer's designated
beneficiaries). Following the termination of this Agreement and upon the
satisfaction of the Employer's Interest in the Policy, the Owner's death benefit
will be equal to the total death benefit provided by the Policy.
c. Owner understands that sufficiency of cash value in the
Policy to provide expected amounts of death benefit under this Agreement may
vary as a result of Policy performance and duration of premium payments and this
is in no event guaranteed by the Employer or the Insurer.
4. Ownership and Rights in the Policy.
a. The Policy will be owned exclusively by the Owner. While
this Agreement is in effect, the Employer has a security interest in the Policy
under this Agreement limited exclusively to the Employer's Interest in the
Policy; provided, however, this paragraph 4 shall not in any way limit or affect
the obligations or rights of the parties under that Exercise Agreement.
b. The Owner shall have the right to make any investment
choices permitted by the Policy and that appear on Exhibit A hereto with respect
to the cash value of the Policy. Any other investment choices will require the
consent of the Employer.
c. The Owner's rights shall also include the right to select
and change beneficiaries to receive Owner's death benefits. The Owner will not
be permitted to borrow against, or partially or totally surrender the Policy as
long as the Collateral Assignment remains in force, except as provided in the
- 3 -
<PAGE>
Exercise Agreement. Any other rights in the Policy other than those specifically
mentioned in this Agreement must be exercised with the written consent of both
the Owner and the Employer.
d. Notwithstanding anything to the contrary in this Agreement,
Owner shall have the right to assign ownership of the Policy to an insurance
trust created by the Owner, provided that any such assignment shall be made
expressly subject to the rights and interests of the Employer to the Policy
created under this Agreement and under the Exercise Agreement and the trustee
thereof shall have executed such instrument as the Employer may reasonably
request confirming such rights and interests of the Employer.
5. Assignment of Policy to Secure Employer's Payments. To secure
Employer's Interest in the Policy under this Agreement, Owner will collaterally
assign the Policy to the Employer by signing the separate Collateral Assignment.
The Collateral Assignment cannot be altered without the Employer's, Owner's and
Insurer's consent.
6. Termination of Split Dollar Agreement. This Agreement will terminate
upon the earliest to occur of the following:
a. Death of the Owner and the payment to Employer of all
amounts due it hereunder;
b. Written agreement of both the Owner and the Employer to
terminate this Agreement;
c. Termination of Owner's employment; provided however, that
if the Employer and Owner are parties to a Supplemental Employment Agreement
substantially in the form of Exhibit 4.11 to the Second Amended and Restated
Employment Agreement dated as of June 7, 1999, between Employer and Owner, Owner
- 4 -
<PAGE>
shall be deemed to be employed by Employer only if Employee has elected to be
bound by Section 5.2(a) thereof; or
d. A release of the Collateral Assignment pursuant to Section
7 herein. Upon termination of this Agreement, the Employer shall receive the
Employer's Interest in the Policy as soon as is practical, but in no event shall
receipt be later than sixty (60) days from the earliest of the dates listed
above. In the event of termination of this Agreement for reason other than the
death of the Owner, the payment of the Employer's Interest in the Policy and
under this Agreement shall be satisfied either directly from the cash value of
the Policy or by direct payment by the Owner, at the discretion of the Owner. In
this event, the recovery of the Employer's Interest shall be limited to the cash
value of the Policy at that time. In the event of termination of this Agreement
by reason of the death of the Owner, the Employer's Interest in the Policy and
under this Agreement shall be satisfied through direct payment from the Insurer
from the Policy proceeds.
7. Release of Collateral Assignment. Upon receipt of the Employer's
Interest in the Policy, as provided above, either whether from the Policy, or
from the Owner, the Employer will release the Collateral Assignment. Upon
satisfaction of the Employer's Interest in the Policy, the Owner shall have
unrestricted ownership to the Policy, subject to the terms of the Exercise
Agreement.
8. Miscellaneous.
a. Not an Employment Agreement. This Agreement does not in any
way constitute an employment agreement, and the Employer reserves the right to
terminate Owner's employment to the same extent as though this Agreement did not
- 5 -
<PAGE>
exist. This Agreement may be amended at any time by written agreement signed on
behalf of the Employer and by the Owner.
b. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Employer and its successors and assigns, and to the
Owner and the Owner's heirs, executor or personal representative and
beneficiaries.
c. Notices. Any notice, consent or demand required or
permitted under this Agreement shall be made in writing and shall be signed by
the party making the notice, consent, or demand. Such notice shall be sent by
United States certified mail, postage pre-paid and shall be sent to the other
party's last known address as shown on the records of the Employer. The date of
such mailing shall be deemed to be the date of such notice, consent or demand.
d. Governing Law. This Agreement shall be governed by and be
construed in accordance with the laws of the State of Maryland, without
reference to the conflicts of laws provisions thereof.
9. Claims Procedures.
a. Claimants. Any person or entity claiming a benefit,
requesting an interpretation or ruling under the Plan (hereinafter referred to
as "Claimant") shall present the request in writing to the Employer, which shall
respond in writing as soon as practicable. If the claim or request is denied,
the written notice of denial shall state the reason for denial, with specific
reference to the provisions on which the denials is based, a description of any
additional material or information required and an explanation of why it is
necessary, and an explanation of the program's claims review procedure.
- 6 -
<PAGE>
b. Review of Claim. Any Claimant whose claim or request is
denied or who has not received a response within sixty (60) days may request a
review by notice given in writing to the Employer. Such request must be made
within sixty (60) days after receipt by the Claimant of the written notice of
denial, or in the event Claimant has not received a response sixty (60) days
after receipt by the Employer of Claimant's claim or request. The claim or
request shall be reviewed by the Employer which may, but shall not be required
to, grant the Claimant a hearing. On review, the Claimant may have
representation, examine pertinent documents, and submit issues and comments in
writing.
c. Final Decision. The decision or review shall normally be
made within sixty (60) days after the Employer's receipt of Claimant's claim or
request. If an extension of time is required for a hearing or other special
circumstances, the Claimant shall be notified and the time limit shall be one
hundred twenty (120) days. The decision shall be in writing and shall state the
reason and the relevant provisions. All decisions on review shall be final and
bind all parties concerned.
- 7 -
<PAGE>
IN WITNESS WHEREOF, the Employer and the Owner have executed and
delivered this Split Dollar Agreement, which is effective as of the effective
date of the Policy described herein.
AMERICAN CAPITAL STRATEGIES. LTD.
By:
-------------------------------
Name:
------------------------
Title:
------------------------
OWNER
-----------------------------------
- -----------------------------
Witness
- 8 -
Exhibit 10.16
SPLIT DOLLAR AGREEMENT
This SPLIT DOLLAR AGREEMENT (this "Agreement") is entered into as of
September 7, 1999, by and between ROLAND CLINE (the "Owner") and AMERICAN
CAPITAL STRATEGIES, LTD., a Delaware corporation (the "Employer").
R E C I T A L S
WHEREAS, the Owner and the Employer have entered into a Stock Option
Exercise Agreement of event date herewith (the "Exercise Agreement") pursuant to
which they have agreed to enter into and consummate this Agreement; and
WHEREAS, Owner will be the owner and possessor of the Policy (as
defined herein) and will assign an interest in the Policy's death benefit and
cash value to the Employer as collateral to secure repayment of Employer's
premium payments with respect to the Policy pursuant to the Exercise Agreement;
and
WHEREAS, it is the intent of the Employer and Owner to define the
extent of the Employer's security interest in the Policy;
NOW, THEREFORE, the parties hereto, in consideration of the foregoing
and intending to be legally bound hereby, agree as follows:
1. Interests in the Policy. The Policy that is the subject of this
Split Dollar Agreement is Security Life of Denver Insurance Company (the
"Insurer") Policy Number 610014589 on the life of the Owner (the "Policy"). The
Employer's interest in the cash value and death benefits of the Policy (the
"Employer's Interest") as of any date, shall be equal to the Unamortized Premium
Payment (as defined herein) as of such date with interest accumulated at a rate
of 4.5% per annum. The Owner's interest in the cash value and death benefits of
the Policy (the "Owner's Interest") shall be equal to the remaining cash value
A:\Exh. 10.16.doc
<PAGE>
and death benefits of the Policy, if any, in excess of the Employer's Interest,
reduced by any distributions made to the Owner prior to such date.
2. Premium Payments. The Employer will, on or as of the date hereof and
on each of the first four anniversaries of the date hereof, make cash payments
on the Policy in the amount of $96,315 (each payment being an "Annual Premium
Payment" and collectively, the "Aggregate Premium Payments"). The Owner shall
have imputed income each year in an amount equal to (a) the annual cost of
current death benefit protection on the life of the Owner, measured by the lower
of (i) the PS 58 rate, as set forth in Revenue Ruling 55-747 (or the
corresponding applicable provision of any future Revenue Ruling), or (ii) the
Insurer's current published premium rate for annually renewable term insurance
for standard risks plus, without duplication, (b) one-tenth of the Aggregate
Premium Payments. The "Unamortized Premium Payment" as of any date shall be the
aggregate Annual Premium Payments made through such date reduced by 2.5% of the
Aggregate Premium Payments on each October 1, January 1, March 1 and July 1
during the term of this Agreement.
3. Death Benefit Amounts.
a. In the event of Owner's death prior to the termination of
this Agreement, the death benefit payable to the Employer (or the Employer's
designated beneficiaries) under this Agreement shall be equal to the Employer's
Interest in the Policy at the time of Owner's death.
b. In the event of the Owner's death prior to the termination
of this Agreement, the death benefit payable to the Owner (or the Owner's
designated beneficiaries) shall be the excess of the total death proceeds under
- 2 -
<PAGE>
the Policy less the amount payable to the Employer (or the Employer's designated
beneficiaries). Following the termination of this Agreement and upon the
satisfaction of the Employer's Interest in the Policy, the Owner's death benefit
will be equal to the total death benefit provided by the Policy.
c. Owner understands that sufficiency of cash value in the
Policy to provide expected amounts of death benefit under this Agreement may
vary as a result of Policy performance and duration of premium payments and this
is in no event guaranteed by the Employer or the Insurer.
4. Ownership and Rights in the Policy.
a. The Policy will be owned exclusively by the Owner. While
this Agreement is in effect, the Employer has a security interest in the Policy
under this Agreement limited exclusively to the Employer's Interest in the
Policy; provided, however, this paragraph 4 shall not in any way limit or affect
the obligations or rights of the parties under that Exercise Agreement.
b. The Owner shall have the right to make any investment
choices permitted by the Policy and that appear on Exhibit A hereto with respect
to the cash value of the Policy. Any other investment choices will require the
consent of the Employer.
c. The Owner's rights shall also include the right to select
and change beneficiaries to receive Owner's death benefits. The Owner will not
be permitted to borrow against, or partially or totally surrender the Policy as
long as the Collateral Assignment remains in force, except as provided in the
Exercise Agreement. Any other rights in the Policy other than those specifically
- 3 -
<PAGE>
mentioned in this Agreement must be exercised with the written consent of both
the Owner and the Employer.
d. Notwithstanding anything to the contrary in this Agreement,
Owner shall have the right to assign ownership of the Policy to an insurance
trust created by the Owner, provided that any such assignment shall be made
expressly subject to the rights and interests of the Employer to the Policy
created under this Agreement and under the Exercise Agreement and the trustee
thereof shall have executed such instrument as the Employer may reasonably
request confirming such rights and interests of the Employer.
5. Assignment of Policy to Secure Employer's Payments. To secure
Employer's Interest in the Policy under this Agreement, Owner will collaterally
assign the Policy to the Employer by signing the separate Collateral Assignment.
The Collateral Assignment cannot be altered without the Employer's, Owner's and
Insurer's consent.
6. Termination of Split Dollar Agreement. This Agreement will terminate
upon the earliest to occur of the following:
a. Death of the Owner and the payment to Employer of all
amounts due it hereunder;
b. Written agreement of both the Owner and the Employer to
terminate this Agreement;
c. Termination of Owner's employment; provided however, that
if the Employer and Owner are parties to a Supplemental Employment Agreement
substantially in the form of Exhibit 4.11 to the Second Amended and Restated
Employment Agreement dated as of June 7, 1999, between Employer and Owner, Owner
- 4 -
<PAGE>
shall be deemed to be employed by Employer only if Employee has elected to be
bound by Section 5.2(a) thereof; or
d. A release of the Collateral Assignment pursuant to Section
7 herein. Upon termination of this Agreement, the Employer shall receive the
Employer's Interest in the Policy as soon as is practical, but in no event shall
receipt be later than sixty (60) days from the earliest of the dates listed
above. In the event of termination of this Agreement for reason other than the
death of the Owner, the payment of the Employer's Interest in the Policy and
under this Agreement shall be satisfied either directly from the cash value of
the Policy or by direct payment by the Owner, at the discretion of the Owner. In
this event, the recovery of the Employer's Interest shall be limited to the cash
value of the Policy at that time. In the event of termination of this Agreement
by reason of the death of the Owner, the Employer's Interest in the Policy and
under this Agreement shall be satisfied through direct payment from the Insurer
from the Policy proceeds.
7. Release of Collateral Assignment. Upon receipt of the Employer's
Interest in the Policy, as provided above, either whether from the Policy, or
from the Owner, the Employer will release the Collateral Assignment. Upon
satisfaction of the Employer's Interest in the Policy, the Owner shall have
unrestricted ownership to the Policy, subject to the terms of the Exercise
Agreement.
8. Miscellaneous.
a. Not an Employment Agreement. This Agreement does not in any
way constitute an employment agreement, and the Employer reserves the right to
terminate Owner's employment to the same extent as though this Agreement did not
- 5 -
<PAGE>
exist. This Agreement may be amended at any time by written agreement signed on
behalf of the Employer and by the Owner.
b. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Employer and its successors and assigns, and to the
Owner and the Owner's heirs, executor or personal representative and
beneficiaries.
c. Notices. Any notice, consent or demand required or
permitted under this Agreement shall be made in writing and shall be signed by
the party making the notice, consent, or demand. Such notice shall be sent by
United States certified mail, postage pre-paid and shall be sent to the other
party's last known address as shown on the records of the Employer. The date of
such mailing shall be deemed to be the date of such notice, consent or demand.
d. Governing Law. This Agreement shall be governed by and be
construed in accordance with the laws of the State of Maryland, without
reference to the conflicts of laws provisions thereof.
9. Claims Procedures.
a. Claimants. Any person or entity claiming a benefit,
requesting an interpretation or ruling under the Plan (hereinafter referred to
as "Claimant") shall present the request in writing to the Employer, which shall
respond in writing as soon as practicable. If the claim or request is denied,
the written notice of denial shall state the reason for denial, with specific
reference to the provisions on which the denials is based, a description of any
additional material or information required and an explanation of why it is
necessary, and an explanation of the program's claims review procedure.
- 6 -
<PAGE>
b. Review of Claim. Any Claimant whose claim or request is
denied or who has not received a response within sixty (60) days may request a
review by notice given in writing to the Employer. Such request must be made
within sixty (60) days after receipt by the Claimant of the written notice of
denial, or in the event Claimant has not received a response sixty (60) days
after receipt by the Employer of Claimant's claim or request. The claim or
request shall be reviewed by the Employer which may, but shall not be required
to, grant the Claimant a hearing. On review, the Claimant may have
representation, examine pertinent documents, and submit issues and comments in
writing.
c. Final Decision. The decision or review shall normally be
made within sixty (60) days after the Employer's receipt of Claimant's claim or
request. If an extension of time is required for a hearing or other special
circumstances, the Claimant shall be notified and the time limit shall be one
hundred twenty (120) days. The decision shall be in writing and shall state the
reason and the relevant provisions. All decisions on review shall be final and
bind all parties concerned.
- 7 -
<PAGE>
IN WITNESS WHEREOF, the Employer and the Owner have executed and
delivered this Split Dollar Agreement, which is effective as of the effective
date of the Policy described herein.
AMERICAN CAPITAL STRATEGIES. LTD.
By:
-------------------------------
Name:
------------------------
Title:
------------------------
OWNER
-----------------------------------
- -----------------------------
Witness
- 8 -
Exhibit 10.19
--------------
EXECUTION COPY
--------------
AMENDMENT NO. 3 TO
LOAN FUNDING AND SERVICING AGREEMENT
THIS AMENDMENT NO. 3 TO LOAN FUNDING AND SERVICING AGREEMENT,
dated as of December 14, 1999 (this "Amendment"), is entered into by and among
ACS FUNDING TRUST I ("Borrower"), as Borrower, AMERICAN CAPITAL STRATEGIES, LTD.
("Servicer"), as Servicer, certain INVESTORS, VARIABLE FUNDING CAPITAL
CORPORATION ("VFCC"), as a Lender, FIRST UNION SECURITIES, INC.
(successor-in-interest to First Union Capital Markets Corp.), as Deal Agent,
FIRST UNION NATIONAL BANK ("First Union"), as a Lender and as Liquidity Agent
and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Collateral Custodian and
the Backup Servicer. Capitalized terms used and not otherwise defined herein are
used as defined in the Agreement (as defined below).
WHEREAS, the parties hereto entered into that certain Loan
Funding and Servicing Agreement, dated as of March 31, 1999 as amended by that
Amendment No. 1, dated as of June 30, 1999, and that Amendment No. 2, dated as
of September 24, 1999 (as amended, the "Agreement");
WHEREAS, the parties hereto desire to amend the Agreement in
certain respects as provided herein;
NOW THEREFORE, in consideration of the premises and the other
mutual covenants contained herein, the parties hereto agree as follows:
SECTION 1. Amendments.
(a) The definition of "Facility Amount" contained in Section
1.1 of the Agreement is hereby amended and restated to read in its entirety as
follows:
"Facility Amount: At any time, $225,000,000.00; provided,
however, on or after the Termination Date, the Facility Amount
shall be zero."
(b) The second sentence of Section 2.5(a) of the Agreement is
hereby amended and restated in its entirety as follows:
"The Notes shall be dated the Closing Date and shall be in a
maximum principal amount equal to (i) $225,000,000 in the case
of VFCC Note, (ii) $225,000,000 in the case of the Investor
Note, and (iii) $10,000,000 in the case of the FUNB Note;
provided, however, that anything to the contrary
CHAR1\507942_ 1
<PAGE>
notwithstanding, the indebtedness of the Borrower evidenced by
the Notes shall not in the aggregate exceed the Facility
Amount."
(c) The Commitment of First Union National Bank as an Investor set
forth on the signature pages of the Agreement is hereby amended and restated to
be "$225,000,000."
(d) The Commitment of First Union National Bank as a Lender set forth
on the signature pages of the Agreement is hereby amended and restated to be
"$10,000,000."
SECTION 2. Increase in Facility Amount and Amount of Notes.
Effective on the date of this Amendment, the Facility Amount shall be increased
to $225,000,000; provided, that First Union shall first have received executed
versions of the Notes referenced in clauses (i), (ii) and (iii) of the
succeeding sentence. In connection with such increase, the Borrower agrees to
execute and deliver to First Union, on behalf of the holders of the Notes, (i)
an amended, restated and substituted VFCC Note in the maximum principal amount
of $225,000,000, (ii) an amended, restated and substituted Investor Note in the
maximum principal amount of $225,000,000, and (iii) an amended, restated and
substituted FUNB Note in the maximum principal amount of $10,000,000
(collectively the "New Notes"). Such New Notes shall replace and supersede any
note or notes previously executed by the Borrower pursuant to the Agreement
(collectively, the "Replaced Notes"). Such New Notes evidence the same
indebtedness, and are secured by the same Collateral as the Replaced Notes.
SECTION 3. Agreement in Full Force and Effect as Amended.
Except as specifically amended hereby, the Agreement shall remain in full force
and effect. All references to the Agreement shall be deemed to mean the
Agreement as modified hereby. This Amendment shall not constitute a novation of
the Agreement, but shall constitute an amendment thereof. The parties hereto
agree to be bound by the terms and conditions of the Agreement, as amended by
this Agreement, as though such terms and conditions were set forth herein.
SECTION 4. Representations. Each of the Borrower and Servicer
represent and warrant as of the date of this Amendment as follows:
(i) it is duly incorporated or organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation or
organization;
(ii) the execution, delivery and performance by it of this
Amendment are within its powers, have been duly authorized, and do not
contravene (A) its charter, by-laws, or other organizational documents,
or (B) any Applicable Law;
(iii) no consent, license, permit, approval or authorization
of, or registration, filing or declaration with any governmental
authority, is required in connection with the execution, delivery,
performance, validity or enforceability of this Amendment by or against
it;
(iv) this Amendment has been duly executed and delivered by
it;
2
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
(v) this Amendment constitutes its legal, valid and binding
obligation enforceable against it in accordance with its terms, except
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally or by general principles of equity;
(vi) it is not in default under the Agreement; and
(vii) there is no Termination Event, Unmatured Termination
Event, or Servicer Termination Event;
SECTION 5. Expenses. In connection with the execution of this
Amendment, the Borrower agrees to pay all reasonable and actual costs and
expenses (including without limitation the reasonable fees and expenses of legal
counsel) of Canadian Imperial Bank of Commerce ("CIBC") and VFCC, respectively,
incurred in connection with the review and negotiation of this Amendment.
SECTION 6. Conditions Precedent. The effectiveness of this
Amendment is subject to the following conditions precedent: (i) execution and
delivery to First Union of the New Notes; (ii) delivery to the Deal Agent and
CIBC of a copy of this Amendment duly executed by each of the parties hereto;
(iii) delivery to the Deal Agent and CIBC (in a form acceptable to the Deal
Agent) of a due authorization, execution and enforceability opinion with respect
to this Amendment; and (iv) such other documents, agreements, certification, or
legal opinions as the Deal Agent, may reasonably require.
SECTION 7. Miscellaneous.
(a) This Amendment may be executed in any number of
counterparts, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument but all
of which together shall constitute one and the same agreement.
(b) The descriptive headings of the various sections of this
Amendment are inserted for convenience of reference only and shall not be deemed
to affect the meaning or construction of any of the provisions hereof.
(c) This Amendment may not be amended or otherwise modified
except as provided in the Agreement.
(d) First Union certifies by execution hereof that it is an
Investor with Commitments in excess of 66-2/3% of the Facility Amount, and
therefore is a Required Investor pursuant to the Agreement.
(e) The failure or unenforceability of any provision hereof
shall not affect the other provisions of this Amendment.
3
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
(f) Whenever the context and construction so require, all
words used in the singular number herein shall be deemed to have been used in
the plural, and vice versa, and the masculine gender shall include the feminine
and neuter and the neuter shall include the masculine and feminine.
(g) This Amendment represents the final agreement between the
parties and may not be contradicted by evidence of prior, contemporaneous or
subsequent oral agreements between the parties. There are no unwritten oral
agreements between the parties.
(h) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS
CONFLICT OF LAWS PROVISIONS.
[Remainder of Page Intentionally Left Blank]
4
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE BORROWER: ACS FUNDING TRUST I
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
ACS Funding Trust I
c/o American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Attention: President
Facsimile No.: (301) 654-6714
Confirmation No.: (301) 951-6122
THE SERVICER: AMERICAN CAPITAL STRATEGIES, LTD.
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Attention: President
Facsimile No.: (301) 654-6714
Confirmation No.: (301 951-6122
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
S-1
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
THE INVESTORS: FIRST UNION NATIONAL BANK
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
Commitment: $225,000,000.00
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Capital Markets Credit Administration
Facsimile No.: (704) 374-3254
Confirmation No: (704) 374-4001
LENDER: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Securities, Inc.
(successor-in-interest to First Union
Capital Markets Corp.), as attorney-in-fact
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
Variable Funding Capital Corporation
c/o First Union Securities, Inc.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
With a copy to:
Lord Securities Corp.
2 Wall Street, 19th Floor
Attention: Vice President
Facsimile No.: (212) 346-9012
Confirmation No.: (212) 346-9008
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
S-2
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3464
Confirmation No.: (612) 667-8058
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3464
Confirmation No.: (612) 667-8058
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
S-3
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
THE DEAL AGENT: FIRST UNION SECURITIES, INC.
(successor-in-interest to First Union
Capital Markets Corp.)
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
LENDER AND LIQUIDITY AGENT FIRST UNION NATIONAL BANK
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Capital Markets Credit Administration
Facsimile No.: (704) 374-3254
Telephone No.: (704) 374-4001
Lender Commitment: $10,000,000
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
S-4
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
CONSENTED TO:
CANADIAN IMPERIAL BANK OF COMMERCE
By:
-----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
Canadian Imperial Bank of Commerce
425 Lexington Avenue, 7th Floor
New York, New York 10017
Attention: Asset Securitization Group -
Credit Administration
Reference: American Capital Strategies
Facsimile No.: (212) 856-3643
Confirmation No.: (212) 856-3753
S-5
CHAR1\507942_ 1
Amendment No. 3 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
--------------
EXECUTION COPY
--------------
AMENDMENT NO. 2 TO
LOAN FUNDING AND SERVICING AGREEMENT
THIS AMENDMENT NO. 2 TO LOAN FUNDING AND SERVICING AGREEMENT,
dated as of September 24, 1999 (this "Amendment"), is entered into by and among
ACS FUNDING TRUST I ("Borrower"), as Borrower, AMERICAN CAPITAL STRATEGIES, LTD.
("Servicer"), as Servicer, certain Investors, VARIABLE FUNDING CAPITAL
CORPORATION ("VFCC"), as a Lender, FIRST UNION CAPITAL MARKETS CORP., as Deal
Agent, FIRST UNION NATIONAL BANK ("First Union"), as a Lender and as Liquidity
Agent and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Collateral Custodian
and the Backup Servicer. Capitalized terms used and not otherwise defined herein
are used as defined in the Agreement (as defined below).
WHEREAS, the parties hereto entered into that certain Loan
Funding and Servicing Agreement, dated as of March 31, 1999 (the "Agreement");
WHEREAS, the parties amended the Agreement pursuant to
Amendment No. 1 to Loan Funding and Servicing Agreement, dated as of June 30,
1999 (the Agreement as amended shall be referred to herein as the "Agreement");
and
WHEREAS, the parties hereto desire to amend the Agreement in
certain respects as provided herein.
NOW THEREFORE, in consideration of the premises and the other
mutual covenants contained herein, the parties hereto agree as follows:
SECTION 8. Amendments.
(a) The definition of "Commitment Termination Date" in Section
1.1 of the Agreement is hereby amended and restated to read in its entirety as
follows:
"Commitment Termination Date: March 31, 2001 or such
later date to which the Commitment Termination Date may be
extended (if extended) in the sole discretion of VFCC and each
Investor in accordance with the terms of Section 2.2(b);
provided, however in the event that the Borrower fails to
deliver or fails to cause the Servicer to deliver (i) a draft
of its Credit and Collection Policy and revised loan grading
system in a form satisfactory to the Deal Agent (in its sole
discretion) on or before September 30, 1999, or (ii) a final
version of its Credit and Collection Policy and revised loan
grading system in a form satisfactory to the Deal Agent (in
its sole discretion) on or before October 30, 1999, the
Commitment Termination Date shall be March 29, 2000."
1
CHAR1\507942_ 1
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Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
(b) Section 6.25(a)(xi) of the Agreement is hereby amended by
deleting the "or" at the end thereof;
(c) Section 6.25(a)(xii) of the Agreement is hereby amended
and restated in its entirety as follows:
"(xii) on or before September 30, 1999, a draft of
its Credit and Collection Policy and revised loan grading
system are not delivered to the Deal Agent by the Borrower and
the Servicer in a form acceptable to the Deal Agent; or"
(d) Section 6.25(a)(xiii) of the Agreement is hereby amended
by adding the following:
"(xiii) on or before October 29, 1999, a final
version of its Credit and Collection Policy and revised loan
grading system are not delivered to the Deal Agent and
Borrower and Servicer in a form acceptable to the Deal Agent."
SECTION 9. Agreement in Full Force and Effect as Amended.
Except as specifically amended hereby, the Agreement shall remain in full force
and effect. All references to the Agreement shall be deemed to mean the
Agreement as modified hereby. This Amendment shall not constitute a novation of
the Agreement, but shall constitute an amendment thereof. The parties hereto
agree to be bound by the terms and conditions of the Agreement, as amended by
this Agreement, as though such terms and conditions were set forth herein.
SECTION 10. Representations. The Borrower and Servicer
represent and warrant that, as of the effective date of this Amendment (i) they
are not in default under the Agreement and (ii) there are no Termination Events,
Unmatured Termination Events or Servicer Termination Events under the Agreement.
SECTION 11. Miscellaneous.
(a) This Amendment may be executed in any number of
counterparts, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument but all
of which together shall constitute one and the same agreement.
(b) The descriptive headings of the various sections of this
Amendment are inserted for convenience of reference only and shall not be deemed
to affect the meaning or construction of any of the provisions hereof.
(c) This Amendment may not be amended or otherwise modified
except as provided in the Agreement.
CHAR1\KPK\BANK\485213_ 3
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Amendment No. 2 to
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(American Capital Strategies)
<PAGE>
(d) First Union certifies by execution hereof that it is an
Investor with Commitments in excess of 66-2/3% of the Facility Amount, and
therefore is a Required Investor pursuant to the Agreement.
(e) The failure or unenforceability of any provision hereof
shall not affect the other provisions of this Amendment.
(f) Whenever the context and construction so require, all
words used in the singular number herein shall be deemed to have been used in
the plural, and vice versa, and the masculine gender shall include the feminine
and neuter and the neuter shall include the masculine and feminine.
(g) This Amendment represents the final agreement between the
parties and may not be contradicted by evidence of prior, contemporaneous or
subsequent oral agreements between the parties. There are no unwritten oral
agreements between the parties.
CHAR1\KPK\BANK\485213_ 3
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Amendment No. 2 to
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(American Capital Strategies)
<PAGE>
(h) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS
CONFLICT OF LAWS PROVISIONS.
[Remainder of Page Intentionally Left Blank]
CHAR1\KPK\BANK\485213_ 3
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Amendment No. 2 to
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(American Capital Strategies)
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE BORROWER: ACS FUNDING TRUST I
By
---------------------------------
Title:
ACS Funding Trust I
c/o American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Attention: President
Facsimile No.: (301) 654-6714
Confirmation No.: (301) 951-6122
THE SERVICER: AMERICAN CAPITAL STRATEGIES, LTD.
By
---------------------------------
Title:
American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Attention: President
Facsimile No.: (301) 654-6714
Confirmation No.: (301 951-6122
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
CHAR1\KPK\BANK\485213_ 3
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Amendment No. 2 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
THE INVESTORS: FIRST UNION NATIONAL BANK
By
---------------------------------
Title:
Commitment: $125,000,000.00
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Capital Markets Credit Administration
Facsimile No.: (704) 374-3254
Confirmation No: (704) 374-4001
LENDER: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Capital Markets Corp., as
attorney-in-fact
By
---------------------------------
Title:
Variable Funding Capital Corporation
c/o First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
With a copy to:
Lord Securities Corp.
2 Wall Street, 19th Floor
Attention: Vice President
Facsimile No.: (212) 346-9012
Confirmation No.: (212) 346-9008
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
CHAR1\KPK\BANK\485213_ 3
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Amendment No. 2 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By
---------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
MAC N9311-161
Minneapolis, MN 55479
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3464
Confirmation No.: (612) 667-8058
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By
---------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
MAC N9311-161
Minneapolis, MN 55479
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3464
Confirmation No.: (612) 667-8058
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
CHAR1\KPK\BANK\485213_ 3
S-3
Amendment No. 2 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
THE DEAL AGENT: FIRST UNION CAPITAL MARKETS CORP.
By
---------------------------------
Title:
First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
LENDER AND LIQUIDITY AGENT FIRST UNION NATIONAL BANK
By
---------------------------------
Title:
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Capital Markets Credit Administration
Facsimile No.: (704) 374-3254
Telephone No.: (704) 374-4001
Lender Commitment: $30,000,000 until the
Swingline Reduction Date, and then $10,000,000
thereafter.
CHAR1\KPK\BANK\485213_ 3
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Amendment No. 2 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
Consented and Agreed to this 24thday of
September, 1999:
CANADIAN IMPERIAL BANK OF COMMERCE
By
---------------------------------
Title:
Canadian Imperial Bank of Commerce
425 Lexington Avenue, 7th Floor
New York, New York 10017
Attention: Asset Securitization Group-Credit
Administration-American Capital
Strategies
Facsimile No.: (212) 856-3643
Confirmation No.: (212) 856-3753
CHAR1\KPK\BANK\485213_ 3
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Amendment No. 2 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
--------------
EXECUTION COPY
--------------
AMENDMENT NO. 1 TO
LOAN FUNDING AND SERVICING AGREEMENT
THIS AMENDMENT NO. 1 TO LOAN FUNDING AND SERVICING AGREEMENT,
dated as of June 30, 1999 (this "Amendment"), is entered into by and among ACS
FUNDING TRUST I ("Borrower"), as Borrower, AMERICAN CAPITAL STRATEGIES, LTD.
("Servicer"), as Servicer, certain Investors, VARIABLE FUNDING CAPITAL
CORPORATION ("VFCC"), as a Lender, FIRST UNION CAPITAL MARKETS CORP., as Deal
Agent, FIRST UNION NATIONAL BANK ("First Union"), as a Lender and as Liquidity
Agent and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Collateral Custodian
and the Backup Servicer. Capitalized terms used and not otherwise defined herein
are used as defined in the Agreement (as defined below).
WHEREAS, the parties hereto entered into that certain Loan
Funding and Servicing Agreement, dated as of March 31, 1999 (the "Agreement");
WHEREAS, the parties hereto desire to amend the Agreement in
certain respects as provided herein;
NOW THEREFORE, in consideration of the premises and the other
mutual covenants contained herein, the parties hereto agree as follows:
SECTION 12. Amendments.
(a) The definition of "Concentration Limits" contained in
Section 1.1 of the Agreement is hereby amended and restated to read in its
entirety as follows:
"Concentration Limits: On any date of determination,
each of the following (calculated on the basis of Aggregate
Outstanding Loan Balance):
(a) the sum of the Outstanding Loan Balances of
Eligible Loans the Obligors of which are residents of any one
state shall not exceed 35%;
(b) the sum of the Outstanding Loan Balances of
Eligible Loans the Obligors of which are in the same Industry
shall not exceed 10%;
(c) the Outstanding Loan Balance of any Eligible Loan
shall not exceed the Large Loan Limit;
(d) the sum of the Outstanding Loan Balances of
Eligible Loans the Obligors of which are Grade 2 Obligors
shall not exceed 10%;
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Amendment No. 1 to
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(American Capital Strategies)
<PAGE>
(e) the sum of the Outstanding Loan Balances of
Eligible Loans that have interest due and payable monthly
shall not be less than 50%;
(f) the sum of the Outstanding Loan Balances of
Eligible Loans that are secured by a security interest in all
assets of the related Obligor shall not be less than 75%;
(g) the sum of the Outstanding Loan Balance of
Eligible Loans that are PIK Loans shall not exceed 30%; and
(h) with respect to each PIK Loan included as a part
of the Collateral, at least a portion of the monthly or
quarterly interest that is due under the PIK Loan must be
payable by Obligor thereof in cash or such Obligor shall have
another Loan included as part of the Collateral that pays
current monthly or quarterly interest in cash."
(b) The definition of "Facility Amount" contained in Section
1.1 of the Agreement is hereby amended and restated to read in its entirety as
follows:
"Facility Amount: At any time, $125,000,000.00;
provided, however, on or after the Termination Date, the
Facility Amount shall be zero."
(c) Section (ii) of the definition of "Grade 1 Obligor"
contained in Section 1.1 of the Agreement is hereby amended and restated to read
in its entirety as follows:
"(ii) an Obligor designated by the Servicer, prior to
delivery of the Credit and Collection Policy, as a `Grade 1
Obligor' with the prior written consent of the Deal Agent."
(d) Section (ii) of the definition of "Grade 2 Obligor"
contained in Section 1.1 of the Agreement is hereby amended and restated to read
in its entirety as follows:
"(ii) an Obligor designated by the Servicer, prior to
delivery of the Credit and Collection Policy, as a `Grade 2
Obligor' with the prior written consent of the Deal Agent."
(e) Section (ii) of the definition of "Grade 3 Obligor"
contained in Section 1.1 of the Agreement is hereby amended and restated to read
in its entirety as follows:
"(ii) an Obligor designated by the Servicer, prior to
delivery of the Credit and Collection Policy, as a `Grade 3
Obligor' with the prior written consent of the Deal Agent."
CHAR1\KPK\BANK\477154_ 10
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Amendment No. 1 to
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(American Capital Strategies)
<PAGE>
(f) Section (ii) of the definition of "Grade 4 Obligor"
contained in Section 1.1 of the Agreement is hereby amended and restated to read
in its entirety as follows:
"(ii) an Obligor designated by the Servicer, prior to
delivery of the Credit and Collection Policy, as a `Grade 4
Obligor' with the prior written consent of the Deal Agent."
(g) The definition of "Large Loan Limit" contained in Section
1.1 of the Agreement is hereby amended and restated to read in its entirety as
follows:
"Large Loan Limit: (i) $10,000,000.00, provided the
Aggregate Outstanding Loan Balance is less than
$200,000,000.00, (ii) $13,000,000.00, provided by the
Aggregate Outstanding Loan Balance is at least $200,000,000.00
but less than $300,000,000.00, and (iii) $15,000,000.00,
provided the Aggregate Outstanding Loan Balance is at least
$300,000,000.00.
(h) The first line of Section 2.2(d) of the Agreement is
hereby amended and restated to read in its entirety as follows:
"No later than 12:00 p.m. (New York City time) on the
proposed Funding Date, the".
(i) The second sentence of Section 2.5(a) of the Agreement is
hereby amended and restated in its entirety as follows:
"The Notes shall be dated the Closing Date and shall
be in a maximum principal amount equal to (i) $125,000,000 in
the case of VFCC Note, (ii) $125,000,000 in the case of the
Investor Note, and (iii) (a) $30,000,000 from the date of this
Amendment through and including July 30, 1999 (the "Swingline
Reduction Date") and (b) $10,000,000 after July 30, 1999, in
the case of the FUNB Note; provided, however, that anything to
the contrary notwithstanding, the indebtedness of the Borrower
evidenced by the Notes shall not in the aggregate exceed the
Facility Amount; provided, further, on the Swingline Reduction
Date, the Borrower shall reduce the amount of FUNB Advances
outstanding to an amount not to exceed the maximum principal
amount of the FUNB Note and shall execute and deliver to First
Union a second amended, restated and substituted FUNB Note in
the maximum principal amount of $10,000,000."
(j) Section 3.2 of the Agreement is hereby amended as follows:
(i) Section 3.2(a)(ii) is hereby amended and restated
to read in its entirety as follows:
CHAR1\KPK\BANK\477154_ 10
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Amendment No. 1 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
"(ii) No event has occurred, or would result from
such Advance or from the application of proceeds therefrom,
that constitutes a Termination Event or an Unmatured
Termination Event;";
(ii) Section 3.2(g) is amended by deleting the word
"and" at the end thereof;
(iii) Section 3.2(h) is amended by deleting the
period at the end thereof and substituting in its place the
following: "; and"; and
(iv) The following new Section 3.2(i) is hereby added
to the end of Section 3.2:
"(i) After giving effect to the Advance or
reinvestment of Available Collections, the weighted
average life of the Aggregate Outstanding Loan
Balance will not exceed eight (8) years."
(k) The second sentence of Section 4.1(v) of the Agreement is
hereby amended and restated to read in its entirety as follows:
"The Deal Agent, as agent for the Secured Parties,
has a first priority perfected security interest in the
Collateral."
(l) The first sentence of Section 6.9(g) is hereby amended and
restated to read in its entirety as follows:
"The Servicer will (a) comply in all material
respects with the Credit and Collection Policy in regard to
each Loan and (b) furnish to the Deal Agent and any Lender,
prior to its effective date, prompt notice of any change in
the Credit and Collection Policy."
(m) Section 7.1(n) of the Agreement is hereby amended and
restated to read in its entirety as follows:
"(n) the Borrower or the Servicer agrees or consents
to, or otherwise permits to occur, any amendment,
modification, change, supplement or recession of or to the
Credit and Collection Policy in whole or in part that could
have a material adverse effect upon the Loans or interest of
any Lender, without the prior written consent of the Deal
Agent and the other Lenders; or".
(n) Section 9.6 of the Agreement is hereby amended by deleting
therefrom all references to "VFCC."
CHAR1\KPK\BANK\477154_ 10
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Amendment No. 1 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
(o) The following new Section 9.9 is added to the end of
Section 9:
"The Deal Agent shall provide to Canadian Imperial
Bank of Commerce a copy of the Monthly Report and the credit
report and transaction summary referenced to in Section 2.2(c)
within two (2) Business Days following the Deal Agent's
receipt of same."
(p) The Commitment of First Union National Bank as an Investor
set forth on the signature pages of the Agreement is hereby amended and restated
to be "$125,000,000."
(q) The Commitment of First Union National Bank as a Lender
set forth on the signature pages of the Agreement is hereby amended and restated
to be "$30,000,000 until the Swingline Reduction Date, and $10,000,000
thereafter."
SECTION 13. Increase in Facility Amount and Amount of Notes.
Effective on the date of this Amendment, the Facility Amount shall be increased
to $125,000,000; provided, that First Union shall first have received executed
versions of the Notes referenced in clauses (i), (ii) and (iii)(a) of the
succeeding sentence. In connection with such increase, the Borrower agrees to
execute and deliver to First Union, on behalf of the holders of the Notes, (i)
an amended, restated and substituted VFCC Note in the maximum principal amount
of $125,000,000, (ii) an amended, restated and substituted FUNB Note in the
maximum principal amount of $125,000,000, and (iii) (a) an amended, restated and
substituted FUNB Note in the maximum principal amount of $30,000,000, and (b) on
the Swingline Reduction Date, a second amended and restated FUNB Note in the
maximum principal amount of $10,000,000 (collectively the "New Notes"). Such New
Notes shall replace and supersede any note or notes previously executed by the
Borrower pursuant to the Agreement (collectively, the "Replaced Notes"). Such
New Notes evidence the same indebtedness, and are secured by the same Collateral
as the Replaced Notes.
SECTION 14. Agreement in Full Force and Effect as Amended.
Except as specifically amended hereby, the Agreement shall remain in full force
and effect. All references to the Agreement shall be deemed to mean the
Agreement as modified hereby. This Amendment shall not constitute a novation of
the Agreement, but shall constitute an amendment thereof. The parties hereto
agree to be bound by the terms and conditions of the Agreement, as amended by
this Agreement, as though such terms and conditions were set forth herein.
SECTION 15. Representations. The Borrower and Servicer
represent and warrant that, as of the effective date of this Amendment (i) they
are not in default under the Agreement and (ii) there are no Termination Events,
Unmatured Termination Events or Servicer Termination Events under the Agreement.
SECTION 16. Expenses. In connection with the execution of this
Amendment, the Borrower agrees to pay all reasonable and actual costs and
expenses (including without
CHAR1\KPK\BANK\477154_ 10
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Amendment No. 1 to
Loan Funding and Servicing Agreement
(American Capital Strategies)
<PAGE>
limitation the reasonable fees and expenses of legal counsel) of CIBC and First
Union, respectively, incurred in connection with the negotiation and preparation
of the Participation Agreement, dated as of even date with this Amendment,
between CIBC and First Union.
SECTION 17. Miscellaneous.
(a) This Amendment may be executed in any number of
counterparts, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument but all
of which together shall constitute one and the same agreement.
(b) The descriptive headings of the various sections of this
Amendment are inserted for convenience of reference only and shall not be deemed
to affect the meaning or construction of any of the provisions hereof.
(c) This Amendment may not be amended or otherwise modified
except as provided in the Agreement.
(d) First Union certifies by execution hereof that it is an
Investor with Commitments in excess of 66-2/3% of the Facility Amount, and
therefore is a Required Investor pursuant to the Agreement.
(e) The failure or unenforceability of any provision hereof
shall not affect the other provisions of this Amendment.
(f) Whenever the context and construction so require, all
words used in the singular number herein shall be deemed to have been used in
the plural, and vice versa, and the masculine gender shall include the feminine
and neuter and the neuter shall include the masculine and feminine.
(g) This Amendment represents the final agreement between the
parties and may not be contradicted by evidence of prior, contemporaneous or
subsequent oral agreements between the parties. There are no unwritten oral
agreements between the parties.
CHAR1\KPK\BANK\477154_ 10
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Amendment No. 1 to
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(American Capital Strategies)
<PAGE>
(h) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS
CONFLICT OF LAWS PROVISIONS.
[Remainder of Page Intentionally Left Blank]
CHAR1\KPK\BANK\477154_ 10
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Amendment No. 1 to
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(American Capital Strategies)
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE BORROWER: ACS FUNDING TRUST I
By
---------------------------------
Title:
ACS Funding Trust I
c/o American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Attention: President
Facsimile No.: (301) 654-6714
Confirmation No.: (301) 951-6122
THE SERVICER: AMERICAN CAPITAL STRATEGIES, LTD.
By
---------------------------------
Title:
American Capital Strategies, Ltd.
3 Bethesda Metro Center, Suite 860
Bethesda, Maryland 20814
Attention: President
Facsimile No.: (301) 654-6714
Confirmation No.: (301 951-6122
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
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(American Capital Strategies)
<PAGE>
THE INVESTORS: FIRST UNION NATIONAL BANK
By
---------------------------------
Title:
Commitment: $125,000,000.00
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Capital Markets Credit Administration
Facsimile No.: (704) 374-3254
Confirmation No: (704) 374-4001
LENDER: VARIABLE FUNDING CAPITAL
CORPORATION
By First Union Capital Markets Corp., as
attorney-in-fact
By
---------------------------------
Title:
Variable Funding Capital Corporation
c/o First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
With a copy to:
Lord Securities Corp.
2 Wall Street, 19th Floor
Attention: Vice President
Facsimile No.: (212) 346-9012
Confirmation No.: (212) 346-9008
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
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<PAGE>
THE BACKUP SERVICER: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By
---------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3464
Confirmation No.: (612) 667-8058
THE COLLATERAL CUSTODIAN: NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By
---------------------------------
Title:
Norwest Bank Minnesota, National Association
Sixth Street and Marquette Avenue
Minneapolis, MN 55479-0070
Attention: Corporate Trust Services
Asset-Backed Administration
Facsimile No.: (612) 667-3464
Confirmation No.: (612) 667-8058
[SIGNATURES CONTINUED ON THE FOLLOWING PAGE]
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<PAGE>
THE DEAL AGENT: FIRST UNION CAPITAL MARKETS CORP.
By
---------------------------------
Title:
First Union Capital Markets Corp.
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
LENDER AND LIQUIDITY AGENT FIRST UNION NATIONAL BANK
By
---------------------------------
Title:
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Capital Markets Credit Administration
Facsimile No.: (704) 374-3254
Telephone No.: (704) 374-4001
Lender Commitment: $30,000,000 until the
Swingline Reduction Date, and then $10,000,000
thereafter.
CHAR1\KPK\BANK\477154_ 10
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Amendment No. 1 to
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(American Capital Strategies)
Exhibit 10.20
AMENDED, RESTATED AND SUBSTITUTED
INVESTOR NOTE
$225,000,000 March 31, 1999
FOR VALUE RECEIVED, ACS FUNDING TRUST I, a Delaware business trust (the
"Borrower"), promises to pay to the INVESTORS named below (the "Lender"), or
registered assigns, the principal sum of TWO HUNDRED AND TWENTY-FIVE MILLION
DOLLARS ($225,000,000) or, if less, the unpaid principal amount of the aggregate
loans ("Advances") made by the Lender to the Borrower pursuant to the Loan
Funding and Servicing Agreement (as defined below), as set forth on the attached
Schedule, on the dates specified in Section 2.6 of the Loan Funding and
Servicing Agreement, and to pay interest on the unpaid principal amount of each
Advance on each day that such unpaid principal amount is outstanding at the
Interest Rate related to such Advance as provided in the Loan Funding and
Servicing Agreement on each Payment Date and each other dates specified in the
Loan Funding and Servicing Agreement.
This Amended, Restated and Substituted Investor Note (the "Note") is
issued pursuant to the Loan Funding and Servicing Agreement, dated as of March
31, 1999 (as amended, modified, supplemented or restated from time to time, the
"Loan Funding and Servicing Agreement"), by and among the Borrower, American
Capital Strategies, Ltd., as servicer, Variable Funding Capital Corporation, as
a lender, the Investors named therein (the "Investors"), Norwest Bank Minnesota,
National Association, as backup servicer and as collateral custodian, First
Union Securities, Inc. (successor-in-interest to First Union Capital Markets
Corp.), as deal agent, and First Union National Bank, as a lender and as
liquidity agent. Capitalized terms used but not defined in this Note are used
with the meanings ascribed to them in the Loan Funding and Servicing Agreement.
Notwithstanding any other provisions contained in this Note, if at any
time the rate of interest payable by the Borrower under this Note, when combined
with any and all other charges provided for in this Note, in the Loan Funding
and Servicing Agreement or in any other document (to the extent such other
charges would constitute interest for the purpose of any applicable law limiting
interest that may be charged on this Note), exceeds the highest rate of interest
permissible under applicable law (the "Maximum Lawful Rate"), then so long as
the Maximum Lawful Rate would be exceeded the rate of interest under this Note
shall be equal to the Maximum Lawful Rate. If at any time thereafter the rate of
interest payable under this Note is less than the Maximum Lawful Rate, the
Borrower shall continue to pay interest under this Note at the Maximum Lawful
Rate until such time as the total interest paid by the Borrower is equal to the
total interest that would have been paid had applicable law not limited the
interest rate payable under this Note. In no event shall the total interest
received by the Lender under
CHAR1\508039_ 1
<PAGE>
this Note exceed the amount which the Lender could lawfully have received had
the interest due under this Note been calculated since the date of this Note at
the Maximum Lawful Rate.
Payments of the principal of, and interest on, Advances represented by
this Note shall be made by the Borrower to the holder hereof by wire transfer of
immediately available funds in the manner and at the address specified for such
purpose as provided in Article 2 of the Loan Funding and Servicing Agreement, or
in such manner or at such other address as the holder of this Note shall have
specified in writing to the Borrower for such purpose, without the presentation
or surrender of this Note or the making of any notation on this Note.
If any payment under this Note falls due on a day that is not a
Business Day, then such due date shall be extended to the next succeeding
Business Day and interest shall be payable on any principal so extended at the
applicable Interest Rate.
If all or a portion of (i) the principal amount hereof or (ii) any
interest payable thereon or (iii) any other amounts payable hereunder shall not
be paid when due (whether at maturity, by acceleration or otherwise), such
overdue amount shall bear interest at a rate per annum that is equal to the Base
Rate plus 1.0%, in each case from the date of such non-payment to (but
excluding) the date such amount is paid in full.
Portions or all of the principal amount of the Note shall become due
and payable at the time or times set forth in the Loan Funding and Servicing
Agreement. Any portion or all of the principal amount of this Note may be
prepaid, together with interest thereon (and as set forth in the Loan Funding
and Servicing Agreement, certain costs and expenses of the Lender) at the time
and in the manner set forth in, but subject to the provisions of, the Loan
Funding and Servicing Agreement.
Except as provided in the Loan Funding and Servicing Agreement, the
Borrower expressly waives presentment, demand, diligence, protest and all
notices of any kind whatsoever with respect to this Note.
All amounts evidenced by this Note, the Lender or Lenders making such
Advance and all payments and prepayments of the principal hereof and the
respective dates and maturity dates thereof shall be endorsed by Deal Agent, as
agent for the Lender, on the schedule attached hereto and made a part hereof or
on a continuation thereof which shall be attached hereto and made a part hereof,
or otherwise recorded by the Deal Agent or Lender in its internal records;
provided, however, that the failure of Deal Agent to make such a notation shall
not in any way limit or otherwise affect the obligations of the Borrower under
this Note as provided in the Loan Funding and Servicing Agreement.
The holder hereof may sell, assign, transfer, negotiate, grant
participations in or otherwise dispose of all or any portion of any Advances
made by such Lender and represented by this Note and the indebtedness evidenced
by this Note.
This Note is secured by the security interests granted pursuant to
Section 2.9 of the Loan Funding and Servicing Agreement. The holder of this Note
is entitled to the benefits of the Loan
CHAR1\508039_ 1
2
<PAGE>
Funding and Servicing Agreement and may enforce the agreements of the Borrower
contained in the Loan Funding and Servicing Agreement and exercise the remedies
provided for by, or otherwise available in respect of, the Loan Funding and
Servicing Agreement, all in accordance with, and subject to the restrictions
contained in, the terms of the Loan Funding and Servicing Agreement. If a
Termination Event shall occur and be continuing, the unpaid balance of the
principal of all Advances, together with accrued interest thereon, shall be
declared, and become due and payable in the manner and with the effect provided
in the Loan Funding and Servicing Agreement.
This Note is the "Investors Note" referred to in the Loan Funding and
Servicing Agreement. This Note shall be construed in accordance with and
governed by the laws of the State of New York.
This Note is intended to be an amendment to, and replacement of, the
Investor Note, dated March 31, 1999, in the maximum principal amount of
$125,000,000 (the "Replaced Note"). This Note evidences the same indebtedness
and is secured by the same Collateral securing the Replaced Note and is not
intended to constitute a novation in any manner.
[Remainder of Page Intentionally Left Blank]
CHAR1\508039_ 1
3
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note as on the
date first written above.
ACS FUNDING TRUST I
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
CHAR1\508039_ 1
4
<PAGE>
Schedule to Note
<TABLE>
<CAPTION>
Name Date of Principal Principal Outstanding
of Advance or Amount of Amount of Principal
Lender Repayment Advance Repayment Amount
------ --------- ------- --------- ------
<S> <C> <C> <C> <C>
</TABLE>
Exhibit 10.21
AMENDED, RESTATED AND SUBSTITUTED
FUNB NOTE
$10,000,000 March 31, 1999
FOR VALUE RECEIVED, ACS FUNDING TRUST I, a Delaware business trust (the
"Borrower"), promises to pay to FIRST UNION NATIONAL BANK (the "Lender"), or
registered assigns, the principal sum of TEN MILLION DOLLARS ($10,000,000) or,
if less, the unpaid principal amount of the aggregate loans ("Advances") made by
the Lender (as defined below) to the Borrower pursuant to the Loan Funding and
Servicing Agreement (as defined below), as set forth on the attached Schedule,
on the dates specified in Section 2.6 of the Loan Funding and Servicing
Agreement, and to pay interest on the unpaid principal amount of each Advance on
each day that such unpaid principal amount is outstanding at the Interest Rate
related to such Advance as provided in the Loan Funding and Servicing Agreement
on each Payment Date and each other dates specified in the Loan Funding and
Servicing Agreement.
This Amended, Restated and Substituted FUNB Note is issued pursuant to
the Loan Funding and Servicing Agreement, dated as of March 31, 1999 (as
amended, modified, supplemented, or restated from time to time, the "Loan
Funding and Servicing Agreement"), by and among the Borrower, American Capital
Strategies, Ltd., as servicer, Variable Funding Capital Corporation, as a
lender, the Investors named therein, Norwest Bank Minnesota, National
Association, as backup servicer and as collateral custodian, First Union
Securities, Inc. (successor-in-interest to First Union Capital Markets Corp.),
as deal agent, and First Union National Bank, as liquidity agent. Capitalized
terms used but not defined in this Note are used with the meanings ascribed to
them in the Loan Funding and Servicing Agreement.
Notwithstanding any other provisions contained in this Note, if at any
time the rate of interest payable by the Borrower under this Note, when combined
with any and all other charges provided for in this Note, in the Loan Funding
and Servicing Agreement or in any other document (to the extent such other
charges would constitute interest for the purpose of any applicable law limiting
interest that may be charged on this Note), exceeds the highest rate of interest
permissible under applicable law (the "Maximum Lawful Rate"), then so long as
the Maximum Lawful Rate would be exceeded the rate of interest under this Note
shall be equal to the Maximum Lawful Rate. If at any time thereafter the rate of
interest payable under this Note is less than the Maximum Lawful Rate, the
Borrower shall continue to pay interest under this Note at the Maximum Lawful
Rate until such time as the total interest paid by the Borrower is equal to the
total interest that would have been paid had applicable law not limited the
interest rate payable under this Note. In no event shall the total interest
received by the Lender under this Note exceed the amount which the Lender could
lawfully have received had the interest due under this Note been calculated
since the date of this Note at the Maximum Lawful Rate.
CHAR1\508036_ 1
<PAGE>
Payments of the principal of, and interest on, Advances represented by
this Note shall be made by the Borrower to the holder hereof by wire transfer of
immediately available funds in the manner and at the address specified for such
purpose as provided in Article 2 of the Loan Funding and Servicing Agreement, or
in such manner or at such other address as the holder of this Note shall have
specified in writing to the Borrower for such purpose, without the presentation
or surrender of this Note or the making of any notation on this Note.
If any payment under this Note falls due on a day that is not a
Business Day, then such due date shall be extended to the next succeeding
Business Day and interest shall be payable on any principal so extended at the
applicable Interest Rate.
If all or a portion of (i) the principal amount hereof or (ii) any
interest payable thereon or (iii) any other amounts payable hereunder shall not
be paid when due (whether at maturity, by acceleration or otherwise), such
overdue amount shall bear interest at a rate per annum that is equal to the Base
Rate plus 1.0%, in each case from the date of such non-payment to (but
excluding) the date such amount is paid in full.
Portions or all of the principal amount of the Note shall become due
and payable at the time or times set forth in the Loan Funding and Servicing
Agreement. Any portion or all of the principal amount of this Note may be
prepaid, together with interest thereon (and as set forth in the Loan Funding
and Servicing Agreement, certain costs and expenses of the Lender) at the time
and in the manner set forth in, but subject to the provisions of, the Loan
Funding and Servicing Agreement.
Except as provided in the Loan Funding and Servicing Agreement, the
Borrower expressly waives presentment, demand, diligence, protest and all
notices of any kind whatsoever with respect to this Note.
All amounts evidenced by this Note, the Lender or Lenders making such
Advance and all payments and prepayments of the principal hereof and the
respective dates and maturity dates thereof shall be endorsed by Deal Agent, as
agent for the Lender, on the schedule attached hereto and made a part hereof or
on a continuation thereof which shall be attached hereto and made a part hereof,
or otherwise recorded by such Deal Agent or Lender in its internal records;
provided, however, that the failure of the Deal Agent to make such a notation
shall not in any way limit or otherwise affect the obligations of the Borrower
under this Note as provided in the Loan Funding and Servicing Agreement.
The holder hereof may sell, assign, transfer, negotiate, grant
participations in or otherwise dispose of all or any portion of any Advances
made by such Lender and represented by this Note and the indebtedness evidenced
by this Note.
This Note is secured by the security interests granted pursuant to
Section 2.9 of the Loan Funding and Servicing Agreement. The holder of this Note
is entitled to the benefits of the Loan Funding and Servicing Agreement and may
enforce the agreements of the Borrower contained in the Loan Funding and
Servicing Agreement and exercise the remedies provided for by, or
2
CHAR1\508036_ 1
<PAGE>
otherwise available in respect of, the Loan Funding and Servicing Agreement, all
in accordance with, and subject to the restrictions contained in, the terms of
the Loan Funding and Servicing Agreement. If a Termination Event shall occur and
be continuing, the unpaid balance of the principal of all Advances, together
with accrued interest thereon, shall be declared, and become due and payable in
the manner and with the effect provided in the Loan Funding and Servicing
Agreement.
This Note is the "FUNB Note" referred to in the Loan Funding and
Servicing Agreement. This Note shall be construed in accordance with and
governed by the laws of the State of New York.
This Note is intended to be and is an amendment to, and replacement of,
the FUNB Note, dated March 31, 1999, in the maximum principal amount of
$30,000,000 (the "Replaced Note"). This Note evidences the same indebtedness and
is secured by the same Collateral securing the Replaced Note and is not intended
to constitute a novation in any manner.
[Remainder of Page Intentionally Left Blank]
3
CHAR1\508036_ 1
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note as on the
date first written above.
ACS FUNDING TRUST I
By:______________________________
Name:____________________________
Title:___________________________
4
CHAR1\508036_ 1
<PAGE>
Schedule to Note
Name Date of Principal Principal Outstanding
of Advance or Amount of Amount of Principal
Lender Repayment Advance Repayment Amount
------ --------- ------- --------- ------
5
CHAR1\508036_ 1
Exhibit 10.22
AMENDED, RESTATED AND SUBSTITUTED
VFCC NOTE
$225,000,000 March 31, 1999
FOR VALUE RECEIVED, ACS FUNDING TRUST I, a Delaware business trust (the
"Borrower"), promises to pay to FIRST UNION SECURITIES, INC.
(successor-in-interest to First Union Capital Markets Corp.), as the agent (the
"Deal Agent") for Variable Funding Capital Corporation (the "Lender"), or
registered assigns, the principal sum of TWO HUNDRED AND TWENTY-FIVE MILLION
DOLLARS ($225,000,000) or, if less, the unpaid principal amount of the aggregate
loans ("Advances") made by the Lender to the Borrower pursuant to the Loan
Funding and Servicing Agreement (as defined below), as set forth on the attached
Schedule, on the dates specified in Section 2.6 of the Loan Funding and
Servicing Agreement, and to pay interest on the unpaid principal amount of each
Advance on each day that such unpaid principal amount is outstanding at the
Interest Rate related to such Advance as provided in the Loan Funding and
Servicing Agreement on each Payment Date and each other dates specified in the
Loan Funding and Servicing Agreement.
This Amended, Restated and Substituted VFCC Note (the "Note") is issued
pursuant to the Loan Funding and Servicing Agreement, dated as of March 31, 1999
(as amended, modified, supplemented or restated from time to time, the "Loan
Funding and Servicing Agreement"), by and among the Borrower, American Capital
Strategies, Ltd., as servicer, Variable Funding Capital Corporation, as a
lender, the Investors named therein, Norwest Bank Minnesota, National
Association, as backup servicer and as collateral custodian, First Union
Securities, Inc. (successor-in-interest to First Union Capital Markets Corp.),
as deal agent, and First Union National Bank, as a lender and as liquidity
agent. Capitalized terms used but not defined in this Note are used with the
meanings ascribed to them in the Loan Funding and Servicing Agreement.
Notwithstanding any other provisions contained in this Note, if at any
time the rate of interest payable by the Borrower under this Note, when combined
with any and all other charges provided for in this Note, in the Loan Funding
and Servicing Agreement or in any other document (to the extent such other
charges would constitute interest for the purpose of any applicable law limiting
interest that may be charged on this Note), exceeds the highest rate of interest
permissible under applicable law (the "Maximum Lawful Rate"), then so long as
the Maximum Lawful Rate would be exceeded the rate of interest under this Note
shall be equal to the Maximum Lawful Rate. If at any time thereafter the rate of
interest payable under this Note is less than the Maximum Lawful Rate, the
Borrower shall continue to pay interest under this Note at the Maximum Lawful
Rate until such time as the total interest paid by the Borrower is equal to the
total interest that would have been paid had applicable law not limited the
interest rate payable under this Note. In no event shall the total interest
received by the Lender under this Note exceed the amount which the Lender could
lawfully have received had the interest due under this Note been calculated
since the date of this Note at the Maximum Lawful Rate.
CHAR1\508049_ 1
Amended, Restated and Substituted VFCC Note
<PAGE>
Payments of the principal of, and interest on, Advances represented by
this Note shall be made by the Borrower to the holder hereof by wire transfer of
immediately available funds in the manner and at the address specified for such
purpose as provided in Article 2 of the Loan Funding and Servicing Agreement, or
in such manner or at such other address as the holder of this Note shall have
specified in writing to the Borrower for such purpose, without the presentation
or surrender of this Note or the making of any notation on this Note.
If any payment under this Note falls due on a day that is not a
Business Day, then such due date shall be extended to the next succeeding
Business Day and interest shall be payable on any principal so extended at the
applicable Interest Rate.
If all or a portion of (i) the principal amount hereof or (ii) any
interest payable thereon or (iii) any other amounts payable hereunder shall not
be paid when due (whether at maturity, by acceleration or otherwise), such
overdue amount shall bear interest at a rate per annum that is equal to the Base
Rate plus 1.0%, in each case from the date of such non-payment to (but
excluding) the date such amount is paid in full.
Portions or all of the principal amount of the Note shall become due
and payable at the time or times set forth in the Loan Funding and Servicing
Agreement. Any portion or all of the principal amount of this Note may be
prepaid, together with interest thereon (and as set forth in the Loan Funding
and Servicing Agreement, certain costs and expenses of the Lender) at the time
and in the manner set forth in, but subject to the provisions of, the Loan
Funding and Servicing Agreement.
Except as provided in the Loan Funding and Servicing Agreement, the
Borrower expressly waives presentment, demand, diligence, protest and all
notices of any kind whatsoever with respect to this Note.
All amounts evidenced by this Note, the Lender or Lenders making such
Advance and all payments and prepayments of the principal hereof and the
respective dates and maturity dates thereof shall be endorsed by the Deal Agent
on the schedule attached hereto and made a part hereof or on a continuation
thereof which shall be attached hereto and made a part hereof, or otherwise
recorded by such Deal Agent in its internal records; provided, however, that the
failure of the Deal Agent to make such a notation shall not in any way limit or
otherwise affect the obligations of the Borrower under this Note as provided in
the Loan Funding and Servicing Agreement.
The holder hereof may sell, assign, transfer, negotiate, grant
participations in or otherwise dispose of all or any portion of any Advances
made by such Lender and represented by this Note and the indebtedness evidenced
by this Note.
This Note is secured by the security interests granted pursuant to
Section 2.9 of the Loan Funding and Servicing Agreement. The holder of this
Note, as agent for the Lender, is entitled to the benefits of the Loan Funding
and Servicing Agreement and may enforce the agreements of the Borrower contained
in the Loan Funding and Servicing Agreement and exercise the remedies provided
for by, or otherwise available in respect of, the Loan Funding and Servicing
Agreement, all in accordance with, and subject to the restrictions contained in,
the terms of the Loan Funding and Servicing
CHAR1\508049_ 1
Amended, Restated and Substituted VFCC Note
<PAGE>
Agreement. If a Termination Event shall occur and be continuing, the unpaid
balance of the principal of all Advances, together with accrued interest
thereon, shall be declared, and become due and payable in the manner and with
the effect provided in the Loan Funding and Servicing Agreement.
This Note is the "VFCC Note" referred to in the Loan Funding and
Servicing Agreement. This Note shall be construed in accordance with and
governed by the laws of the State of New York.
This Note is intended to be and is an amendment to, and replacement of,
the VFCC Note, dated March 31, 1999 in the maximum principal amount of
$125,000,000 (the "Replaced Note"). This Note evidences the same indebtedness
and is secured by the same Collateral securing the Replaced Note and is not
intended to constitute a novation in any manner.
[Remainder of Page Intentionally Left Blank]
CHAR1\508049_ 1
Amended, Restated and Substituted VFCC Note
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note as on the
date first written above.
ACS FUNDING TRUST I
By:____________________________
Name:__________________________
Title:_________________________
CHAR1\508049_ 1
Amended, Restated and Substituted VFCC Note
<PAGE>
Schedule to Note
Name Date of Principal Principal Outstanding
of Advance or Amount of Amount of Principal
Lender Repayment Advance Repayment Amount
------ --------- ------- --------- ------
CHAR1\508049_ 1
Amended, Restated and Substituted VFCC Note
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements (Form S-8, No. 333-68993 and Form S-3, No. 333-68991) of American
Capital Strategies, Ltd. and in the related Prospectuses, of our report dated
February 2, 2000, with respect to the financial statements of American Capital
Strategies, Ltd. included in this Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
McLean, Virginia
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 817473
<NAME> American Capital Strategies, Ltd.
<MULTIPLIER> 1000
<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
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 256,105
<SHARES-COMMON-STOCK> 18,252
<SHARES-COMMON-PRIOR> 11,081
<ACCUMULATED-NII-CURRENT> (23,052)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,631)
<OVERDISTRIBUTION-GAINS> 2,711
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 77,612
<DIVIDEND-INCOME> 311,745
<INTEREST-INCOME> 449
<OTHER-INCOME> 30,384
<EXPENSES-NET> 2,572
<NET-INVESTMENT-INCOME> 7,251
<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
<NET-CHANGE-IN-ASSETS> 97,201
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (116)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<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
<RETURNS-OF-CAPITAL> 0.038
<PER-SHARE-NAV-END> 97,247
<EXPENSE-RATIO> 6.80
</TABLE>
