<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTER ENDED JUNE 30, 2000.
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER: 814-00149
------------------------
AMERICAN CAPITAL STRATEGIES, LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-145-1377
-------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
2 BETHESDA METRO CENTER, 14TH FLOOR
BETHESDA, MARYLAND 20814
(Address of principal executive office)
(301) 951-6122
(Registrant's telephone number,
including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of shares of the
issuer's Common Stock, $.01 par value, outstanding as of August 3, 2000 was
24,676,887.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2000 (unaudited) and December
31, 1999.................................................... 1
Schedules of Investments as of June 30, 2000 (unaudited) and
December 31, 1999........................................... 2
Statements of Operations for the three and six months ended
June 30, 2000 and 1999 (unaudited).......................... 8
Statements of Shareholders' Equity for the six months ended
June 30, 2000 and June 30, 1999 (unaudited)................. 9
Statements of Cash Flows for the six months ended
June 30, 2000 and June 30, 1999 (unaudited)................. 10
Financial Highlights for the six months ended
June 30, 2000 and June 30, 1999 (unaudited)................. 11
Notes to Unaudited Financial Statements (unaudited)......... 12
Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 2.
Introduction................................................ 16
Results of Operations....................................... 18
Financial Condition, Liquidity and Capital Resources........ 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 23
Item 2. Changes in Securities....................................... 23
Item 3. Defaults upon Senior Securities............................. 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
Item 5. Other Information........................................... 24
Item 6. Exhibits and Reports on Form 8-K............................ 24
Signature.............................................................. 25
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Assets
Cash and cash equivalents................................... $ 3,434 $ 2,037
Investments at fair value (cost of $401,980 and $305,264,
respectively)............................................. 486,242 377,554
Investment in unconsolidated operating subsidiary........... 3,113 4,893
Due from unconsolidated operating subsidiary................ 7,584 2,331
Interest receivable......................................... 4,369 2,417
Other....................................................... 4,858 6,140
-------- --------
Total assets................................................ $509,600 $395,372
======== ========
Liabilities and Shareholders' Equity
Revolving credit facility................................... $ 57,039 $ 78,545
Accrued dividends payable................................... -- 547
Other....................................................... 4,707 4,535
-------- --------
Total liabilities........................................... 61,746 83,627
Shareholders' equity
Undesignated preferred stock, $0.01 par value, 5,000 shares
authorized,
0 issued and outstanding.................................. -- --
Common stock, $.01 par value, 70,000 shares authorized,
24,677 and 18,252 issued and outstanding, respectively.... 247 183
Capital in excess of par value.............................. 380,144 255,922
Notes receivable from sale of common stock.................. (24,577) (23,052)
Undistributed net realized earnings......................... 2,457 1,080
Unrealized appreciation of investments...................... 89,583 77,612
-------- --------
Total shareholders' equity.................................. 447,854 311,745
-------- --------
Total liabilities and shareholders' equity.................. $509,600 $395,372
======== ========
</TABLE>
See accompanying notes.
1
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------- ----------- ----------
<S> <C> <C> <C>
SENIOR DEBT--10.18%
BIW Connector Systems, LLC......................... Manufacturing $ 2,978 $ 2,978
JAG Industries, Inc.(2)............................ Manufacturing 1,212 1,212
Chance Coach, Inc.(2).............................. Bus Manufacturer 1,764 1,764
Cycle Gear, Inc. .................................. Motor Cycle Accessories 750 750
EuroCaribe Packing Company, Inc.(2)................ Meat Processing 6,479 6,479
Patriot Medical Technologies, Inc.(2).............. Repair Services 3,072 3,072
Tube City Olympic of Ohio, Inc. ................... Mill Services 9,238 9,238
MBT International Inc.(2).......................... Musical Instrument Distributor 3,750 3,750
Caswell-Massey Holdings Corp. ..................... Toiletries 2,000 2,000
Warner Power, LLC.................................. Power Systems and Electric Ballasts 5,750 5,750
Fulton Bellows & Components, Inc.(2)............... Bellows Manufacturer 12,300 12,300
----------- ----------
Subtotal....................................... 49,293 49,293
SUBORDINATED DEBT--56.95%
BIW Connector Systems, LLC......................... Manufacturing 6,430 6,430
Westwind Group Holdings, Inc. ..................... Restaurant 3,012 3,012
JAG Industries, Inc.(2)............................ Manufacturing 2,414 2,414
Chance Coach, Inc.(2).............................. Bus Manufacturer 7,811 7,811
The L.A. Studios, Inc. ............................ Audio Production 2,510 2,510
Decorative Surfaces International, Inc.(2)......... Decorative Paper & Vinyl Mfg. 5,677 5,677
New Piper Aircraft, Inc. .......................... Aircraft Manufacturing 18,114 18,114
Electrolux, LLC.................................... Vacuum Cleaners 9,309 9,309
Cycle Gear, Inc. .................................. Motor Cycle Accessories 3,127 3,127
Confluence Holdings Corp. ......................... Canoes & Kayaks 9,200 9,200
EuroCaribe Packing Company, Inc.(2)................ Meat Processing 9,008 7,008
Starcom Holdings, Inc. ............................ Electrical Contractor 19,059 19,059
Centennial Broadcasting, Inc. ..................... Radio Stations 17,847 17,847
Lion Brewery, Inc.(2).............................. Malt Beverages 5,976 5,976
Auxi-Health, Inc. ................................. Home Health Care 11,203 11,203
Patriot Medical Technologies, Inc.(2).............. Repair Services 2,504 2,504
Tube City, Inc. ................................... Mill Services 6,227 6,227
Erie County Plastics Corporation................... Molded Plastic Manufacturing 8,888 8,888
Aeriform Corporation............................... Packaged Industrial Gas 8,053 8,053
MBT International, Inc.(2)......................... Musical Instrument Distributor 6,633 6,633
Dixie Trucking Company, Inc.(2).................... Overnight Shorthaul Delivery 4,071 4,071
Caswell-Massey Holdings Corp. ..................... Toiletries 1,706 1,706
Transcore Holdings, Inc. .......................... Transportation Info. Mgmt. Services 22,628 22,628
The Inca Group(2).................................. Manufacturer of Steel Products 15,373 15,373
Crosman Corporation................................ Small Arms 3,776 3,776
Parts Plus Group................................... Auto Parts Distributor 4,144 4,144
IGI, Inc. ......................................... Veterinary Vaccines 5,662 5,662
Wireless Communication Network
o2 Wireless Solutions Inc. ........................ Services 10,501 10,501
Warner Power, LLC.................................. Power Systems and Electric Ballasts 3,915 3,915
A.H. Harris & Sons, Inc. .......................... Construction Material Distribution 4,746 4,746
Fulton Bellows & Components, Inc.(2)............... Bellows Manufacturer 6,721 6,721
A&M Cleaning Products, Inc. ....................... Household Cleaning Products 4,995 4,995
Goldman Industrial Group........................... Machine Tools, Metal Cutting Types 27,205 27,205
JAAGIR, LLC........................................ IT Staffing and Consulting 2,729 2,729
----------- ----------
Subtotal....................................... 281,174 279,174
</TABLE>
2
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------- ----------- ----------
<S> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK--2.45%
Chance Coach, Inc.(2) 12% dividend convertible into Bus Manufacturer
20% of Co. ...................................... $ 2,000 $ 2,793
Decorative Surfaces International, Inc.(2) prime Decorative Paper & Vinyl Mfg.
rate plus 4% dividend convertible into 2.9% of
Co. ............................................. 777 777
Patriot Medical Technologies, Inc.(2) 8% dividend Repair Services
convertible into 16.9% of Co. ................... 1,061 1,061
MBT International, Inc.(1)(2) convertible into Musical Instrument Distributor
53.1% of Co. .................................... 2,250 2,250
Transcore Holdings, Inc.(2) 8% dividend convertible Transportation Info. Mgmt. Services
into 0.7% of Co. redeemable...................... 538 538
Parts Plus Group(1) convertible into 1.9% of Auto Parts Distributor
Co. ............................................. 556 556
Fulton Bellows & Components, Inc.(1)(2) convertible Bellows Manufacturer
into 40% of Co. ................................. 3,000 3,000
A&M Cleaning Products, Inc.(1) convertible into Household Cleaning Products
8.2% of Co. ..................................... 1,000 1,000
----------- ----------
Subtotal....................................... 11,182 11,975
COMMON STOCK AND MEMBERSHIP INTEREST WARRANTS(1)--15.16%
BIW Connector Systems, LLC 8% of LLC............... Manufacturing 652 1,194
Westwind Group Holdings, Inc. 5% of Co. ........... Restaurant 350 244
JAG Industries, Inc.(2) 75% of Co. ................ Manufacturing 505 --
Chance Coach, Inc.(2) 43.2% of Co. ................ Bus Manufacturer 4,041 5,950
The L.A. Studios, Inc. 17% of Co. ................. Audio Production 902 1,176
Decorative Surfaces International, Inc.(2) 42.3% of Decorative Paper & Vinyl Mfg.
Co. ............................................. 4,571 4,394
New Piper Aircraft, Inc. 4% of Co. ................ Aircraft Manufacturing 2,231 3,578
Cycle Gear, Inc. 27.6% of Co. ..................... Motor Cycle Accessories 374 374
Confluence Holdings Corp. 18.4% of Co. ............ Canoes & Kayaks 1,499 1,499
EuroCaribe Packing Company, Inc.(2) 37.1% of Meat Processing
Co. ............................................. 1,110 --
Starcom Holdings, Inc. 17.5% of Co. ............... Electrical Contractor 3,914 5,597
Lion Brewery, Inc.(2) 54% of Co. .................. Malt Beverages 675 4,010
Auxi Health, Inc. 20% of Co. ...................... Home Health Care 2,599 1,856
Patriot Medical Technologies, Inc.(2) 14.9% of Repair Services
Co. ............................................. 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 141 327
Caswell-Massey Holdings Corp. 24% of Co. .......... Toiletries 552 1,236
Transcore Holdings, Inc. 10.9% of Co. ............. Transportation Info. Mgmt. Services 4,686 5,129
The Inca Group(2) 57.3% of Co. .................... Manufacturer of Steel Products 3,060 4,135
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 2,003
Wireless Communication Network
o2 Wireless Solutions Inc. ........................ Services 2,698 17,992
Warner Power, LLC(2) 53.1% of LLC.................. Power Systems and Electric Ballasts 1,629 1,629
A.H. Harris & Sons, Inc. 3.5% of Co. .............. Construction Material Distribution 267 267
Fulton Bellows & Components, Inc.(2) 20% of Co. ... Bellows Manufacturer 1,305 1,305
A&M Cleaning Products, Inc. 13.7% of Co. .......... Household Cleaning Products 1,030 1,030
Goldman Industrial Group 15.0% of Co. ............. Machine Tools, Metal Cutting Types 2,822 2,822
JAAGIR, LLC 4.0% of Co. ........................... IT Staffing and Consulting 271 271
----------- ----------
Subtotal....................................... 50,069 74,200
</TABLE>
3
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
INDUSTRY COST FAIR VALUE
-------- ----------- ----------
<S> <C> <C> <C>
COMMON STOCK AND MEMBERSHIP INTERESTS(1)--14.69%
Chance Coach, Inc.(2) 20.5% of Co. ................ Bus Manufacturer $ 1,896 $ 2,793
Electrolux, LLC 2.5% of Co. ....................... Vacuum Cleaners 246 2,000
Confluence Holdings Corp. 0.7% of Co. ............. Canoes & Kayaks 537 537
Starcom Holdings, Inc. 2.8% of Co. ................ Electrical Contractor 616 896
The Inca Group(2) 18.5% of Co. .................... Manufacturer of Steel Products 1,700 2,010
Capital.com, Inc.(2) 85% of Co. ................... Internet-based Financial Portal 1,492 63,535
Internet-based Auto Parts
Wrenchead.com, Inc. 1% of Co. ..................... Distributor -- 104
ACS Equities, LP(2) 90% of LP...................... Investment Partnership 3,775 --
----------- ----------
Subtotal....................................... 10,262 71,875
----------- ----------
401,980 486,517
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE BASIS SWAP AGREEMENTS--(0.06)%
--------------------------------------------
NO. OF CONTRACTS NOTIONAL AMOUNT EXPIRATION DATE RECEIVE RATE PAY RATE
---------------- ---------------- --------------- ------------ --------
<C> <C> <C> <C> <C> <S> <C> <C>
6 $113,325 4/10/04 Floating Floating -- (275)
---------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total Investments $ 401,980 $ 486,242
========== =========
INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--0.63%
American Capital Financial Services(1)(2) Investment Banking
100% of Co. .............................. 403 3,113
---------- ---------
Totals.............................. $ 402,383 $ 489,355
========== =========
</TABLE>
------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
4
<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).................................. Manufacturer of Steel Products 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
o2 Wireless Solutions Inc. ........................ Wireless Communication Network Services 10,348 10,348
Warner Power, LLC.................................. Power Systems and Electric Ballasts 3,871 3,871
A.H. Harris & Sons, Inc. .......................... Construction Material Distribution 4,733 4,733
-------- --------
Subtotal....................................... 211,674 211,674
</TABLE>
5
<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>
PREFERRED STOCK--2.00%
Chance Coach, Inc.(2) 12% dividend convertible into Bus Manufacturer
20% of Co........................................ $ 2,000 $ 2,793
Decorative Surfaces International, Inc.(2) prime Decorative Paper & Vinyl Mfg.
rate plus 4% dividend convertible into 2.9% of
Co. ............................................. 728 728
Patriot Medical Technologies, Inc.(2) 8% dividend Repair Services
convertible into 16.9% of Co. ................... 1,020 1,020
MBT International, Inc.(1)(2) convertible into Musical Instrument Distributor
53.1% of Co. .................................... 2,250 2,250
Transcore Holdings, Inc.(2) 8% dividend Transportation Info. Mgmt. Services
redeemable....................................... 306 306
Parts Plus Group(1) convertible into 1.9% of Auto Parts Distributor
Co. ............................................. 556 556
-------- --------
Subtotal....................................... 6,860 7,653
COMMON STOCK AND MEMBERSHIP INTEREST WARRANTS(1)--11.48%
BIW Connector Systems, LLC 8% of LLC............... Manufacturing 652 451
Westwind Group Holdings, Inc. 5% of Co. ........... Restaurant 350 244
JAG Industries, Inc.(2) 75% of Co. ................ Manufacturing 505 --
Chance Coach, Inc.(2) 43.2% of Co. ................ Bus Manufacturer 4,041 5,950
The L.A. Studios, Inc. 17% of Co. ................. Audio Production 902 902
Decorative Surfaces International, Inc. (2) 42.3% Decorative Paper & Vinyl Mfg.
of Co. .......................................... 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 Meat Processing
Co. ............................................. 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 Repair Services
Co. ............................................. 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. 7.3% of Co. .............. Transportation Info. Mgmt. Services 1,694 1,694
The Inca Group(2) 66.5% of Co. .................... Manufacturer of Steel Products 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
o2 Wireless Solutions Inc. ........................ Wireless Communication Network Services 2,698 2,698
Warner Power, LLC(2) 53.1% of LLC.................. Power Systems and Electric Ballasts 1,629 1,629
A.H. Harris & Sons, Inc. 3.5% of Co. .............. Construction Material Distribution 267 267
-------- --------
Subtotal....................................... 41,469 43,905
</TABLE>
6
<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>
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. .................... Manufacturer of Steel Products 850 850
Capital.com, Inc.(2) 85% of Co. ................... Internet-based Financial Portal 1,492 72,500
Wrenchead.com, Inc. 1% of Co....................... Internet-based Auto Parts Distributor -- 104
ACS Equities, LP(2) 90% of LP...................... Investment Partnership 3,655 --
-------- --------
Subtotal....................................... 8,800 78,024
-------- --------
305,264 377,717
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE BASIS SWAP AGREEMENTS--(0.06)%
--------------------------------------------
NO. OF CONTRACTS NOTIONAL AMOUNT EXPIRATION DATE RECEIVE RATE PAY RATE
---------------- ---------------- --------------- ------------ --------
<C> <C> <C> <C> <C> <S> <C> <C>
4 $ 61,325 4/10/04 Floating Floating -- (163)
---------- ---------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total Investments $ 305,264 $ 377,554
========== =========
INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--1.28%
American Capital Financial Services (1)(2) 100% Investment Banking
of Co. .......................................... 403 4,893
---------- ---------
Totals..................................... $ 305,667 $ 382,447
========== =========
</TABLE>
------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
7
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income:
Interest and dividend income................ $13,094 $ 6,490 $24,132 $12,344
Loan fees................................... 1,799 665 2,279 1,331
------- ------- ------- -------
Total operating income...................... 14,893 7,155 26,411 13,675
Operating expenses:
Salaries and benefits....................... 764 188 928 498
General and administrative.................. 650 385 1,121 654
Interest.................................... 2,466 1,077 4,245 1,896
------- ------- ------- -------
Total operating expenses.................... 3,880 1,650 6,294 3,048
Operating income before equity in loss of
unconsolidated operating subsidiary....... 11,013 5,505 20,117 10,627
Equity in loss of unconsolidated operating
subsidiary................................ (1,222) (421) (1,780) (816)
------- ------- ------- -------
Net operating income........................ 9,791 5,084 18,337 9,811
Net realized gain on investments............ 235 551 235 867
Increase in unrealized appreciation of
investments............................... 1,203 526 11,971 2,507
------- ------- ------- -------
Net increase in shareholders' equity
resulting from operations................. $11,229 $ 6,161 $30,543 $13,185
======= ======= ======= =======
Net operating income per common share:
Basic..................................... $ 0.48 $ 0.46 $ 0.96 $ 0.88
Diluted................................... $ 0.47 $ 0.44 $ 0.93 $ 0.85
Earnings per common share:
Basic..................................... $ 0.55 $ 0.55 $ 1.60 $ 1.19
Diluted................................... $ 0.54 $ 0.53 $ 1.59 $ 1.15
Weighted average shares of common stock
outstanding
Basic..................................... 20,364 11,131 19,098 11,102
Diluted 20,878 11,666 19,619 11,498
</TABLE>
See accompanying notes.
8
<PAGE>
AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RECEIVABLE
COMMON STOCK CAPITAL IN FROM SALE OF UNDISTRIBUTED UNREALIZED TOTAL
------------------- EXCESS OF COMMON NET REALIZED APPRECIATION SHAREHOLDERS'
SHARES AMOUNT PAR VALUE STOCK EARNINGS OF INVESTMENTS EQUITY
-------- -------- ---------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998... 11,081 $ 111 $145,245 $ (300) $ (116) $ 7,783 $152,723
======= ======= ======== ======== ======== ======= ========
Issuance of common stock
under stock option plans... 851 9 12,698 -- -- -- 12,707
Issue of common stock under
the Dividend Reinvestment
Plan....................... 20 -- 339 -- -- -- 339
Issuance of restricted
stock...................... 10 -- 166 -- -- -- 166
Issuance of notes receivable
from sale of common
stock...................... -- -- -- (13,611) -- -- (13,611)
Net increase in shareholders'
equity resulting from
operations................. -- -- -- -- 10,678 2,507 13,185
Distributions................ -- -- -- -- (9,706) -- (9,706)
------- ------- -------- -------- -------- ------- --------
Balance at June 30, 1999....... 11,962 $ 120 $158,448 $(13,911) $ 856 $10,290 $155,803
======= ======= ======== ======== ======== ======= ========
Balance at December 31, 1999... 18,252 $ 183 $255,922 $(23,052) $ 1,080 $77,612 $311,745
======= ======= ======== ======== ======== ======= ========
Issuance of common stock
under stock option plans... 84 1 1,768 (1,769) -- -- --
Issue of common stock under
the Dividend Reinvestment
Plan....................... 16 -- 373 -- -- -- 373
Issuance of common stock..... 6,325 63 122,081 -- -- -- 122,144
Termination of notes
receivable from sale of
common stock............... -- -- -- 244 -- -- 244
Net increase in shareholders'
equity resulting from
operations................. -- -- -- -- 18,572 11,971 30,543
Distributions................ -- -- -- -- (17,195) -- (17,195)
------- ------- -------- -------- -------- ------- --------
Balance at June 30, 2000....... 24,677 $ 247 $380,144 $(24,577) $ 2,457 $89,583 $447,854
======= ======= ======== ======== ======== ======= ========
</TABLE>
See accompanying notes.
9
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Operating activities
Net increase in shareholders' equity resulting from
operations............................................. $ 30,543 $ 13,185
Adjustments to reconcile net increase in shareholders'
equity resulting from operations to net cash provided
by operating activities:
Unrealized appreciation of investments.............. (11,971) (2,507)
Net realized gain on investments.................... (235) (867)
Accretion of loan discounts......................... (1,824) (908)
Amortization of deferred finance costs.............. 568 280
Increase in interest receivable..................... (1,952) (768)
Increase in accrued payment-in-kind dividends and
interest............................................ (1,262) (1,150)
Receipt of note for prepayment penalties............ (884) --
Increase in due from unconsolidated operating
subsidiary.......................................... (5,253) (980)
Increase (decrease) in other assets................. 1,028 (1,134)
Increase in other liabilities....................... 172 1,674
Equity in loss of unconsolidated operating
subsidiary.......................................... 1,780 816
-------- --------
Net cash provided by operating activities................... 10,710 7,641
Investing activities
Proceeds from sale or maturity of investments......... -- 22,519
Principal repayments.................................. 2,460 14,592
Purchase of investments............................... (94,862) (65,554)
Purchase of securities................................ -- (12,900)
-------- --------
Net cash used in investing activities....................... (92,402) (41,343)
Financing activities
(Repayments) drawings on revolving credit facilities,
net.................................................. (21,506) 53,900
Increase in deferred financing costs.................. -- (1,701)
Issuance of common stock.............................. 122,337 --
Distributions paid.................................... (17,742) (10,928)
-------- --------
Net cash provided by financing activities................... 83,089 41,271
-------- --------
Net increase in cash and cash equivalents................... 1,397 7,569
Cash and cash equivalents at beginning of period............ 2,037 6,149
-------- --------
Cash and cash equivalents at end of period.................. $ 3,434 $ 13,718
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest................................ $ 396 $ 349
NON-CASH FINANCING ACTIVITIES:
Notes receivable issued in exchange for common
stock................................................ $ 1,768 $ 13,611
Net repayment of margin borrowings through sale of
securities........................................... -- 26,956
Receipt of short term note in exchange for principal
repayment of long term note.......................... 8,424 --
Dividends reinvested.................................. 373 543
</TABLE>
See accompanying notes.
10
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
---------------- ----------------
<S> <C> <C>
Per Share Data (1)
Net asset value at beginning of the period.................. $ 17.08 $ 13.80
Net operating income........................................ 0.96 0.88
Realized gain on investments................................ 0.01 0.08
Increase in unrealized appreciation on investments.......... 0.63 0.23
-------- --------
Net increase in shareholders' equity from operations........ $ 1.60 $ 1.19
Issuance of common stock.................................... 0.57 --
Distribution of net investment income....................... 0.94 0.84
Effect of dilution.......................................... 0.16 1.13
-------- --------
Net asset value at end of period............................ $ 18.15 $ 13.02
Per share market value at beginning of period............... $ 22.750 $ 17.250
Per share market value at end of period..................... $ 23.875 $ 18.250
Total return (2)............................................ 9.08% 10.67%
Shares outstanding at end of period......................... 24,677 11,962
Ratio/Supplemental Data
Net assets at end of period................................. $447,854 $155,803
Ratio of operating expenses to average net assets........... 1.66% 1.98%
Ratio of net operating income to average net assets......... 4.83% 6.36%
</TABLE>
------------------------
(1) Basic per share data.
(2) Amounts were not annualized for the results of the six month periods ended
June 30, 2000 and 1999.
See accompanying notes.
11
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim financial statements of American Capital Strategies, Ltd. (the
"Company") are prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual financial statements
prepared in accordance with GAAP are omitted. In the opinion of management, all
adjustments, consisting solely of normal recurring accruals, necessary for the
fair presentation of financial statements for the interim periods have been
included. The current period's results of operations are not necessarily
indicative of results that ultimately may be achieved for the year. The interim
financial statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K, as
filed with the Securities and Exchange Commission.
NOTE 2. ORGANIZATION
American Capital Strategies, Ltd., a Delaware corporation (the "Company"),
was incorporated in 1986 to provide financial advisory services to and invest in
middle market companies. On August 29, 1997, the Company completed an initial
public offering ("IPO") of 10,382,437 shares of common stock ("Common Stock"),
and became a non-diversified closed end investment company that has elected to
be treated as a business development company ("BDC") under the Investment
Company Act of 1940, as amended ("1940 Act"). On October 1, 1997, the Company
began operations so as to qualify to be taxed as a regulated investment company
("RIC") as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal
Revenue Code of 1986 as amended (the "Code"). As contemplated by these
transactions, the Company materially changed its business plan and format from
structuring and arranging financing for buyout transactions on a fee for
services basis to primarily being a lender to and investor in middle market
companies. As a result of the changes, the Company is operating as a holding
company whose predominant source of operating income has changed from financial
performance and advisory fees to interest and dividends earned from investing
the Company's assets in debt and equity of businesses. The Company's investment
objectives are to achieve current income from the collection of interest and
dividends, as well as long-term growth in its shareholders' equity through
appreciation in value of the Company's equity interests.
The Company continues to provide financial advisory services to businesses
through American Capital Financial Services, Inc. ("ACFS"), a wholly-owned
subsidiary. The Company is headquartered in Bethesda, Maryland, and has offices
in New York, Boston, Pittsburgh, San Francisco, Chicago, Dallas and Los Angeles.
The Company's reportable segments are its investing operations as a business
development company and the financial advisory operations of its wholly-owned
subsidiary, ACFS (see Note 4). The Company has no foreign operations.
NOTE 3. CAPITAL.COM
Capital.com, an Internet finance portal, was launched in July 1999 under the
name 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
12
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3. CAPITAL.COM (CONTINUED)
stake and warrants to acquire up to an additional 5% of the common equity at a
nominal price. The warrants are exercisable based on a subsequent valuation of
Capital.com in connection with a subsequent investment or offer to invest within
a year of First Union's stock purchase. If the subsequent valuation results in a
value of Capital.com of $100,000 or more, the warrants will be extinguished. If
the subsequent valuation results in a value of Capital.com of $75,000 or less,
all the warrants will be exercisable. If the subsequent valuation results in a
value between $75,000 and $100,000, a pro-rata portion of the warrants will be
exercisable.
In considering the appropriate valuation of this investment at December 31,
1999 and June 30, 2000, in addition to the value implied by First Union's
investment for a 15% equity interest, management and the Board of Directors
considered several factors including:
- The valuation of comparable public company entities;
- The very early development stage of Capital.com;
- 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:
- The valuation implied by comparable private company transactions.
Based on all these factors and others that were considered, the Board of
Directors valued the investment in Capital.com at $63,535 at June 30, 2000,
which represents unrealized depreciation of $8,965 for the three and six months
ended June 30, 2000. This investment represents 12% of total assets and 14% of
total shareholders' equity at June 30, 2000. Realization of this valuation in
subsequent periods is subject to a high degree of uncertainty including the
ability of Capital.com to attract and retain financial and service providers,
develop and maintain a significant customer base that will support the on going
investment and capital needs of the business, attract additional investors in
the business, and develop and execute an exit strategy for investors. The
outcome of these matters is highly uncertain. Inability to achieve these or
other factors could negatively impact future valuations of Capital.com and such
differences could be material.
NOTE 4. INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY
As discussed in Note 2, ACFS is an operating subsidiary of the Company and
is accounted for under the equity method effective October 1, 1997.
13
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 4. INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY (CONTINUED)
Condensed financial information for ACFS is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- --------------
<S> <C> <C>
Assets
Investments in ACS Equities, LP, at fair value............ $10,365 $10,365
Other assets, net......................................... 5,305 3,572
------- -------
Total assets................................................ $15,670 $13,937
======= =======
Liabilities and Shareholder's Equity
Deferred income taxes..................................... $ 916 $ 2,007
Due to parent............................................. 7,584 2,331
Other liabilities......................................... 4,057 4,706
Shareholder's equity...................................... 3,113 4,893
------- -------
Total liabilities and shareholder's equity.................. $15,670 $13,937
======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income................. $ 1,547 $ 580 $ 2,097 $2,015
Operating expense................ 3,519 1,781 4,969 3,825
------- ------ ------- ------
Net operating loss............... (1,972) (1,201) (2,872) (1,810)
Realized gains on investments.... 1 -- 1 925
Change in unrealized appreciation
of investments................. -- 522 -- (432)
Other income..................... 749 258 1,091 501
------- ------ ------- ------
Net loss......................... $(1,222) $ (421) $(1,780) $ (816)
======= ====== ======= ======
</TABLE>
NOTE 5. BORROWINGS
As of June 30, 2000, the Company had $57,039 in borrowings outstanding under
a debt funding facility. The facility expires in April 2001, at which time all
outstanding principal is due and payable. Interest on borrowings under this
facility is charged at one month LIBOR (6.68% at June 30, 2000) plus 150 basis
points. During the six months ended June 30, 2000, the company had weighted
average outstanding borrowings of $84,297 and the weighted average interest
rate, including amortization of deferred finance costs, was 10.1%.
14
<PAGE>
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share............. $11,229 $ 6,161 $30,543 $13,185
Denominator for basic-weighted
average shares................. 20,364 11,131 19,098 11,102
Employee stock options........... 69 451 78 327
Warrants......................... 17 84 17 69
Contingently issuable shares..... 428 -- 426 --
------- ------- ------- -------
Dilutive potential shares........ 514 535 521 396
------- ------- ------- -------
Denominator for diluted weighted
average shares................. 20,878 11,666 19,619 11,498
------- ------- ------- -------
Basic earnings per common
share.......................... $ 0.55 $ 0.55 $ 1.60 $ 1.19
Diluted earnings per common
share.......................... $ 0.54 $ 0.53 $ 1.59 $ 1.15
</TABLE>
NOTE 7. INTEREST RATE RISK MANAGEMENT
The Company enters into interest rate basis swap agreements with financial
institutions as part of its strategy to manage interest rate risks and to
fulfill its obligation under the terms of its debt funding facility. The Company
uses interest rate swap agreements for hedging and risk management only and not
for speculative purposes. The Company is a party in six interest rate basis swap
agreements with an aggregate notional amount of $113,325. Pursuant to these swap
agreements, the Company pays a variable rate equal to the prime lending rate
(9.50% at June 30, 2000) and receives a rate of the one month LIBOR (6.68% at
June 30, 2000) plus a weighted average spread of 2.71%. The swaps have a
remaining maturity of approximately four years. At June 30, 2000, the fair value
of the interest rate basis swap agreements represented a liability of $275.
NOTE 8. SHAREHOLDERS' EQUITY
On May 24, 2000 the Company issued 5,500 shares of common stock for an
aggregate purchase price of $113,000 and granted the underwriters the option to
purchase up to 825 additional shares of common stock within thirty days for an
aggregate purchase price of $17,000. The net proceeds from the sale of the 5,500
shares of common stock were approximately $106,000. On June 20, 2000, the
underwriters exercised their option to acquire 825 shares from the Company. The
net proceeds from the sale of the 825 shares of common stock were approximately
$16,000. The Company used the proceeds from the offerings to repay outstanding
borrowings under its debt funding facility.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS INCLUDING, BUT
NOT LIMITED TO, STATEMENTS REGARDING ANTICIPATED ACTIVITY ARE FORWARD LOOKING IN
NATURE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FOLLOWING: CHANGES IN THE ECONOMIC CONDITIONS IN WHICH THE
COMPANY OPERATES NEGATIVELY IMPACTING THE FINANCIAL RESOURCES OF THE COMPANY;
CERTAIN OF THE COMPANY'S COMPETITORS WITH SUBSTANTIALLY GREATER FINANCIAL
RESOURCES THAN THE COMPANY REDUCING THE NUMBER OF SUITABLE INVESTMENT
OPPORTUNITIES OFFERED TO THE COMPANY OR REDUCING THE YIELD NECESSARY TO
CONSUMMATE THE INVESTMENT; INCREASED COSTS RELATED TO COMPLIANCE WITH LAWS,
INCLUDING ENVIRONMENTAL LAWS; GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER
RISK FACTORS DESCRIBED IN THE COMPANY'S REPORTS FILED FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE COMPANY CAUTIONS READERS NOT TO PLACE
UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING STATEMENTS, WHICH STATEMENTS ARE MADE
PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS SUCH,
SPEAK ONLY AS OF THE DATE MADE.
THE FOLLOWING ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO. AS DISCUSSED IN NOTE 2, THE COMPANY COMPLETED
AN INITIAL PUBLIC OFFERING ("IPO") OF ITS COMMON STOCK ON AUGUST 29, 1997 AND ON
OCTOBER 1, 1997 BEGAN TO OPERATE SO AS TO QUALIFY TO BE TAXED AS A REGULATED
INVESTMENT COMPANY ("RIC").
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 $486,242 and $377,554 at June 30, 2000 and December 31, 1999,
respectively. During the three months ended June 30, 2000, the Company
originated investments totaling $61,200 and advanced $2,200 previously committed
under working capital facilities. During the six months ended June 30, 2000, the
Company originated investments totaling $93,200, including $1,800 in funds
committed but undrawn under credit facilities, and advanced $3,450 previously
committed under working capital facilities. The weighted average effective
interest rate on total capital invested as of June 30, 2000 was 14.3%. Summaries
of the composition of the Company's portfolio of publicly and non-publicly
traded securities, excluding government securities, at June 30, 2000 and
December 31, 1999 at cost and fair value are shown in the following table:
<TABLE>
<CAPTION>
COST JUNE 30, 2000 DECEMBER 31, 1999
---- ------------- -----------------
<S> <C> <C>
Senior debt..................................... 12.4% 11.9%
Subordinated debt............................... 69.8% 69.4%
Convertible preferred stock..................... 2.8% 2.2%
Common stock warrants........................... 12.5% 13.6%
Common stock.................................... 2.5% 2.9%
</TABLE>
<TABLE>
<CAPTION>
FAIR VALUE JUNE 30, 2000 DECEMBER 31, 1999
---------- ------------- -----------------
<S> <C> <C>
Senior debt..................................... 10.2% 9.7%
Subordinated debt............................... 57.2% 56.0%
Convertible preferred stock..................... 2.5% 2.0%
Common stock warrants........................... 15.3% 11.6%
Common stock.................................... 14.8% 20.7%
</TABLE>
On a fair value basis, the concentration of the portfolio in common stock is
due to the valuation of Capital.com. Capital.com, an Internet finance portal,
was launched in July 1999 under the name of
16
<PAGE>
AmericanCapitalOnline.com. In December 1999, the assets of
AmericanCapitalOnline.com were contributed to Capital.com, Inc., a newly formed
entity, and the site was renamed Capital.com. The total cost of the assets
contributed to Capital.com by the Company was $1,492. During December, 1999, a
subsidiary of First Union Corporation ("First Union") invested $15,000 in
Capital.com in exchange for a 15% common equity stake and warrants to acquire up
to an additional 5% of the common equity at a nominal price. The warrants are
exercisable based on a subsequent valuation of Capital.com in connection with a
subsequent investment or offer to invest within a year of First Union's stock
purchase. If the subsequent valuation results in a value of Capital.com of
$100,000 or more, the warrants will be extinguished. If the subsequent valuation
results in a value of Capital.com of $75,000 or less, all the warrants will be
exercisable. If the subsequent valuation results in a value between $75,000 and
$100,000, a pro-rata portion of the warrants will be exercisable.
In considering the appropriate valuation of this investment at December 31,
1999 and June 30, 2000, in addition to the value implied by First Union's
investment for a 15% equity interest, management and the Board of Directors
considered several factors including:
- The valuation of comparable public company entities;
- The very early development stage of Capital.com;
- 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.
- The valuation implied by comparable private company transactions.
Based on all these factors and others that were considered, the Board of
Directors valued the investment in Capital.com at $63,535 at June 30, 2000,
which represents unrealized depreciation of $8,965 for the three and six months
ended June 30, 2000. This investment represents 12% of total assets and 14% of
total shareholders' equity at June 30, 2000. Realization of this valuation in
subsequent periods is subject to a high degree of uncertainty including the
ability of Capital.com to attract and retain financial and service providers,
develop and maintain a significant customer base that will support the on going
investment and capital needs of the business, attract additional investors in
the business, and develop and execute an exit strategy for investors. The
outcome of these matters is highly uncertain. Inability to achieve these or
other factors could negatively impact future valuations of Capital.com and such
differences could be material.
17
<PAGE>
The following table shows the portfolio composition by industry grouping at
cost and at fair value:
<TABLE>
<CAPTION>
COST JUNE 30, 2000 DECEMBER 31, 1999
---- ------------- -----------------
<S> <C> <C>
Manufacturing................................... 60.5% 56.6%
Wholesale & Retail.............................. 8.9% 11.5%
Information Technology.......................... 7.7% 2.5%
Construction.................................... 5.9% 7.7%
Healthcare...................................... 5.3% 6.5%
Media........................................... 4.4% 5.5%
Telecommunications.............................. 3.3% 4.3%
Service......................................... 2.6% 3.5%
Transportation.................................. 1.0% 1.4%
Internet........................................ 0.4% 0.5%
</TABLE>
<TABLE>
<CAPTION>
FAIR VALUE JUNE 30, 2000 DECEMBER 31, 1999
---------- ------------- -----------------
<S> <C> <C>
Manufacturing................................... 50.6% 46.2%
Internet........................................ 13.1% 19.2%
Wholesale & Retail.............................. 7.6% 9.3%
Information Technology.......................... 6.4% 2.0%
Telecommunications.............................. 5.9% 3.5%
Construction.................................... 5.3% 6.2%
Healthcare...................................... 4.3% 5.2%
Media........................................... 3.7% 4.5%
Service......................................... 2.2% 2.8%
Transportation.................................. 0.9% 1.1%
</TABLE>
Management expects that the largest percentage of the Company's investments
will continue to be in manufacturing companies, however, management intends to
continue to diversify the Company's portfolio and will explore new investment
opportunities in a variety of industries.
RESULTS OF OPERATIONS
The Company's financial performance, as reflected in its Statements of
Operations, is composed of three primary elements. The first element, "Net
operating income," is primarily the interest and dividends earned from investing
in debt and equity securities and the equity in earnings of its unconsolidated
operating subsidiary less the operating expenses of the Company. The second
element is "Increase in unrealized appreciation of investments," which is the
net change in the estimated fair value of the Company's portfolio assets at the
end of the period compared with their estimated fair values at the beginning of
the period or their stated costs, as appropriate. The third element is "Realized
gain on investments," which reflects the difference between the proceeds from a
sale or maturity of a portfolio investment and the cost at which the investment
was carried on the Company's balance sheet.
18
<PAGE>
The operating results for the three and six months ended June 30, 2000 and
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating income........................... $14,893 $7,155 $26,411 $13,675
Operating expenses......................... 3,880 1,650 6,294 3,048
Equity in loss of unconsolidated operating
subsidiary............................... (1,222) (421) (1,780) (816)
------- ------ ------- -------
Net operating income....................... 9,791 5,084 18,337 9,811
Realized gain on investments............... 235 551 235 867
Increase in unrealized appreciation of
investments.............................. 1,203 526 11,971 2,507
------- ------ ------- -------
Net increase in shareholders' equity
resulting from operations................ $11,229 $6,161 $30,543 $13,185
======= ====== ======= =======
</TABLE>
Total operating income is comprised of two components: interest and dividend
income and loan fees. For the Second Quarter 2000, the Company recorded $12,720
in interest and dividends on non-publicly traded securities and $374 in interest
on bank deposits, repurchase agreements, and shareholder loans, compared to
$6,323 in interest and dividends on non-publicly traded securities and $167 in
interest on government agency securities, bank deposits, repurchase agreements
and shareholder loans recorded in the three months ended June 30, 1999 ("Second
Quarter 1999"). For the six months ended June 30, 2000 (the "2000 YTD Period"),
the Company recorded $23,393 in interest and dividends on non-publicly traded
securities and $739 in interest on bank deposits, repurchase agreements, and
shareholder loans; for the six months ended June 30, 1999 ("1999 YTD Period"),
the Company recorded $12,136 in interest and dividends on non-publicly traded
securities and $208 in interest on government agency securities, bank deposits,
repurchase agreements and shareholder loans.
Total operating income for the three months ended June 30, 2000 ("Second
Quarter 2000") increased 7,738, or 108%, compared to the three months ended
June 30, 1999. The increase in operating income for the Second Quarter 2000 is a
result of the Company closing 25 investments in private companies totaling
$198,700 between June 30, 1999 and June 30, 2000, an increase in the prime
lending rate from 7.75% at June 30, 1999 to 9.50% at June 30, 2000, and an
increase in loan fees. As a result of the investment originations between
June 30, 1999 and June 30, 2000, interest and dividend income increased
approximately $6,400 compared to the Second Quarter 1999. In addition, the rise
in the prime lending rate contributed excess interest income of approximately
$200 for the Second Quarter 2000 compared to the same period in 1999. See
discussion of interest rate sensitivity below under INTEREST RATE RISK. Loan
fees for the Second Quarter 2000 increased from $665 in the Second Quarter 1999
to $1,799 in Second Quarter 2000 primarily due to $884 in prepayment penalties
recognized on the repayment of the Company's subordinated debt investment in
Electrolux, LLC. Under the terms of the transaction, the Company received a
180-day note in exchange for the retirement of the original subordinated note
plus the prepayment penalties in exchange for the former note. The remaining
term of the original subordinated note was six and one half years at the time of
prepayment. The transaction was accounted for as a repayment of the subordinated
note and an origination of a new note. Loan fees also increased due to the
increase in investment origination volume from $37,000 during the Second Quarter
1999 to $61,200 in the Second Quarter 2000. Loan fees as a percentage of
originations, exclusive of prepayment penalties, increased from 1.2% in the
Second Quarter 1999 to 1.5% in the Second Quarter 2000.
For the 2000 YTD Period, total operating income increased $12,736, or 93%,
over the same period in 1999. The increase in operating income for the 2000 YTD
Period is a result of the Company's investment originations between June 30,
1999 and June 30, 2000 noted above, the increase in the prime lending rate,
19
<PAGE>
and the increase in loan fees. Interest and dividend income increased
approximately $11,500 compared to the 1999 YTD Period due to the investment
originations between June 30, 1999 and June 30, 2000. In addition, the rise in
the prime lending rate contributed excess interest income of approximately $300
for the 2000 YTD Period compared to the same period in 1999. For the 2000 YTD
Period, loan fees increased to $2,279 from $1,331 during the same period in
1999. The increase is due to an increase in prepayment penalties of $400 due to
the transaction noted above, and the increase in investment origination volume
from $62,900 during the 1999 YTD Period to $93,200 during the 2000 YTD Period.
For the 2000 YTD Period, loan fees as a percentage of originations, exclusive of
prepayment penalties, increased to 1.5% from 1.3% during the same period in
1999.
Operating expenses for the Second Quarter 2000 increased $2,230, or 135%,
over the same period in 1999. The increase is primarily due to the increase in
interest expense from $1,077 during the Second Quarter 1999 to $2,466 during the
Second Quarter 2000. Interest expense increased due to both an increase in
weighted average outstanding borrowings from $48,700 in the Second Quarter 1999
to $82,500 in the Second Quarter 2000 and an increase in effective borrowing
rate, including amortization of deferred loan costs, from 7.1% at June 30, 1999
to 10.1% at June 30, 2000. For the 2000 YTD Period, interest expense increased
$2,349, or 124%, over the same period in 1999. The increase was attributable to
the interest rate increase noted above and the increase in the weighted average
outstanding borrowings from $44,855 during the six months ended June 30, 1999 to
$84,297 during the 2000 YTD period. General and administrative expenses
increased from $385 in the Second Quarter 1999 to $650 in the Second Quarter
2000. For the 2000 YTD Period, general and administrative expenses increased
from $654 in the 1999 YTD Period to $1,121 in the 2000 YTD Period. The increase
for the three and six months ended June 30, 2000 was due to higher public
reporting, recruiting and marketing expenses. For the Second Quarter 2000 and
the 2000 YTD Period, salaries and benefits expense increased $576 and $430,
respectively, over the comparable periods in 1999. The increase is attributable
to the increase in the number of employees from 34 at June 30, 1999 to 48 at
June 30, 2000 and an increase in incentive compensation awarded in the Second
Quarter 2000. Incentive compensation increased approximately $300 and $200,
respectively, during the Second Quarter 2000 and the 2000 YTD Period due to both
the higher headcount and improved performance.
Equity in loss of unconsolidated operating subsidiary, which represents
ACFS's results, for the Second Quarter 2000 increased from a loss of $421 in
Second Quarter 1999 to a loss of $1,222 in Second Quarter 2000. For the Second
Quarter 2000, ACFS's results included $1,547 of operating income, $3,519 of
operating expenses, $1 of realized gains on investments and $749 in other
income. For the Second Quarter 1999, ACFS's results included $580 of operating
income, $1,781 of operating expenses, $522 of unrealized appreciation of
investments, and $258 in other income. For the 2000 YTD Period, ACFS's results
included $2,097 of operating income, $4,969 of operating expenses, $1 of
realized gains on investments, and $1,091 of other income; for the 1999 YTD
Period, ACFS's results included $2,015 of operating income, $3,825 of operating
expenses, $925 of realized gains on investments, $432 of unrealized depreciation
of investments, and $501 of other income. The increase in ACFS's operating
income was primarily due to an increase in loan processing fees generated by the
higher investment originations during the quarter. For the 2000 YTD Period,
operating income slightly increased from $2,015 in the 1999 YTD Period to
$2,097. The increase in loan processing fees during the period was offset by a
decrease in investment banking fees compared to the 1999 YTD Period. Operating
expenses for the Second Quarter 2000 increased $1,738, or 98%, compared to the
same period in 1999. For the 2000 YTD Period, operating expenses increased
$1,144, or 30%, compared to the same period in 1999. The increase in operating
expenses for both the three and six month period was due to the increase in
salaries and benefits caused by the increase in the number of employees, all of
whom are also employees of the Company, from 34 at June 30, 1999 to 48 at
June 30, 2000 and the increase in incentive compensation awarded for the Second
Quarter 2000. Incentive compensation, driven by both the increase in headcount
and certain performance measures, increased $1,300 and $800 compared to the
three and six months ended June 30, 1999. The higher operating income, offset by
higher operating expenses, resulted in an $801 increase in ACFS's net loss in
the Second Quarter 2000 compared to the
20
<PAGE>
Second Quarter 1999, and a $964 increase in the net loss in the 2000 YTD Period
compared to the 1999 YTD Period.
During the Second Quarter 2000, the Company recorded a realized gain of $235
on the repayment of its subordinated debt investment in Electrolux, LLC. Under
the terms of the transaction, the Company received a 180-day note for the full
proceeds of the original subordinated note plus the prepayment penalties in
exchange for the former note. The realized gain on the transaction is comprised
of the realization of unamortized loan discounts. ACFS recorded $1 of realized
gains during the Second Quarter 2000 and the 2000 YTD Period as a result of the
receipt of funds held in escrow from the sale of its Four-S investment in 1999.
The increase in unrealized appreciation of investments is based on portfolio
asset valuations determined by the Company's Board of Directors. Unrealized
appreciation of investments for the Second Quarter 2000 increased $677 over the
Second Quarter 1999. Unrealized appreciation for the Second Quarter 2000 was
comprised of valuation increases of $14,038 on investments in ten portfolio
companies, including $7,664 of appreciation on the Company's common stock
warrant investment in o2 Wireless, $1,615 on its investment in Lion
Brewery, Inc., and $1,385 on its investment in The Inca Group. The unrealized
appreciation was offset by valuation decreases of $12,835 on investments in four
portfolio companies, including depreciation of $8,965 on the Company's
investment in Capital.com, $2,000 on its investment in EuroCaribe Packing
Company, Inc., and $1,335 on its investment in IGI, Inc. For the 2000 YTD
Period, unrealized appreciation was comprised of valuation increases of $25,510
on investments in thirteen companies, including $15,294 on the Company's
investment in o2 Wireless, and valuation decreases of $13,539 on investments in
four companies, including $8,965 on the Company's investment in Capital.com.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At June 30, 2000, the Company had $3,434 in cash and cash equivalents. In
addition, the Company had outstanding debt secured by assets of the Company of
$57,039 under a $225,000 debt funding facility. During the six months ended
June 30, 2000, the Company funded investments using draws on the debt funding
facility.
On May 24, 2000, the Company completed a public offering of its common stock
and received net proceeds of approximately $106,000 in exchange for 5,500 common
shares. On June 20, 2000 the Company sold 825 shares of its common stock
pursuant to the underwriter's overallotment option granted on May 24, 2000 and
received net proceeds of approximately $16,000. The proceeds from the offerings
were used to repay borrowings outstanding under its debt funding facility.
As a RIC, the Company is required to distribute annually 90% or more of its
net operating income and net realized short-term capital gains to shareholders.
While the Company provides shareholders with the option of reinvesting their
distributions in the Company, the Company anticipates having to issue debt or
equity securities in addition to the above borrowings to expand its investments
in middle market companies. The terms of the future debt and equity issuances
can not be determined and there can be no assurances that the debt or equity
markets will be available to the Company on terms it deems favorable.
PORTFOLIO CREDIT QUALITY
The Company grades all loans on a scale of 1 to 4. This system is intended
to reflect the performance of the borrower's business, the collateral coverage
of the loans and other factors considered relevant.
Under this system, management believes that loans with a grade of 4 involve
the least amount of risk in the Company's portfolio. The borrower is performing
above expectations and the trends and risk factors are generally favorable.
Management believes that loans graded 3 involve an acceptable level of risk that
is similar to the risk at the time of origination. The borrower is performing as
expected and the risk factors are neutral to favorable. All new loans are
initially graded 3. Loans graded 2 involve a borrower performing below
expectations and the loan risk has increased since origination. The borrower may
be out
21
<PAGE>
of compliance with debt covenants, however, loan payments are not more than
120 days past due. For loans graded 2, the Company's management will increase
procedures to monitor the borrower and will write down the fair value of the
loan if it is deemed to be impaired. A loan grade of 1 indicates that the
borrower is performing materially below expectations and the loan risk has
substantially increased since origination. Some or all of the debt covenants are
out of compliance and payments are delinquent. Loans graded 1 are not
anticipated to be repaid in full and the Company will reduce the fair market
value of the loan to the amount it anticipates will be recovered.
To monitor and manage the investment portfolio risk, management tracks the
weighted average portfolio grade. The weighted average portfolio grade was 3.4
and 3.2 at June 30, 2000 and December 31, 1999, respectively. In addition, all
of the Company's outstanding loans are currently paying as agreed. At June 30,
2000 and December 31, 1999, the Company's portfolio was graded as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------- --------------------------------
INVESTMENTS AT PERCENTAGE OF INVESTMENTS AT PERCENTAGE OF
GRADE FAIR VALUE TOTAL PORTFOLIO FAIR VALUE TOTAL PORTFOLIO
--------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
4 $200,928 47.5% $ 65,638 21.5%
3 190,735 45.1% 223,898 73.4%
2 31,215 7.4% 15,577 5.1%
1 -- -- -- --
-------- ----- -------- -----
422,878 100.0% 305,113 100.0%
</TABLE>
The amounts at June 30, 2000, and December 31, 1999 do not include the
Company's investments in Capital.com, Wrenchead.com, and ACS Equities, LP as the
Company has only invested in the equity securities of these companies.
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
June 30, 2000, approximately 65% of the Company's interest bearing assets
provided fixed rate returns and approximately 35% of the company's interest
bearing assets provided floating rate returns. The Company attempts to match
fund its liabilities and assets by financing floating rate assets with floating
rate liabilities and fixed rate assets with fixed rate liabilities or equity. At
June 30, 2000, the Company had floating rate investments in debt securities with
a face amount of $120 million and had total borrowings outstanding of
$57 million. All of the Company's outstanding debt at June 30, 2000 has a
variable rate of interest based on one-month LIBOR (6.68% at June 30, 2000),
while all floating rate investments have an interest rate based on the prime
lending rate (9.50% at June 30, 2000). A change in floating interest rates would
have the following annual impact on the investment portfolio at June 30, 2000:
<TABLE>
<CAPTION>
ANNUAL INCREASE (DECREASE) IN
---------------------------------------------------------------------
CHANGE IN FLOATING NET OPERATING NET OPERATING
INTEREST RATE INTEREST INCOME INTEREST EXPENSE INCOME INCOME PER SHARE
------------------- --------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
+ 200 basis points $ 2,400 $ 1,141 $ 1,259 $ 0.05
+ 100 basis points 1,200 570 630 0.03
- 100 basis points (1,200) (570) (630) (0.03)
- 200 basis points (2,400) (1,141) (1,253) (0.05)
</TABLE>
In addition to match funding the assets and liabilities between fixed and
floating rates, the Company also enters into interest rate basis swap agreements
to match the floating rate basis of its assets and liabilities and to fulfill
its obligation under the terms of its debt funding facility. At June 30, 2000,
the Company had entered into six interest rate basis swap agreements under which
the Company pays a floating rate based on the prime rate and receives a weighted
average interest rate based on one month LIBOR plus 271 basis points. The total
notional amount of the swap agreements is $113,325 and the agreements have a
remaining term of approximately four years. The Company intends to use
derivative instruments for non-trading and non-speculative purposes only.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company, nor any of the Company's subsidiaries, is currently
subject to any material litigation nor, to the Company's knowledge, is any
material litigation threatened against the Company or any subsidiary, other than
routine litigation and administrative proceedings arising in the ordinary course
of business. Such proceedings are not expected to have a material adverse effect
on the business, financial conditions, or results of operation of the Company or
any subsidiary.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 2000, the Company held its Annual Meeting of Stockholders. Three
matters were submitted to the stockholders for consideration.
1. Election of three Directors;
2. The adoption of an amendment to the Company's Second Amended and
Restated Certificate of Incorporation (i) so as to extend indemnification
rights to the Company's employees, and (ii) limit the exculpation from
liability to the Company or its stockholders for officers and directors
in certain circumstances;
3. Approval of the Company's 2000 Employee Stock option Plans;
4. Approval of the Company's 2000 Disinterested Director Stock Option Plan;
5. Adoption of an amendment to the Company's fundamental policies so as to
permit the Company to be an underwriter in limited circumstances related
to the Company's Directed Share Subscription program;
6. Ratification of the selection of Ernst & Young LLP as auditors for the
fiscal year ending December 31, 2000.
The results of the shares voted with regard to each of these matters is as
follows:
1. Election of Three Directors:
<TABLE>
<CAPTION>
DIRECTOR FOR AGAINST WITHHELD
-------- ---------- --------- --------
<S> <C> <C> <C>
Philip R. Harper............................. 15,846,225 56,773 --
Stephen P. Walko............................. 13,293,064 2,609,934 --
Malon Wilkus................................. 15,861,058 41,940 --
</TABLE>
Continuing Directors whose terms did not expire at the annual meeting
were as follows: Robert L. Allbritton, Adam Blumenthal, David Gladstone,
Neil M. Hahl, Stan Lundine, and Alvin N. Puryear.
2. Approval of Charter Amendment regarding indemnification and exculpation:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTES
--------------------- --------- --------- ----------------
<S> <C> <C> <C>
13,475,564..... 2,189,705 237,429 300
</TABLE>
23
<PAGE>
3. Approval of 2000 Employee Stock Option Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTES
--------------------- --------- --------- ----------------
<S> <C> <C> <C>
10,284,879..... 1,164,485 88,568 4,365,066
</TABLE>
4. Approval of 2000 Disinterested Director Stock Option Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTES
--------------------- --------- --------- ----------------
<S> <C> <C> <C>
11,052,961..... 400,147 111,820 4,365,069
</TABLE>
5. Approval of Amendment to Fundamental Policies regarding underwriting:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTES
--------------------- --------- --------- ----------------
<S> <C> <C> <C>
11,371,378..... 69,728 96,827 4,365,065
</TABLE>
6. Ratification of the selection of Ernst & Young LLP as auditors for the
fiscal year ending December 31, 2000:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED BROKER NON-VOTES
--------------------- --------- --------- ----------------
<S> <C> <C> <C>
15,817,612..... 54,221 30,865 300
</TABLE>
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) The registrant has not filed any reports on a Current Report on
Form 8-K during the quarter for which this report 10-Q is filed.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
AMERICAN CAPITAL STRATEGIES, LTD.,
By: /s/ JOHN R. ERICKSON
-----------------------------------------
John R. Erickson
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: August 9, 2000
</TABLE>
25
