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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 2001
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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, 2000
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
(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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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(301) 951-6122
(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 February 27, 2001, the aggregate market value of the Registrant's common
stock held by nonaffiliates of the Registrant was approximately $711,297,000
based upon a closing price of the Registrant's common stock of $25.38 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 February 27, 2001, there were 28,025,885 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 9, 2001 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 11, 2000, 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 $350 million.
The Company is a publicly traded buyout and mezzanine fund 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 $30 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 $30 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, 2000, the weighted average effective y ield on the Company's
investments was 14.6%. From its formation in 1986 through the IPO, the Company
arranged financing transactions aggregating over $400 million and invested in
the equity securities of eight of those transactions. From the IPO through
December 31, 2000, the Company invested $111 million in equity securities and
$512 million in debt securities of middle market companies including over $9.5
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, 2000, the Company had board seats on 35 out of 45 portfolio
companies and had board observation rights on 4 of the remaining portfolio
companies 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, 2000, the Company had a fully-diluted weighted
average ownership interest of 31% 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. As of
December 31, 2000, the Company has invested $40 million in follow-on
investments. 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 the company's board of
directors. Providing assistance to its borrowers serves as a means of influence
for the Company as well as an opportunity for the Company to assist in
maximizing the value of the portfolio company.
Prior to the IPO, the Company established itself as a leading firm in
structuring and obtaining funding for management and employee buyouts of
subsidiaries, divisions and product lines being divested by larger corporations
through the use of an ESOP. The
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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 believes that it has established an extensive referral
network comprised of private equity and mezzanine funds, 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 senior vice
president of marketing dedicated to maintaining contact with members of the
referral network and receiving opportunities for the Company to consider. During
2000 the marketing department received information concerning in excess of 3,300
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 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, Los Angeles, Philadelphia, Chicago and
Dallas.
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 that has 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.
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OPERATIONS
MARKETING AND ORIGINATION PROCESS. The Company and ACFS have 32
professionals responsible for originating loans and investments and providing
financial assistance to middle market companies and intend to hire between 8 and
12 additional professionals during the next twelve months. To identify potential
financing opportunities, the Company has a dedicated marketing department headed
by a senior vice president who manages an extensive referral network comprised
of private equity and mezzanine funds, 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, 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, background investigations on the management team and
research on the applicant's products, service and industry. The Company engages
professionals such as environmental consultants, accountants, lawyers, risk
managers and management consultants to perform elements of the due diligence
review as it deems appropriate. Upon completion of a due diligence
investigation, one of the Company's principals prepares an investment committee
report summarizing the target company's historical and projected financial
statements, industry, and management team and analyzing its conformity to the
Company's general investment criteria. The principal then presents this profile
to the Company's Investment Committee. The Company's Investment Committee and
the Company's Board of Directors must approve each financing.
PORTFOLIO MANAGEMENT. In addition to the review at the time of original
underwriting, the Company attempts to preserve and enhance the earnings quality
of its portfolio companies through proactive management of its relationships
with its clients. This process includes attendance at portfolio company board
meetings, management consultation and review and management of covenant
compliance. The Company's investment and finance personnel regularly review
portfolio company monthly financial statements to assess cash flow performance
and trends, periodically evaluate the operations of the client, seek to identify
industry or other economic issues that may adversely affect the client, and
prepare quarterly summaries of the aggregate portfolio quality for management
review.
LOAN GRADING
The Company evaluates and classifies all loans based on their current
risk profiles. The process 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 the highest risk of loss.
The loan grade is then reviewed and approved by the Investment Committee and the
Board of Directors. This loan grading process 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 and
mezzanine funds, 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
relat ionships and build their market shares. There is no assurance that the
competitive pressures the Company faces will not have a material adverse effect
on its 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 meet its
investment goals.
EMPLOYEES
As of December 31, 2000, the Company had 58 employees, 32 of whom are
professionals working on financings for middle market companies. The Company
believes that its relations with its employees are excellent.
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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:
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;
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
cash, cash items, Government securities, or high quality debt
securities maturing in one year or less from the time of investment.
The Company may not change the nature of its business so as to cease to
be, or withdraw its election as, a BDC unless authorized by vote of the holders
of the majority, as defined in the 1940 Act, of the Company's outstanding voting
securities. Since the Company made its BDC election, it has not made any
substantial change in its structure or in the nature of its business.
The Company operates 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 shareholders 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 val ue 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 shareholders will be characterized as
ordinary income (to the extent of the Company's current and accumulated earnings
and profits).
The Company's wholly-owned subsidiary, ACFS, is a corporation under
Subchapter C of the Code and 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
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an agreed upon future date and at a price which is greater than the purchase
price by an amount that reflects an agreed-upon interest rate. Such interest
rate is effective for the period of time during which the investor's money is
invested in the arrangement and is related to current market interest rates
rather than the coupon rate on the purchased security. The Company requires the
continual maintenance by its custodian or the correspondent in its account with
the Federal Reserve/Treasury Book Entry System of underlying securities in an
amount at least equal to the repurchase price. If the seller were to default on
its repurchase obligation, the Company might suffer a loss to the extent that
the proceeds from the sale of the underlying securities were less than the
repurchase price. A seller's bankruptcy could delay or prevent a sale of the
underlying securities.
LEVERAGE
For the purpose of making investments and to take advantage of
favorable interest rates, the Company has issued, and intends to continue to
issue, senior debt securities and other evidences of indebtedness, up to the
maximum amount permitted by the 1940 Act, which currently permits the Company,
as a BDC, to issue senior debt securities and preferred stock (collectively,
"Senior Securities") in amounts such that the Company's asset coverage, as
defined in the 1940 Act, is at least 200% after each issuance of Senior
Securities. Such indebtedness may also be incurred for the purpose of effecting
share repurchases. As a result, the Company is exposed to the risks of leverage.
Although the Company has no current intention to do so, it has retained the
right to issue preferred stock. As permitted by the 1940 Act, the Company may,
in addition, borrow amounts up to five percent (5%) of its total assets for
temporary purposes.
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to achieve a high level of
current income from the collection of interest, dividends and related fees, as
well as long-term growth in its shareholders' 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:
o 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.
o 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.
o 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. As a BDC, the
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.
o 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
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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 shareholders 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 its subsidiary owns any real estate or other
physical properties materially important to the operation of the Company or any
of its subsidiaries. The Company and its subsidiary lease office space in nine
locations for terms ranging up to six years.
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, 2000, 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, 2000,
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 SHAREHOLDER 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 shareholders. 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.
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The Company's Common Stock is quoted on the Nasdaq Stock Market under
the symbol ACAS. As of February 27, 2001, the Company had 307 shareholders of
record and approximately 13,000 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 January 1, 1998 through February 27, 2001.
SALE PRICE
DIVIDEND
HIGH LOW DECLARED
---- --- --------
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 (1)
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 (2)
2000
First Quarter $ 26.81 $ 20.88 $ 0.45
Second Quarter $ 27.75 $ 19.81 $ 0.49
Third Quarter $ 26.00 $ 21.75 $ 0.49
Fourth Quarter $ 26.00 $ 20.25 $ 0.74 (3)
2001
First Quarter
(through February 27, 2001) $ 27.88 $ 21.88 $ 0.53
(1) Includes extra dividend of $0.11.
(2) Includes extra dividend of $0.03.
(3) Includes extra dividend of $0.22.
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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.
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months
Year Ended Year Ended Year Ended Ended Nine Months Year Ended
December 31, December 31, December 31, December 31, September 30, December 31,
2000 1999 1998 1997 1997 1996
------------ ------------ ------------ ------------ ------------- ------------
Total operating income $ 62,728 $ 33,405 $ 16,979 $ 2,797 $ 2,901 $ 2,746
Total operating expenses 14,284 7,251 1,709 551 2,651 2,862
------------ ------------ ------------ ------------ ------------- ------------
Operating income (loss) before equity in
(loss) earnings of unconsolidated
operating subsidiary 48,444 26,154 15,270 2,246 250 (116)
Equity in (loss) earnings of
unconsolidated operating subsidiary (3,773) (1,493) (482) 24 -- --
------------ ------------ ------------ ------------ ------------- ------------
Net operating income (loss) 44,671 24,661 14,788 2,270 250 (116)
Realized gain on investments 4,538 2,711 -- -- -- --
(Decrease) increase in unrealized
appreciation on investments (53,582) 69,829 2,127 167 5,321 484
------------ ------------ ------------ ------------ ------------- ------------
(Loss) income before income taxes (4,373) 97,201 16,915 2,437 5,571 368
Provision for income taxes -- -- -- -- 2,128 159
------------ ------------ ------------ ------------ ------------- ------------
Net (decrease) increase in shareholders'
equity resulting from operations (4,373) 97,201 16,915 2,437 3,443 209
============ ============ ============ ============ ============= ============
Per share data:
Net operating income:
Basic $ 2.00 $ 1.79 $ 1.34 $ 0.21
Diluted $ 1.96 $ 1.73 $ 1.29 $ 0.20
Net (loss) earnings:
Basic $ (0.20) $ 7.07 $ 1.53 $ 0.22
Diluted $ (0.19) $ 6.80 $ 1.48 $ 0.21
Cash dividends $ 2.17 $ 1.74 $ 1.34 $ 0.21
Balance Sheet Data:
Total assets $614,644 $ 395,372 $ 270,019 $ 150,705 $ 154,322 $ 5,432
Total shareholders' equity
445,167 311,745 152,723 150,652 150,539 3,372
Other Data:
Number of portfolio companies
at period end 45 33 15 3
Principal amount of loan originations $ 257,509 $ 139,433 $ 116,864 $ 16,817
Principal amount of loan repayments $ 34,486 $ 30,731 $ 1,719 $ 93
NOI as % of average equity 13.6% 13.0% 10.2% 1.5%
Return on equity (1) (2) (1.1)% 41.9% 11.2% 6.5%
Weighted average yield on investments 14.6% 13.9% 13.0% 12.2%
(1) Amounts are annualized for the three months ended December 31, 1997.
(2) Return represents net (decrease) increase in shareholders' equity resulting
from operations.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(DOLLARS 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 I N CONJUNCTION WITH THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO.
PORTFOLIO COMPOSITION
The Company's primary business is investing in and lending to
businesses through investments in senior debt, subordinated debt generally with
detachable common or preferred stock warrants, preferred stock, and common
stock. The total portfolio value of investments in publicly and non-publicly
traded securities was $582,108 and $377,554 at December 31, 2000 and 1999,
respectively. During the years ended December 31, 2000, 1999, and 1998, the
Company made investments totaling $275,500, $175,800, and $150,200, including
$9,500, $13,500, and $7,400 in funds committed but undrawn under credit
facilities, respectively. The weighted average effective interest rate on the
investment portfolio was 14.6%, 13.9%, and 13.0% at December 31, 2000, 1999, and
1998, respectively.
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," which 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 "(Decrease) increase in net unrealized appreciation of
investments," which is the net change in the estimated fair values 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 "Net 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.
The operating results for the years ended December 31, 2000, 1999, and
1998 are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ----------------- -----------------
Operating income ............................................. $ 62,728 $ 33,405 $ 16,979
Operating expenses ........................................... 14,284 7,251 1,709
Equity in loss of unconsolidated operating subsidiary ........ (3,773) (1,493) (482)
Net operating income ......................................... 44,671 24,661 14,788
Net realized gain on investments ............................. 4,538 2,711 --
(Decrease) increase in unrealized appreciation of investments (53,582) 69,829 2,127
Net (decrease) increase in shareholders' equity resulting from
operations ................................................... $ (4,373) $ 97,201 $ 16,915
10
Total operating income for the year ended December 31, 2000, increased
$29,323, or 88%, over the year ended December 31, 1999. The increase is a result
of the company closing 28 investments totaling $275 million, the increase in the
prime lending rate, and an increase in loan fees. Total operating income for
2000 consisted of $57,038 in interest and dividends on non-publicly traded
securities, $1,695 in interest on bank deposits, repurchase agreements, and
shareholder loans, and $3,995 in loan fees. Interest and dividend income
increased approximately $27,900 compared to 1999 due to net originations in
2000, and the rise in the prime lending rate. The rise in the weighted average
prime lending rate from 8.0% in 1999 to 9.2% in 2000 contributed additional
interest income of approximately $1,495 in 2000 compared to the same period in
1999. Loan fees as a percentage of originations, exclusive of prepayment
penalties, decreased to 1.1% in 2000 compared to 1.3% in 1999.
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 $172 million
and selling investments in 2 portfolio companies during 1999, net of the effect
of a decrease in the prime lending rate. Total operating income for 1999
consisted of $29,893 in interest and dividends on non-publicly traded securities
and $940 in interest on government agency securities, bank deposits, shareholder
loans, and repurchase agreements, and $2,572 in loan fees. Total operating
income for 1998 consisted of $11,020 in interest and dividends on non-publicly
traded securities, $3,410 in interest on government agency securities, bank
deposits and repurchase agreements, and $2,549 in loan fees. Interest and
dividend income increased approximately $16,400 compared to 1998 due to net
originations in 1999, net of a decrease in the prime lending rate. The decrease
in the weighted average prime lending rate from 8.4% in 1998 to 8.0% in 1999
reduced interest income by approximately $251. Loan fees as a percentage of
originations, exclusive of prepayment penalties, decreased to 1.3% in 1999
compared to 1.8% in 1998.
Operating expenses for 2000 increased $7,033, or 97%, over 1999. The
increase is primarily due to an increase in interest expense from $4,716 in 1999
to $9,691 in 2000 and an increase in general and administrative expenses from
$1,490 in 1999 to $2,414 in 2000. Operating expenses for 2000 consisted of
$2,179 in salaries and benefits, $2,414 in general and administrative expenses,
and $9,691 in interest expense. Interest expense increased due to an increase in
the Company's weighted average borrowings from $48,608 in 1999 to $97,588 in
2000. In addition, the weighted average interest rate on outstanding borrowings,
including amortization of deferred finance costs, increased from 9.7% in 1999 to
9.9% in 2000. General and administrative expenses increased primarily due to an
increase in marketing expenses incurred to support the Company's increased
origination platform, increased professional and recruiting expenses to support
the increase in the number of investment professionals at the Company, increased
rent expense relating to the Company's move to a larger Bethesda corporate
office during the fourth quarter of 1999, and higher public reporting expenses.
Operating expenses also increased due to increases in salaries and benefits from
$1,045 in 1999 to $2,179 in 2000 due to an increase in employees from 39 at
December 31, 1999 to 58 at December 31, 2000.
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 $1,493 in 1999 to a loss of $3,773 in
2000. ACFS provides financial advisory and investment structuring services to
businesses. For the year ended December 31, 2000, ACFS's results included $7,324
of operating income, $13,098 of operating expenses, and $2,000 of other income.
The decrease in ACFS's earnings for 2000 was primarily attributable to the
increase in salaries and benefits caused by an increase in employees, all of
whom are also employees of the Company, from 39 to 58, and to increases in
professional services and recruiting costs.
Equity in loss of unconsolidated operating subsidiary 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 appreciation of
investments, and $912 in 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. The decrease in ACFS's earnings for 1999 was
primarily attributable to the increase in salaries and benefits caused by an
increase in employees, all of whom are also employees of the Company, from 30 to
39. 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.
11
During 2000, one of the Company's portfolio companies, o2wireless,
completed an initial public offering. In conjunction with the offering,
o2wireless repaid the Company's $13,000 subordinated note. In addition, the
Company exercised and sold 180 of the 2,737 common stock warrants it owns. As a
result of these transactions, the Company recorded a realized gain of $4,303
which was comprised of $2,475 of previously unamortized original issue discount
and $1,828 of gain on the sale of the exercised warrants. During 1999, the
Company recorded realized gains on investments 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. The Company did
not record any realized gains on investments in 1998.
During 2000, the Company paid Federal income taxes of $759 on retained
realized gains recorded primarily on the STS transaction during the tax year
ended September 30, 2000. 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. The Company did not have any
retained realized gains in 1998. These payments were treated as a deemed
distribution because they were paid on behalf of the Company's shareholders. As
a result, the Company did not record an income tax provision. The Company may
elect to retain future realized gains and pay taxes on behalf of the
shareholders.
The unrealized appreciation of investments is based on portfolio asset
valuations determined by the Company's Board of Directors. The following table
explains the change in unrealized appreciation of investments for the three
years ended December 31, 2000:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
Gross unrealized appreciation of investments $ 33,397 $ 6,254 $ 2,324
Gross unrealized depreciation of
investments, excluding Capital.com ......... (15,064) (6,719) (197)
Unrealized (depreciation) appreciation of
Capital.com ................................ (71,008) 71,008 --
Unrealized depreciation of interest rate
swaps ...................................... (907) (163) --
Reversal of previously recorded unrealized
appreciation ............................... -- (551) --
------------ --------- ---------
Net (depreciation) appreciation of
investments ................................ $(53,582) $ 69,829 $ 2,127
============ ========= =========
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 stake and warrants to acquire up
to an additional 5% of the common equity at a nominal price. The warrants are
fully vested as of December 31, 2000.
In considering the appropriate valuation of this investment at December 31, 2000
and December 31, 1999, in addition to the value implied by First Union's
investment for a 15% equity interest, the Board of Directors considered several
factors including:
- - The valuation of comparable public company entities; T
- - 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 its original cost $1,492 at
December 31, 2000. This value represents a decrease of $71,008 from its December
31, 1999 valuation of $72,500. This depreciation is attributed to numerous
factors arising during the year ended December 31, 2000, including the
unfavorable financing environment for Internet companies and substantial
declines in the valuations of comparable public and private companies. Since the
Company's original investment in the third quarter of 1999, the Company has
experienced no net depreciation of its investment in Capital.com.
12
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At December 31, 2000, the Company had $11,192 in cash and cash
equivalents. In addition, the Company had outstanding debt secured by assets of
the Company of $68,002 under a $225,000 revolving debt funding facility, and
$87,200 under an asset securitization. During 2000, the Company funded its
investments with proceeds from the revolving debt funding facility, proceeds
from the asset securitization, and two follow-on equity offerings from which it
received net proceeds of approximately $185,000 (see Note 8).
On December 20, 2000, the Company completed a $115,400 asset
securitization. In conjunction with the transaction, the Company established
ACAS Business Loan Trust 2000-1 (the "Trust"), an affiliated business trust, and
contributed to the Trust $153,700 in loans. Subject to certain conditions
precedent, the Company will remain servicer of the loans. Simultaneously with
the initial contribution, the Trust was authorized to issue $69,200 Class A
notes and $46,200 Class B notes to institutional investors and $38,300 of Class
C notes were retained by the Trust. The Class A notes carry an interest rate of
one-month LIBOR plus 45 basis points, the Class B notes carry an interest rate
of one-month LIBOR plus 150 basis points. As of December 31, 2000, the Company
had issued $69,200 of the Class A notes, and $18,000 of the Class B notes; in
January 2001, the Company issued the remaining $28,200 of the Class B notes. The
notes are backed by loans to 29 of the Company's portfolio companies. The Class
A notes mature on March 20, 2006, and the Class B notes mature on August 20,
2007. The transfer of the 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. Early repayments are first
applied to the Class A notes, and then to the Class B notes. The Company enters
into interest rate swaps in order to mitigate interest rate risk related to the
asset securitization (see "Interest Rate Risk" below).
The Company's $225,000 revolving debt funding facility has a term of
two years and an interest rate on borrowings originally charged at one-month
LIBOR (6.57% at December 31, 2000) plus 150 basis points, that was subsequently
decreased to LIBOR plus 50 basis points on December 20, 2000. The full amount of
principal will be amortized over a 24 month period 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. Subsequent to December 31, 2000, the Company received an extension
of the two-year term of this facility beginning March 31, 2001.
As a BDC, the Company's asset coverage must be at least 200% after each
issuance of Senior Securities. As of December 31, 2000 and 1999, the Company's
asset coverage was approximately 400% and 500%, respectively.
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, 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. Loans graded 3 involve a 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 indicates that the loan's 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 that 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
as of both December 31, 2000 and 1999. As of December 31, 2000, one loan is on
non-accrual. At December 31, 2000 and 1999, the Company's investment portfolio
was graded as follows:
DECEMBER 31, 2000 DE CEMBER 31, 1999
----------------- ------------------
INVESTMENTS AT PERCENTAGE OF PERCENTAGE OF TOTAL PORTFOLIO
GRADE FAIR VALUE TOTAL PORTFOLIO INVESTMENTS AT FAIR VALUE
----- ---------- ---------------- -------------- --------------
4 $182,964 32.4% $65,638 21.5%
3 355,015 62.9% 223,898 73.4%
2 18,971 3.4% 15,577 5.1%
1 7,432 1.3% -- --
----- ---------- ---------------- -------------- --------------
$ 564,382 100.0% 305,113 $ 100.0%
13
The amounts at December 31, 2000 and 1999 do not include the Company's
investments in Capital.com, Wrenchead.com, o2wireless, Electrolux, and ACS
Equities, LP for which the Company has only invested in the equity securities of
these companies.
At December 31, 2000, there were no loans 0-60 days past due, one loan totaling
$3,214 was 60-90 days past due, and no loans were greater than 90 days past due.
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
revolving debt funding facility and asset securitization, 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. 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. The
Company enters into interest rate basis swap agreements to match the interest
rate basis of its assets and liabilities and to fulfill its obligation under the
terms of its debt funding facility. As a result of the Company's use of interest
rate swaps, at December 31, 2000, approximately 54% of the Company's interest
bearing assets provided fixed rate returns and approximately 46% of the
Company's interest bearing assets provided floating rate returns. Adjusted for
the effect of interest rate swaps, at December 31, 2000, the Company had
floating rate investments in debt securities with a face amount of $238 million
and had total borrowings outstanding of $155 million. All of the Company's
outstanding debt at December 31, 2000 has a variable rate of interest based on
one-month LIBOR. At December 31, 2000, the Company had entered into seventeen
interest rate basis swap agreements under which the Company either pays a
floating rate based on the prime rate and receives a floating interest rate
based on one-month LIBOR, or pays a fixed rate and receives a floating interest
rate based on one-month LIBOR. The total notional amount of the swap agreements
was $268 million and the agreements have a remaining term of approximately 5.6
years. 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.
14
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, 2000 and 1999,
the related statements of operations, shareholders' equity, and cash flows and
the financial highlights for the three years ended December 31, 2000. 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 and financial highlights referred to
above present fairly, in all material respects, the financial position of
American Capital Strategies, Ltd. at December 31, 2000 and 1999, and the results
of its operations, its cash flows and its financial highlights for the three
years ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
February 5, 2001
15
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Assets
Cash and cash equivalents ...................................................... $ 11,192 $ 2,037
Investments at fair value (cost of $563,331 and $305,264, respectively) ........ 582,108 377,554
Investment in unconsolidated operating subsidiary .............................. 1,120 4,893
Due from unconsolidated operating subsidiary ................................... 7,433 2,331
Interest receivable ............................................................ 4,935 2,417
Other .......................................................................... 7,856 6,140
--------- ---------
Total assets ................................................................... $ 614,644 $ 395,372
========= =========
Liabilities and Shareholders' Equity
Revolving credit facility ...................................................... $ 68,002 $ 78,545
Notes payable .................................................................. 87,200 --
Accrued dividends payable ...................................................... 6,163 547
Other .......................................................................... 8,112 4,535
--------- ---------
Total liabilities .............................................................. 169,477 83,627
Commitments and Contingencies
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 28,003 and 18,252
issued and outstanding, respectively ........................................... 280 183
Capital in excess of par value ................................................. 448,587 255,922
Notes receivable from sale of common stock ..................................... (27,389) (23,052)
(Distributions in excess of) undistributed net realized earnings ............... (341) 1,080
Unrealized appreciation of investments ......................................... 24,030 77,612
--------- ---------
Total shareholders' equity ..................................................... 445,167 311,745
--------- ---------
Total liabilities and shareholders' equity ..................................... $ 614,644 $ 395,372
========= =========
See accompanying notes.
16
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
COMPANY INDUSTRY INVESTMENT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
A&M Cleaning Products, Inc. Manufacturing - Household Cleaning Subordinated Debt $5,045 $5,045
Common Stock Warrants, 21.9% of Co. 1,643 2,237
Redeemable Preferred Stock (1) 447 447
--------- --------
7,135 7,729
- ------------------------------------------------------------------------------------------------------------------------------------
A.H. Harris & Sons, Inc. Whol esale & Retail - Construction Subordinated Debt 9,494 9,494
Material Common Stock Warrants, 10.0% of Co. 534 1,050
--------- --------
10,028 10,544
- ------------------------------------------------------------------------------------------------------------------------------------
Aeriform Corporation Manufacturing - Packaged Industrial Subordinated Debt 8,346 8,346
- ------------------------------------------------------------------------------------------------------------------------------------
Atlantech International Manufacturing - Polymer-based Subordinated Debt with Non-Detachable 18,781 18,781
Products Warrants
Redeemable Preferred Stock with
Non-Detachable Common
Stock, 1.3% of Co. 1,007 1,007
--------- --------
19,788 19,788
- ------------------------------------------------------------------------------------------------------------------------------------
Auxi Health, Inc. (2) Healthcare - Home Healthcare Subordinated Debt 12,546 12,546
Common Stock Warrants, 17.9% of Co. 2,599 1,856
Preferred Stock, Convertible into 55.8%
of Co. 2,578 2,578
--------- --------
17,723 16,980
- ------------------------------------------------------------------------------------------------------------------------------------
Biddeford Textile Corp. Manufacturing - Electronic Blankets Senior Debt 1,552 1,552
Common Stock Warrants, 10.0% of Co. 1,100 942
--------- --------
2,652 2,494
- ------------------------------------------------------------------------------------------------------------------------------------
BIW Connector Systems, LLC Manufacturing - Specialty Connectors Senior Debt 2,553 2,553
Subordinated Debt 4,940 4,940
Common Stock Warrants, 8.0% of Co. 652 2,068
--------- --------
8,145 9,561
- ------------------------------------------------------------------------------------------------------------------------------------
Capital.com, Inc. (2) Internet - Financial Portal Common Stock, 85.0% of Co. 1,492 1,492
- ------------------------------------------------------------------------------------------------------------------------------------
Case Logic Manufacturing - Storage Products Subordinated Debt with Non-Detachable 19,958 19,958
Designer and Marketer Warrants, 9.6% of Co.
- ------------------------------------------------------------------------------------------------------------------------------------
Caswell-Massey Holdings Corp. Wholesale & Retail - Toiletries Senior Debt 1,833 1,833
Subordinated Debt 1,745 1,745
Common Stock Warrants, 24.0% of Co. 552 1,092
--------- --------
4,130 4,670
- ------------------------------------------------------------------------------------------------------------------------------------
Centennial Broadcasting, Inc. Media - Radio Stations Subordinated Debt 18,778 18,778
- ------------------------------------------------------------------------------------------------------------------------------------
Chance Coach, Inc. (2) Manufacturing - Buses Senior Debt 2,411 2,411
Subordinated Debt 8,147 8,147
Common Stock, 20.4% of Co. 1,896 2,793
Common Stock Warrants, 43.0% of Co. 4,041 5,950
Preferred Stock, Convertible into 20.0%
of Co. 2,000 2,793
--------- --------
18,495 22,094
- ------------------------------------------------------------------------------------------------------------------------------------
Chromas Technologies (2) Manufacturing - Printing Presses Senior Debt 10,452 10,452
Subordinated Debt 4,447 4,447
Common Stock, 35.0% of Co. 1,500 1,500
Common Stock Warrants, 25.0% of Co. 1,071 1,071
Preferred Stock, Convertible into 40.0%
of Co. 4,080 4,080
--------- --------
21,550 21,550
- ------------------------------------------------------------------------------------------------------------------------------------
Confluence Holdings Corp. (2) Manufacturing - Canoes & Kayaks Subordinated Debt 10,648 10,648
Common Stock, 6.0% of Co. 537 37
Common Stock Warrants, 20.4% of Co. 1,630 1,352
--------- --------
12,815 12,037
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
17
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
COMPANY INDUSTRY INVESTMENT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Cornell Companies, Inc. Service - Private Corrections Subordinated Debt $28,929 $28,929
Common Stock Warrants, 2.2% of Co. 1,102 1,071
--------- --------
30,031 30,000
- ------------------------------------------------------------------------------------------------------------------------------------
Crosman Corporation Manufacturing - Small Arms Subordinated Debt 3,854 3,854
Common Stock Warrants 3.5% of Co. 330 330
--------- --------
4,184 4,184
- ------------------------------------------------------------------------------------------------------------------------------------
Cycle Gear, Inc. (2) Wholesale & Retail - Motor Cycle Senior Debt 750 750
Accessories
Subordinated Debt 4,344 4,344
Common Stock Warrants, 34.0% of Co. 374 884
--------- --------
5,468 5,978
- ------------------------------------------------------------------------------------------------------------------------------------
Decorative Surfaces Manufacturing - Decorative Paper & Subordinated Debt 12,878 12,878
International, Inc. (2) Vinyl Products
Common Stock Warrants, 42.3% of Co. 4,571 -
Preferred Stock, Convertible into 2.9%
of Co. 803 -
--------- --------
18,252 12,878
- ------------------------------------------------------------------------------------------------------------------------------------
Dixie Trucking Company, Inc. (2) Transportation - Overnight Subordinated Debt 4,079 4,079
Shorthaul Delivery
Common Stock Warrants, 32.0% of Co. 141 553
--------- --------
4,220 4,632
- ------------------------------------------------------------------------------------------------------------------------------------
Electrolux, LLC Manufacturing - Vacuum Cleaners Common Stock, 2.5% of Co. 246 2,000
- ------------------------------------------------------------------------------------------------------------------------------------
Erie County Plastics Corporation Manufacturing - Molded Plastics Subordinated Debt 8,920 8,920
Common Stock Warrants, 8.0% of Co. 1,170 1,170
--------- --------
10,090 10,090
- ------------------------------------------------------------------------------------------------------------------------------------
EuroCaribe Packing Company, Inc. Manufacturing - Meat Processing Senior Debt 7,959 7,959
Subordinated Debt 9,048 7,048
Common Stock Warrants, 37.1% of Co. 1,110 -
--------- --------
18,117 15,007
- ------------------------------------------------------------------------------------------------------------------------------------
Fulton Bellows & Components, Inc. Manufacturing - Bellows Senior Debt 13,100 13,100
(2) Subordinated Debt 6,771 6,771
Common Stock Warrants, 20.0% of Co. 1,305 1,305
Preferred Stock, Convertible into 40.0% 3,191 3,191
--------- --------
of Co. (1) 24,367 24,367
- ------------------------------------------------------------------------------------------------------------------------------------
Manufacturing - Machine Tools, Subordinated Debt 27,280 27,280
Goldman Industrial Group Metal Cutting Types
Common Stock Warrants, 15.0% of Co. 2,822 2,822
--------- --------
30,102 30,102
- ------------------------------------------------------------------------------------------------------------------------------------
IGI, Inc. Healthcare - Veterinary Vaccines Subordinated Debt 5,294 5,294
Common Stock Warrants, 18.7% of Co. 2,003 1,878
--------- --------
7,297 7,172
- ------------------------------------------------------------------------------------------------------------------------------------
Iowa Mold Tooling, Inc. (2) Manufacturing - Specialty Equipment Subordinated Debt 23,562 23,562
Common Stock, 28.7% of Co. 3,200 3,200
Common Stock Warrants, 53.0% of Co. 5,918 5,918
--------- --------
32,680 32,680
- ------------------------------------------------------------------------------------------------------------------------------------
JAAGIR, LLC Service - IT Staffing and ConsultingSubordinated Debt 2,789 2,789
Common Stock Warrants, 4.0% of Co. 271 271
--------- --------
3,060 3,060
- ------------------------------------------------------------------------------------------------------------------------------------
JAG Industries, Inc. (2) Manufacturing - Metal Fabrication Senior Debt 1,142 1,142
and Tablet Manufacturing
Subordinated Debt 2,446 2,446
Common Stock Warrants, 75.0% of Co. 505 -
--------- --------
4,093 3,588
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
18
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
COMPANY INDUSTRY INVESTMENT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Lion Brewery, Inc. (2) Manufacturing - Malt Beverages Subordinated Debt $5,996 $5,996
Common Stock Warrants, 54.0% of Co. 675 7,688
--------- --------
6,671 13,684
- ------------------------------------------------------------------------------------------------------------------------------------
Lubricating Specialties Co. Manufacturing - Lubricant and Grease Senior Debt 7,206 7,206
Subordinated Debt 14,718 14,718
Common Stock Warrants, 21.0% of Co. 791 791
--------- --------
22,715 22,715
- ------------------------------------------------------------------------------------------------------------------------------------
MBT International Inc. (2) Wholesale & Retail - Musical Senior Debt 3,300 3,300
Instrument Distributor
Subordinated Debt 6,810 6,810
Common Stock Warrants, 30.6% of Co. 1,214 1,214
Preferred Stock, Convertible into 53.1% 2,250 2,250
--------- --------
of Co. (1) 13,574 13,574
- ------------------------------------------------------------------------------------------------------------------------------------
New Piper Aircraft, Inc. Manufacturing Aircraft Manufacturing Subordinated Debt 18,211 18,211
Common Stock Warrants, 4.0% of Co. 2,231 3,578
--------- --------
20,442 21,789
- ------------------------------------------------------------------------------------------------------------------------------------
o2wireless Solutions Inc. Telecommunications - Wireless Common Stock Warrants, 8.0% of Co. 2,521 16,670
Communications Network Services
- ------------------------------------------------------------------------------------------------------------------------------------
Parts Plus Group Wholesale & Retail - Auto Parts Subordinated Debt 4,329 4,329
Distributor
Common Stock Warrants, 3.6% of Co. 333 333
Preferred Stock, Convertible into 1.7%
of Co. (1) 555 117
--------- --------
5,217 4,779
- ------------------------------------------------------------------------------------------------------------------------------------
Patriot Medical Technologies, Service - Repair Services Senior Debt 2,805 2,805
Inc. (2)
Subordinated Debt 2,767 2,767
Common Stock Warrants, 15.0% of Co. 612 612
Preferred Stock, Convertible into 16.0% 1,104 1,104
--------- --------
of Co. 7,288 7,288
- ------------------------------------------------------------------------------------------------------------------------------------
Starcom Holdings, Inc. Construction - Electrical Contractor Subordinated Debt 19,199 19,199
Common Stock, 2.8% of Co. 616 866
Common Stock Warrants, 17.5% of Co. 3,914 5,415
--------- --------
23,729 25,480
- ------------------------------------------------------------------------------------------------------------------------------------
Sunvest Industries, LLC (2) Manufacturing - Contract Senior Debt 5,000 5,000
Manufacturing
Subordinated Debt 5,295 5,295
Common Stock Warrants, 38.0% of Co.
705 705
Preferred Stock, 35.0% of Co. (1) 1,000 1,000
--------- --------
12,000 12,000
- ------------------------------------------------------------------------------------------------------------------------------------
The Inca Group (2) Manufacturing - Steel Products Subordinated Debt 15,858 15,858
Common Stock, 27.7% of Co. 1,700 2,010
Common Stock Warrants, 57.3% of Co. 3,060 4,136
--------- --------
20,618 22,004
- ------------------------------------------------------------------------------------------------------------------------------------
The L.A. Studios, Inc. Wholesale & Retail - Audio ProductionSubordinated Debt 2,555 2,555
Common Stock Warrants, 17.0% of Co. 902 1,176
--------- --------
3,457 3,731
- ------------------------------------------------------------------------------------------------------------------------------------
Transcore Holdings, Inc. Information Technology - Subordinated Debt 22,908 22,908
Transportation Information
Management Services
Common Stock Warrants, 10.2% of Co. 4,686 5,369
Redeemable Preferred Stock 571 571
--------- --------
28,165 28,848
- ------------------------------------------------------------------------------------------------------------------------------------
Tube City Olympic of Ohio, Inc. Manufacturing - Mill Services Senior Debt 7,909 7,909
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
19
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
COMPANY INDUSTRY INVESTMENT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Tube City, Inc. Manufacturing - Mill Services Subordinated Debt $6,460 $6,460
Common Stock Warrants, 14.8% of Co. 2,523 3,040
--------- --------
8,983 9,500
- ------------------------------------------------------------------------------------------------------------------------------------
Warner Power, LLC (2) Manufacturing - Power Systems and Senior Debt 1,125 1,125
Electrical Ballasts
Subordinated Debt 3,959 3,959
Common Stock Warrants, 53.1% of LLC 1,629 4,587
--------- --------
6,713 9,671
- ------------------------------------------------------------------------------------------------------------------------------------
Westwind Group Holdings, Inc. Service - Restaurants Subordinated Debt 3,011 1,673
Common Stock Warrants, 5.0% of Co. 350 -
--------- --------
3,361 1,673
- ------------------------------------------------------------------------------------------------------------------------------------
Wrenchead.com, Inc. Internet - Auto Parts Distributor Common Stock, 1.0% of Co. - 104
- ------------------------------------------------------------------------------------------------------------------------------------
ACS Equities, LP (2) Investment Partnership Common Stock, 90.0% of LP 6,726 -
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Basis Swap Pay Fixed / Receive Floating 9 Contracts / Notional Amounts Totaling
Agreements $102,123 - (582)
Pay Floating / Receive Floating 8 Contracts / Notional Amounts Totaling
$166,030 - (488)
--------- --------
- (1,070)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments $563,331 $582,108
- ------------------------------------------------------------------------------------------------------------------------------------
American Capital Financial Investment Banking Common Stock, 100% of Co. (1) 403 1,120
Services(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Totals $563,734 $583,228
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
20
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
COMPANY INDUSTRY INVESTMENT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
A.H. Harris & Sons, Inc. Wholesale & Retail - Construction Subordinated Debt $4,733 $4,733
Common Stock Warrants, 3.5% of Co. 267 267
--------- --------
5,000 5,000
- ------------------------------------------------------------------------------------------------------------------------------------
Aeriform Corporation Manufacturing - Packaged Industrial Subordinated Debt 7,774 7,774
Gas
- ------------------------------------------------------------------------------------------------------------------------------------
Auxi Health, Inc. Healthcare - Home Healthcare Common Stock Warrants, 20% of Co. 2,599 1,856
Subordinated Debt 10,136 10,136
--------- --------
12,735 11,992
- ------------------------------------------------------------------------------------------------------------------------------------
BIW Connector Systems, LLC Manufacturing - Specialty Connectors Senior Debt 3,404 3,404
Subordinated Debt 6,829 6,829
Common Stock Warrants, 8% of LLC 652 451
--------- --------
10,885 10,684
- ------------------------------------------------------------------------------------------------------------------------------------
Capital.com, Inc. (2) Internet - Financial Portal Common Stock, 85% of Co. 1,492 72,500
- ------------------------------------------------------------------------------------------------------------------------------------
Caswell-Massey Holdings Corp. Wholesale & Retail - Toiletries Senior Debt 2,000 2,000
Subordinated Debt 1,670 1,670
Common Stock Warrants, 24% of Co. 552 552
--------- --------
4,222 4,222
- ------------------------------------------------------------------------------------------------------------------------------------
Centennial Broadcasting, Inc. Media - Radio Stations Subordinated Debt 16,975 16,975
- ------------------------------------------------------------------------------------------------------------------------------------
Chance Coach, Inc. (2) Manufacturing - Buses Senior Debt 1,071 1,071
Subordinated Debt 7,520 7,520
Preferred Stock, Convertible into 20% 2,000 2,793
of Co.
Common Stock, 20.5% of Co. 1,896 2,793
Common Stock Warrants, 43.2% of Co. 4,041 5,950
--------- --------
16,528 20,127
- ------------------------------------------------------------------------------------------------------------------------------------
Confluence Holdings Corp. Manufacturing - Canoes & Kayaks Subordinated Debt 8,812 8,812
Common Stock, 0.7% of Co. 45 17
Common Stock Warrants, 18% of Co. 1,319 1,217
--------- --------
10,176 10,046
- ------------------------------------------------------------------------------------------------------------------------------------
Crosman Corporation Manufacturing - Small Arms Subordinated Debt 3,702 3,702
Common Stock Warrants, 3.5% of Co. 330 330
--------- --------
4,032 4,032
- ------------------------------------------------------------------------------------------------------------------------------------
Cycle Gear, Inc. (2) Wholesale & Retail - Motor Cycle Senior Debt 750 750
Accessories 2,262 2,262
Subordinated Debt
Common Stock Warrants, 27.6% of Co. 374 374
--------- --------
3,386 3,386
- ------------------------------------------------------------------------------------------------------------------------------------
Decorative SurfacesManufacturing - Decorative Paper & Subordinated Debt 5,606 5,606
International, Vinyl Products
Inc. (2)
Common Stock Warrants, 42.3% of Co. 4,571 4,394
Preferred Stock, Convertible into 2.9% 728 728
--------- --------
of Co. 10,905 10,728
- ------------------------------------------------------------------------------------------------------------------------------------
Dixie Trucking Company, Inc. (2) Transportation - Overnight Shorthaul Subordinated Debt 4,064 4,064
Delivery
Common Stock Warrants, 32% of Co. 141 141
--------- --------
4,205 4,205
- ------------------------------------------------------------------------------------------------------------------------------------
Electrolux, LLC Manufacturing - Vacuum Cleaners Subordinated Debt 7,849 7,849
Common Stock, 2.5% of Co. 246 1,144
--------- --------
8,095 8,993
- ------------------------------------------------------------------------------------------------------------------------------------
Erie County Plastics Corporation Manufacturing - Molded Plastics Subordinated Debt 8,858 8,858
Common Stock Warrants, 8% of Co. 1,170 1,170
--------- --------
10,028 10,028
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
21
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
COMPANY INDUSTRY INVESTMENT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
EuroCaribe Packing Company, Manufacturing - Meat Processing Senior Debt $6,276 $6,276
Inc. (2) Subordinated Debt 8,971 8,971
Common Stock Warrants, 37.1% of Co. 1,110 1,046
--------- --------
16,357 16,293
- ------------------------------------------------------------------------------------------------------------------------------------
IGI, Inc. Healthcare - Veterinary Vaccines Subordinated Debt 5,037 5,037
Common Stock Warrants, 16.7% of Co. 2,003 2,587
--------- --------
7,040 7,624
- ------------------------------------------------------------------------------------------------------------------------------------
JAG Industries, Inc. (2) Manufacturing - Metal Fabrication Senior Debt 1,200 1,200
and Tablet Manufacturing
Subordinated Debt 2,385 2,385
Common Stock Warrants, 75% of Co. 505 -
--------- --------
4,090 3,585
- ------------------------------------------------------------------------------------------------------------------------------------
Lion Brewery, Inc. (2) Manufacturing - Malt Beverages Subordinated Debt 5,975 5,975
Common Stock Warrants, 54% of Co. 675 1,863
--------- --------
6,650 7,838
- ------------------------------------------------------------------------------------------------------------------------------------
MBT International Inc. (2) Wholesale & Retail - Musical Senior Debt 4,200 4,200
Instrument Distributor
Common Stock Warrants, 30.6% of Co. 1,214 1,214
Preferred Stock, Convertible into 2,250 2,250
53.1% of Co. (1)
Subordinated Debt 6,439 6,439
--------- --------
14,103 14,103
- ------------------------------------------------------------------------------------------------------------------------------------
New Piper Aircraft, Inc . Manufacturing - Aircrafts Subordinated Debt 18,023 18,023
Common Stock Warrants, 4% of Co. 2,231 2,884
--------- --------
20,254 20,907
- ------------------------------------------------------------------------------------------------------------------------------------
o2wireless Solutions Inc. Telecommunications - Wireless Subordinated Debt 10,348 10,348
Communications Network Services
Common Stock Warrants, 11.5% of Co. 2,698 2,698
--------- --------
13,046 13,046
- ------------------------------------------------------------------------------------------------------------------------------------
Parts Plus Group Wholesale & Retail - Auto Parts Subordinated Debt 4,119 4,119
Distributor
Preferred Stock, Convertible into 1.9% 556 556
of Co. (1)
Common Stock Warrants, 2.4% of Co. 333 333
--------- --------
5,008 5,008
- ------------------------------------------------------------------------------------------------------------------------------------
Patriot Medical Technologies, Service - Repair Services Senior Debt 3,250 3,250
Inc. (2) Subordinated Debt 2,487 2,487
Common Stock Warrants, 14.9% of Co. 612 612
Preferred Stock, Convertible
into 16.9% of Co. 1,020 1,020
--------- --------
7,369 7,369
- ------------------------------------------------------------------------------------------------------------------------------------
Starcom Holdings, Inc. Construction - Electrical Contractor Subordinated Debt 18,929 18,929
Common Stock Warrants, 17.5% of Co. 3,914 3,914
Common Stock, 2.8% of Co. 616 616
--------- --------
23,459 23,459
- ------------------------------------------------------------------------------------------------------------------------------------
The Inca Group (2) Manufacturing - Steel Products Common Stock, 18.5% of Co. 850 850
Subordinated Debt 11,177 11,177
Common Stock Warrants, 66.5% of Co. 3,060 3,060
--------- --------
15,087 15,087
- ------------------------------------------------------------------------------------------------------------------------------------
The L.A. Studios, Inc. Wholesale & Retail - Audio ProductionSubordinated Debt 2,466 2,466
Common Stock Warrants, 17% of Co. 902 902
--------- --------
3,368 3,368
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
22
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
COMPANY INDUSTRY INVESTMENT COST FAIR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Transcore Holdings, Inc. Information Technology - Subordinated Debt $5,656 $5,656
Transportation Information
Management Services
Common Stock Warrants, 7.3% of Co. 1,694 1,694
Redeemable Preferred Stock 306 306
--------- --------
7,656 7,656
- ------------------------------------------------------------------------------------------------------------------------------------
Tube City Olympic of Ohio, Inc. Manufacturing - Mill Services Senior Debt 9,700 9,700
- ------------------------------------------------------------------------------------------------------------------------------------
Tube City, Inc. Manufacturing - Mill Services Subordinated Debt 6,017 6,017
Common Stock Warrants, 14.75% of Co. 2,523 2,523
--------- --------
8,540 8,540
- ------------------------------------------------------------------------------------------------------------------------------------
Warner Power, LLC (2) Manufacturing - Power Systems and Senior Debt 4,610 4,610
Electrical Ballasts
Subordinated Debt 3,871 3,871
Common Stock Warrants, 53.1% of LLC 1,629 1,629
--------- --------
10,110 10,110
- ------------------------------------------------------------------------------------------------------------------------------------
Westwind Group Holdings, Inc. Service - Restaurants Subordinated Debt 2,984 2,984
Common Stock Warrants, 5% of Co. 350 244
--------- --------
3,334 3,228
- ------------------------------------------------------------------------------------------------------------------------------------
Wrenchead.com, Inc. Internet - Auto Parts Distributor Common Stock, 1% of Co. - 104
- ------------------------------------------------------------------------------------------------------------------------------------
ACS Equities, LP (2) Investment Partnership Common Stock, 90% of LP 3,655 -
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Basis Swaps Pay Floating / Receive Floating 4 Contracts / Notional Amounts Totaling - (163)
Agreements $61,325
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments $305,264 $377,554
- ------------------------------------------------------------------------------------------------------------------------------------
American Capital Financial Investment Banking Common Stock, 100% of Co.(1) 403 4,893
Services(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Totals $305,667 $382,447
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Non-income producing
(2) Affiliate
See accompanying notes.
23
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
-------- -------- --------
Operating income:
Interest and dividend income ............................ $ 58,733 $ 30,833 $ 14,430
Loan fees ............................................... 3,995 2,572 2,549
-------- -------- --------
Total operating income .................................. 62,728 33,405 16,979
Operating expenses:
Salaries and benefits ................................... 2,179 1,045 843
General and administrative ............................. 2,414 1,490 809
Interest ................................................ 9,691 4,716 57
-------- -------- --------
Total operating expenses ................................ 14,284 7,251 1,709
-------- -------- --------
Operating income before equity in loss of unconsolidated
operating subsidiary .................................... 48,444 26,154 15,270
Equity in loss of unconsolidated operating subsidiary ... (3,773) (1,493) (482)
-------- -------- --------
Net operating income .................................... 44,671 24,661 14,788
Net realized gain on investments ........................ 4,538 2,711 --
(Decrease) increase in net unrealized appreciation of
investments ............................................. (53,582) 69,829 2,127
-------- -------- --------
Net (decrease) increase in shareholders' equity resulting
from operations ......................................... $ (4,373) $ 97,201 $ 16,915
======== ======== ========
Net operating income per common share:
Basic ........................ $ 2.00 $ 1.79 $ 1.34
Diluted ...................... $ 1.96 $ 1.73 $ 1.29
(Loss) earnings per common share:
Basic ........................ $ (0.20) $ 7.07 $ 1.53
$ (0.19) $ 6.80 $ 1.48
Diluted
Weighted average shares of Basic ........................ 22,323 13,744 11,068
common stock outstanding Diluted....................... 22,748 14,294 11,424
See accompanying notes.
24
AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(Distributions
Notes in Excess of)
Capital in Receivable Undistributed
Preferred Common Stock Excess of From Sale of Net Realized '
STOCK SHARES AMOUNT PAR VALUE COMMON STOCK EARNINGS
----- ------ ------ --------- ------------ --------
Balance at January 1, 1998 $-- $11,069 $111 $144,940 $ -- $ (55)
Issuance of common stock under
stock option plans -- 28 -- 396 -- --
Issuance of common stock under
the Dividend Reinvestment Plan -- 7 -- 128 -- --
Repurchase of outstanding shares -- (23) -- (219) -- --
Issuance of note receivable from
sale of common stock -- -- -- -- (300) --
Net increase in shareholders'
equity resulting from operations -- -- -- -- -- 14,788
Distributions -- -- -- -- -- (14,849)
------------- ----------- --------- --------- ---------- -----------
Balance at December 31, 1998 $-- 11,081 $111 $145,245 $(300) $(116)
============= =========== ========= ========= ========== ===========
Issuance of common stock -- 5,605 57 89,151 -- --
Issuance of common stock under
stock option plans -- 1,520 15 22,832 (22,752) --
Issuance of common stock under
the Dividend Reinvestment Plan -- 36 -- 693 -- --
Repurchase of common stock
warrants -- -- -- (2,165) -- --
Issuance of restricted shares -- 10 -- 166 -- --
Net increase in shareholders'
equity resulting from operations -- -- -- -- -- 27,372
Distributions -- -- -- -- -- (26,176)
------------- ----------- --------- --------- ---------- -----------
Balance at December 31, 1999 $ -- $18,252 $183 $255,922 $(23,052) $1,080
============= =========== ========= ========= ========== ===========
Issuance of common stock -- 9,430 94 185,224 -- --
Issuance of common stock under
stock option plans -- 290 3 6,699 (6,702) --
Issuance of common stock under
the Dividend Reinvestment Plan -- 31 -- 742 -- --
Repayments of notes receivable
from sale of common stock -- -- -- -- 2,365 --
Net decrease in shareholders'
equity resulting from operations -- -- -- -- -- 49,209
Distributions -- -- -- -- -- (50,630)
------------- ----------- --------- --------- ---------- -----------
Balance at December 31, 2000 $ -- $28,003 $280 $448,587 $(27,389) $(341)
============= =========== ========= ========= ========== ===========
Unrealized Total
Appreciation Shareholders
OF INVESTMENTS EQUITY
-------------- ---------
Balance at January 1, 1998 $5,656 $150,652
Issuance of common stock under
stock option plans -- 396
Issuance of common stock under
the Dividend Reinvestment Plan -- 128
Repurchase of outstanding shares -- (219)
Issuance of note receivable from
sale of common stock -- (300)
Net increase in shareholders'
equity resulting from operations 2,127 16,915
Distributions -- (14,849)
---------- ------------
Balance at December 31, 1998 $7,783 $152,723
========== ============
Issuance of common stock -- 89,208
Issuance of common stock under
stock option plans -- 95
Issuance of common stock under
the Dividend Reinvestment Plan -- 693
Repurchase of common stock
warrants -- (2,165)
Issuance of restricted shares -- 166
Net increase in shareholders'
equity resulting from operations 69,829 97,201
Distributions -- (26,176)
---------- ------------
Balance at December 31, 1999 $77,612 $311,745
========== ============
Issuance of common stock 185,318 --
Issuance of common stock under
stock option plans -- --
Issuance of common stock under
the Dividend Reinvestment Plan -- 742
Repayments of notes receivable
from sale of common stock -- 2,365
Net decrease in shareholders'
equity resulting from operations (53,582) (4,373)
Distributions --
---------- ------------
Balance at December 31, 2000 $24,030 $445,167
========== ============
See accompanying notes.
25
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------------ ----------------- -----------------
Operating activities
Net (decrease) increase in shareholders' equity resulting from $ (4,373) $ 97,201 $ 16,915
operations
Adjustments to reconcile net (decrease) increase in
shareholders' equity resulting from operations to net cash
provided by operating activities:
Unrealized deprecia tion (appreciation) of investments ....... 53,582 (69,829) (2,127)
Realized gain on investments ................................. (4,538) (2,711) --
Net amortization of securities ............................... -- -- (1,336)
Accretion of loan discounts .................................. (4,317) (2,049) (913)
Amortization of deferred finance costs ....................... 1,187 854 --
Increase in interest receivable .............................. (2,518) (856) (917)
Increase in accrued payment-in-kind dividends and interest ... (5,550) (3,038) (478)
Receipt of note for prepayment penalty ....................... (884) -- --
(Increase) decrease in due from unconsolidated subsidiary .... (5,102) (1,553) 83
Increase in other assets ..................................... (1,716) (4,338) (71)
Increase in other liabilities ................................ 3,577 4,409 73
Loss of unconsolidated operating subsidiary .................. 3,773 1,493 482
----------------- ----------------- -----------------
Net cash provided by operating activities .................... 33,121 19,583 11,711
Investing activities
Proceeds from sale or maturity of investments ................ 2,004 27,823 231,580
Principal repayments ......................................... 34,486 30,731 1,719
Purchases of investments ..................................... (276,138) (171,595) (142,865)
Purchases of securities ...................................... -- (12,900) (207,146)
----------------- ----------------- -----------------
Net cash used in investing activities ........................ (239,648) (125,941) (116,712)
Financing activities
(Repayments of) proceeds from short term notes payable, net .. -- (5,000) 85,948
Proceeds from asset securitization ........................... 87,200 -- --
(Repayments of) drawings on revolving credit facilities, net . (10,543) 48,545 30,000
Increase in deferred financing costs ......................... (2,243) (2,427) (37)
Repurchase of common stock ................................... -- -- (219)
Issuance of common stock ..................................... 185,318 89,451 224
Repurchase of common stock warrants .......................... -- (2,165) --
Distributions paid .......................................... (44,050) (26,158) (13,628)
----------------- ----------------- -----------------
Net cash provided by financing activities .................... 215,682 102,246 102,288
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents ......... 9,155 (4,112) (2,713)
Cash and cash equivalents at beginning of period ............. 2,037 6,149 8,862
----------------- ----------------- -----------------
Cash and cash equivalents at end of period ................... $ 11,192 $ 2,037 $ 6,149
================= ================= =================
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ....................................... $ 7,830 $ 4,385 $ 56
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in conjunction with dividend
reinvestment ................................................. $ 742 $ 693 $ 128
Notes receivable issued in exchange for common stock ......... 6,702 22,752 300
Net repayment of margin borrowings through sale of securities $-- $ 80,948 $--
Receipt of short term note in exchange for
principal repayment
of long term note ............................................ $ 8,424 $ 22,752 $ 300
See accompanying notes.
26
AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
--------------- --------------- ---------------
Per Share Data (1)
Net asset value at beginning of the period ........ $ 17.08 $ 13.80 $ 13.61
Net operating income .............................. 2.00 1.79 1.34
Realized gain on investments ...................... 0.21 0.20 --
(Decrease) increase in unrealized appreciation on
investments ....................................... (2.41) 5.08 0.19
--------------- --------------- ---------------
Net (decrease) increase in shareholders' equity
resulting from operations ......................... $ (0.20) $ 7.07 $ 1.53
Issuance of common stock .......................... 0.70 0.71 --
Effect of antidilution (dilution) ................. 0.49 (2.76) --
Distribution of net investment income ............. (2.17) (1.74) (1.34)
--------------- --------------- ---------------
Net asset value at end of period .................. $ 15.90 $ 17.08 $ 13.80
Per share market value at end of period ........... $ 25.19 $ 22.75 $ 17.25
Total return (2) .................................. 20.25% 41.97% 2.57%
Shares outstanding at end of period ............... 28,003 18,252 11,081
Ratio/Supplemental Data
Net assets at end of period ....................... $ 445,167 $ 311,745 $ 152,723
Ratio of operating expenses to average net assets . 3.77% 3.81% 1.13%
Ratio of net operating income to average net assets 11.80% 12.94% 9.74%
(4) Basic per share data.
(5) Total return equals the increase (decrease) of the ending market value
over the beginning market value plus dividends, divided by the beginning
market value.
See accompanying notes.
27
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. 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, Los Angeles, Philadelphia, 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
accounting principles generally accepte d in the United States and Article 6 of
Regulation S-X of the Code of Federal Regulations. The Company accounts for its
investment in ACFS under the equity method.
VALUATION OF INVESTMENTS
Investments are carried at fair value, as determined by the Board of Directors.
Securities that are publicly traded are valued at the closing price on the
valuation date. Debt and equity securities that are not publicly traded are
valued at fair value as determined in good faith by the Board of Directors. In
making such determination, the Board of Directors will value non-convertible
debt securities at cost plus amortized original issue discount, if any, unless
adverse factors lead to a determination of a lesser valuation. In valuing
convertible debt, equity or other securities, the Board of Directors determines
the fair value based on the collateral, the issuer's ability to make payments,
the earnings of the issuer, sales to third parties of similar securities, the
comparison to publicly traded securities and other pertinent factors. Due to the
uncertainty inherent in the valuation process, such estimates of fair value may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
Additionally, changes in the market environment and other events that may occur
over the life of the investments may cause the gains ultimately realized on
these investments to be different than the valuations currently assigned (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.
28
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
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 by the
Company's wholly-owned subsidiary, ACFS, based on services provided. 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.
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, 2000, 1999, and
1998.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the period reported. Actual results
could differ from those estimates (see Note 4).
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets
ranging from three 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.
CONCENTRATION OF CREDIT RISK
The Company places its cash and cash equivalents with financial institutions
and, at times, cash held in checking accounts may exceed the Federal Deposit
Insurance Corporation insured limit.
29
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
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 any impact on the Company's
financial statements or disclosures because the Company already reports its
derivative instruments at fair value.
NOTE 3. INVESTMENTS
Investments consist primarily of securities issued by publicly- and
privately-held companies which have been valued at $583,178 as of December 31,
2000. These securities consist of senior debt, subordinated debt with equity
warrants, preferred stock and common stock. The debt securities have effective
interest rates ranging from 10.2% to 32.4% and are payable in installments with
final maturities generally 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. At
December 31, 2000, there were no loans 0-60 days past due, one loan totaling
$3,214 was 60-90 days past due, and no loans were greater than 90 days past due.
In addition, one of the Company's investments is on non-accrual status.
Summaries of the composition of the Company's portfolio of publicly and
non-publicly traded securities as of December 31, 2000 and 1999 at cost and fair
value are shown in the following table:
COST DECEMBER 31, 2000 DECEMBER 31, 1999
- ---- ----------------- -----------------
Senior debt 12.4% 11.9%
Subordinated debt 61.8% 69.4%
Subordinated debt with non-detachable warrants 6.9% --
Preferred stock 3.5% 2.2%
Common stock warrants 13.1% 13.6%
Common stock 2.3% 2.9%
INCLUDING CAPITAL.COM EXCLUDING CAPITAL.COM
FAIR VALUE DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1999
- ---------- ----------------- ----------------- ---------------------
Senior debt 11.8% 9.7% 11.9%
Subordinated debt 58.2% 56.0% 69.4%
Subordinated debt with non-detachable warrants 6.6% -- --
Preferred stock 3.3% 2.0% 2.5%
Common stock warrants 17.1% 11.6% 14.4%
Common stock 3.0% 20.7% 1.8%
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, 2000 due
to the value of the Capital.com investment of $72,500. At December 31, 1999,
Capital.com accounted for approximately 19% of the total portfolio value of
investments in publicly and non-publicly traded securities (see Note 4).
30
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
The following table shows the portfolio composition by industry grouping at cost
and at fair value:
COST DECEMBER 31, 2000 DECEMBER 31, 1999
- ---- ----------------- -----------------
Manufacturing 66.0% 56.6%
Service 7.8% 3.5%
Wholesale & Retail 7.5% 11.5%
Information Technology 5.0% 2.5%
Healthcare 4.5% 6.5%
Construction 4.3% 7.7%
Media 3.4% 5.5%
Transportation 0.8% 1.4%
Telecommunications 0.4% 4.3%
Internet 0.3% 0.5%
FAIR VALUE DECEMBER 31, 2000 DECEMBER 31, 1999
- ---------- ----------------- -----------------
Manufacturing 65.0% 46.2%
Wholesale & Retail 7.4% 9.3%
Service 7.2% 2.8%
Information Technology 4.9% 2.0%
Construction 4.3% 6.2%
Healthcare 4.1% 5.2%
Media 3.2% 4.5%
Telecommunications 2.8% 3.5%
Transportation 0.8% 1.1%
Internet 0.3% 19.2%
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. The current investment composition within the
manufacturing segment includes investments in 24 different manufacturing
Standardized Industrial Classification ("SIC") codes, with the largest
percentages being 9% in SIC code 3531 ("Construction Machinery and Equipment"),
and 12% in SIC code 3721 ("Aircraft") as of December 31, 2000 and 1999,
respectively.
The following table shows the portfolio composition by geographic location at
cost and at fair value:
COST DECEMBER 31, 2000 DECEMBER 31, 1999
- ---- ----------------- -----------------
Mid-Atlantic 27.0% 31.2%
Southeast 21.1% 34.0%
Northeast 18.1% 14.8%
Southwest 13.5% 7.0%
South-Central 11.1% 7.6%
North-Central 9.2% 5.4%
31
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
FAIR VALUE DECEMBER 31, 2000 DECEMBER 31, 1999
- ---------- ----------------- -----------------
Mid-Atlantic 25.9% 25.2%
Southeast 22.5% 27.2%
Northeast 18.2% 30.5%
Southwest 13.3% 5.9%
South-Central 10.8% 6.0%
North-Central 9.3% 5.2%
NOTE 4. 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 stake and warrants to acquire up
to an additional 5% of the common equity at a nominal price. At December 31,
2000 the warrants were fully vested.
In considering the appropriate valuation of this investment at December 31, 1999
and December 31, 2000, in addition to the value implied by First Union's
investment for a 15% equity interest, 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 C apital.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 its original cost $1,492 at
December 31, 2000. This value represents a decrease of $71,008 from its December
31, 1999 valuation of $72,500. This depreciation is attributed to numerous
factors arising during the year ended December 31, 2000, including the
unfavorable financing environment for Internet companies and substantial
declines in the valuations of comparable public and private companies. Since the
Company's original investment in the third quarter of 1999, the Company has
experienced no net depreciation of its investment in Capital.com.
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.
32
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
Condensed financial information for ACFS is as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
Assets
Investments in ACS Equities, LP at fair value (See Note 15) $ 10,365 $ 10,365
Other assets, net 4,270 3,572
----------------- -----------------
Total assets $ 14,635 $ 13,937
================= =================
Liabilities and Shareholder's Equity
Deferred income taxes $ -- $ 2,007
Due to parent 7,433 2,331
Other liabilities 6,082 4,706
Shareholder's equity 1,120 4,893
----------------- -----------------
Total liabilities and shareholder's equity $ 14,635 $ 13,937
================= =================
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ----------------- -----------------
Operating income $ 7,324 $ 6,030 $ 5,227
Operating expense 13,098 9,114 6,451
----------------- ----------------- -----------------
Net operating loss (5,774) (3,084) (1,224)
Realized gain on investments 1 925 --
(Decrease) increase in unrealized
appreciation of investments -- (246) 481
Other 2,000 912 261
----------------- ----------------- -----------------
Net loss $ (3,773) $ (1,493) $ (482)
================= ================= =================
NOTE 6. BORROWINGS
The Company's $225,000 revolving debt funding facility has a term of
two years and an interest rate on borrowings originally charged at one-month
LIBOR (6.57% at December 31, 2000) plus 150 basis points, that was subsequently
decreased to LIBOR plus 50 basis points on December 20, 2000. The full amount of
principal will be amortized over a 24 month period 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. Subsequent to December 31, 2000, the Company received an extension
of the two-year term of this facility beginning March 31, 2001.
On December 20, 2000, the Company completed a $115,400 asset securitization. In
conjunction with the transaction, the Company established ACAS Business Loan
Trust 2000-1 (the "Trust"), an affiliated business trust, and contributed to the
Trust $153,700 in loans. Subject to certain conditions precedent, the Company
will remain servicer of the loans. Simultaneously with the initial contribution,
the Trust was authorized to issue $69,200 Class A notes and $46,200 Class B
notes to institutional investors and $38,300 of Class C notes were retained by
the Trust. The Class A notes carry an interest rate of one-month LIBOR plus 45
basis points, the Class B notes carry an interest rate of one-month LIBOR plus
150 basis points. As of December 31, 2000, the Company had issued all $69,200 of
the Class A notes, and $18,000 of the Class B notes; in January 2001, the
Company issued the remaining $28,200 of the Class B notes. The notes are backed
by loans to 29 of the Company's portfolio companies. The Class A notes mature on
March 20, 2006, and the Class B notes mature on August 20, 2007. The transfer of
the 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
33
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
Standards No. 125. Early repayments are first applied to the Class A notes, and
then to the Class B notes. The Company enters into interest rate swaps in order
to mitigate interest rate risk related to the asset securitization (see Note
10).
During the years ended December 31, 2000, 1999, and 1998, the cash paid for
interest was approximately $7,830, $4,385, and $56, respectively. The weighted
average interest rates, including amortization of deferred finance costs, for
the years ended December 31, 2000 and 1999 were 9.9%, 9.7%, and 5.9%,
respectively.
For the above borrowings, the fair value of the borrowings approximates cost.
NOTE 7. 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
(decrease) increase in shareholders' equity resulting from operations calculated
as if compensation costs were computed in accordance with SFAS 123. The 1997
Stock Option Plan (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. In May, 1998, the Company authorized 500 additional shares to be
granted under the 1997 Plan. During May, 2000, shareholders approved the 2000
Stock Option Plan (the "2000 Plan") which provided for the granting of options
to purchase 2,000 shares of common stock. As of December 31, 2000, there are 72
and 612 shares available to be granted under the 1997 and 2000 Plans,
respectively.
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 from 15 to 20 options
to each of the non-employee directors for a total grant of 125 options. At
December 31, 2000, there are 25 shares available for grant under the Director
Plan.
Options granted under the 1997 and 2000 Plans 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 nonstatutory stock options.
Only employees of the Company and its subsidiaries are eligible to receive
incentive stock options under the 1997 and 2000 Plans. Options under both the
1997 and 2000 Plans 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 and 2000 Plans 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.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ----------------- -----------------
Net operating income
As reported $ 44,671 $ 24,661 $ 14,788
Pro forma $ 37,478 $ 22,643 $ 13,609
Net (decrease) increase in shareholders'
equity resulting from operations
As reported $ (4,373) $ 97,201 $ 16,915
Pro forma $ (11,567) $ 95,183 $ 15,737
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 (decrease) increase in shareholders' equity resulting from operations
for future years.
For options granted during the year ended December 31, 2000, 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
8.6%, risk-free interest rate 5.0%, expected volatility factor .43, and expected
lives of the options of 5 years.
34
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
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.
A summary of the status of the Company's stock option plans as of and for
the years ended December 31, 2000 and 1999 is as follows:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2000 1999
--------------------------------- ------------------------------
WEIGHTED- WEIGHTED-
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
------------- ------------- ------------- -------------
Options outstanding, beginning of year 354 $ 17.60 1,633 $ 14.96
Granted .............................. 1,529 $ 22.81 303 $ 19.01
Exercised ............................ (290) $ 21.53 (1,520) $ 15.00
Canceled ............................. (89) $ 20.47 (62) $ 17.76
------------- ------------- ------------- --------------
Options outstanding, end of year ..... $ 1,504 21.97$ 354 17.60
============= ============= ============= ==============
Options exercisable at year end ...... 1,504 354
The following table summarizes information about stock options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- -----------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
- ------------------------ ----------------- ---------------- -------------- ----------------- --------------
$15.00 to $17.00 82 7.6 Years $ 15.00 82 $ 15.00
$17.01 to $18.74 85 7.4 Years $ 18.55 80 $ 18.54
$18.75 to $19.75 65 8.4 Years $ 18.78 65 $ 18.78
$19.76 to $22.32 92 9.7 Years $ 22.15 72 $ 22.31
$22.33 TO $22.88 1,180 9.4 YEARS $ 22.86 1,165 $ 22.87
-------------- ----------------- -------------- -------------- -----------
$15.00 to $22.88 1,504 9.1 YEARS $ 21.97 1,464 $ 21.98
During 2000 and 1999, the Company issued 290 and 1,520 shares,
respectively, of common stock to employees of the Company, pursuant to option
exercises, in exchange for notes receivable totaling $6,702 and $22,752,
respectively. 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.
NOTE 8. CAPITAL STOCK
In May and November 2000, the Company sold 6,325 and 3,105 shares of common
stock, respectively, in two follow-on equity offerings. The net proceeds of the
offerings of approximately $185,318 were used to repay outstanding borrowings
under the revolving debt funding facility and to fund investments.
35
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
In August 1999 the Company sold 5,605 shares of common stock. The net
proceeds of the offering of approximately $89,151 were used to repay outstanding
borrowings under the revolving debt funding facility and to fund investments.
The Company declared dividends of $50,630, $26,176, and $14,849, or $2.17,
$1.74 and $1.34 per share for the years ended December 31, 2000, 1999, and 1998,
respectively.
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.
NOTE 9. REALIZED GAIN ON INVESTMENTS
During 2000, one of the Company's portfolio companies, o2wireless,
completed an initial public offering. In conjunction with the offering,
o2wireless repaid the Company's $13,000 subordinated note. In addition, the
Company exercised and sold 180 of the 2,737 common stock warrants it owns. As a
result of these transactions, the Company recorded a realized gain of $4,303
which was comprised of $2,475 of previously unamortized original issue discount
and $1,828 of gain on the sale of the exercised warrants.
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 $7,200 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 original issue discount 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 10. 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 revolving debt funding facility
and asset securitization. The Company uses interest rate swap agreements for
hedging and risk management only and not for speculative purposes. During the
year ended December 31, 2000, the Company entered into 17 interest rate swap
agreements with an aggregate notional amount of $268,153. Pursuant to these swap
agreements, the Company pays either a variable rate equal to the prime lending
rate (9.50% and 8.50% at December 31, 2000 and 1999, respectively) and receives
a floating rate of the one-month LIBOR (6.57% and 6.47% at December 31, 2000 and
1999, respectively), or pays a fixed rate and receives a floating rate of the
one-month LIBOR. For 2000 and 1999, the swaps had a remaining weighted average
maturity of approximately 5.6 and 4.3 years, respectively. At December 31, 2000
and 1999, the fair value of the interest rate swap agreements represented a
liability of $1,070 and $163, respectively. The following table presents the
notional principal amounts of interest rate swaps by class:
NOTIONAL VALUE AT NOTIONAL VALUE AT
TYPE OF INTEREST RATE SWAP DECEMBER 31, 2000 DECEMBER 31, 1999
-------------------------- ----------------- -----------------
Pay fixed, receive floating $ 102,123 $ --
Pay floating, receive floating 166,030 61,325
----------------- -----------------
Total $ 268,153 $ 61,325
================= =================
36
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 11. 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, 2000, 1999, and
1998.
The aggregate gross unrealized appreciation of the Company's investments
over the cost for Federal income tax purposes was $33,397, $77,833, and $2,310,
as of December 31, 2000, 1999, and 1998, respectively. The net unrealized
appreciation over cost was $18,723, $72,305, and 2,265, respectively, for the
same periods. The aggregate cost of securities for Federal income tax purposes
was $563,331, $305,264, and $252,718 as of December 31, 2000, 1999 and 1998,
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 2000 and 1999, the Company paid Federal income taxes of $759 and
$309, respectively, on retained realized gains recorded during the tax years
ended September 30, 2000 and 1999. The payment was treated as a deemed
distribution because taxes were paid on behalf of the shareholders. As a result,
the Company did not record income tax expense.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases for office space and office
equipment. The leases expire over the next six years and contain provisions for
certain annual rental escalations. Rent expense for operating leases for the
years ended December 31, 2000, 1999, and 1998 was approximately $199, $113, and
$60, respectively.
Future minimum lease payments under non-cancelable operating leases at
December 31, 2000 were as follows:
2001 $ 801
2002 773
2003 673
2004 685
2005 and thereafter 2,637
------------
Total $ 5,569
============
In addition, at December 31, 2000, the Company had commitments under loan
agreements to fund up to $9,500 to four portfolio companies. These commitments
are composed of three 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 13. EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an Employee Stock Ownership Plan ("ESOP"), which
includes all employees and is fully funded on a pro rata basis by the Company
and its wholly-owned subsidiary, ACFS. Contributions are made at the Company's
discretion up to the lesser of $30 or 25% of annual compensation expense for
each employee. Employees are not fully vested until completing five years of
service. For the years ended December 31, 2000, 1999, and 1998, the Company and
ACFS contributed $179, $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 that are deposited into the ESOP.
37
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the years ended December 31, 2000, 1999, and 1998:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ----------------- -----------------
Numerator for basic and diluted
(loss) earnings per share $ (4,373) $ 97,201 $ 16,915
Denominator for basic weighted
average shares 22,323 13,744 11,068
Employee stock options 80 167 269
Contingently issuable shares 328 303 --
Warrants 17 80 87
----------------- ----------------- -----------------
Dilutive potential shares 425 550 356
----------------- ----------------- -----------------
Denominator for diluted weighted
average shares 22,748 14,294 11,424
----------------- ----------------- -----------------
Basic (loss) earnings per share $ (0.20) $ 7.07 $ 1.53
Diluted (loss) earnings per share $ (0.19) $ 6.80 $ 1.48
NOTE 15. RELATED PARTY TRANSACTIONS
The Company has provided loans to employees for the exercise of options
under the 1997 and 2000 Stock Option Plans. 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, 2000, the
Company issued $6,702 in loans to 21 employees for the exercise of options and
related taxes. During the year ended December 31, 1999, the Company issued
$22,752 in loans to 18 employees for the exercise of options and related taxes.
The Company recognized interest income from these loans of $1,340 and $623
during the years ended December 31, 2000 and 1999, respectively.
In connection with the issuance of the notes in 1999, 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 years ended December 31, 2000 and 1999,
the Company recorded $282 and $67 of amortization expense, respectively.
During 1999, the Company and ACFS formed ACS Equities, LP. Upon formation,
ACFS contributed all of its equity investments held as of September 30, 1999 at
fair value; the Company contributed $50 of capital. The investments contributed
by ACFS consisted of the following common stock investments:
FAIR VALUE AT FAIR VALUE AT
DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- -----------------
Biddeford Textile Corporation $ 1,470 $ 2,173
Erie Forge & Steel, Inc. -- 2,553
Mobile Tool International, Inc. 2,169 1,984
----------------- -----------------
Total $ 3,639 $ 6,710
================= =================
38
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
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 years ended December 31, 2000 and 1999,
the Company recorded unrealized depreciation of $3,071 and $3,655, respectively,
on its investment in ACS Equities, LP; a corresponding liability to ACS
Equities, LP of $6,726 is included in other liabilities.
NOTE 16. SELECTED QUARTERLY DATA (UNAUDITED)
YEAR ENDED DECEMBER 31, 2000
----------------------------
QTR 1 QTR 2 QTR 3 QTR 4
----- ----- ----- -----
Total operating income $ 11,518 $ 14,893 $ 16,956 $ 19,361
Net operating income 8,546 9,791 12,332 14,002
Net increase (decrease) in shareholders' equity resulting
from operations 19,314 11,229 (27,306) (7,610)
Basic earnings (loss) per common share 1.08 0.55 (1.12) (0.29)
Diluted earnings (loss) per common share 1.05 0.54 (1.10) (0.28)
39
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 9, 2001 (the "2001 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 2001 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 2001 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 2001 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, 2000 and 1999
Schedules of Investments as of December 31, 2000 and 1999
Statements of Operations for the Years Ended December 31, 2000, 1999, and
1998.
Statements of Shareholders' Equity for the Years Ended December 31, 2000,
1999, and 1998.
Statement of Cash Flows for the Years Ended December 31, 2000, 1999, and
1998.
Financial Highlights for the Years Ended December 31, 2000, 1999, and 1998.
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
40
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(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 to
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 as Exhibit 3.1 to Form 10-K
for the year ended December 31, 1999 filed March 31, 2000, and as
further amended by a Certificate of Amendment No. 2 in the form filed
as Appendix I to the Definitive Proxy Statement for the 2000 Annual
Meeting filed on April 5, 2000.
*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 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 incorporated by reference to
Exhibit 10.19 of Form 10-K for the year ended December 31, 1999 filed
March 31, 2000, and as further amended by an Amendment No. 4 dated as
of June 16, 2000 and an Amendment No. 5 dated as of December 20, 2001,
each of which is filed herewith.
*10.2 Pledge and Security Agreement among American Capital Strategies, Ltd.,
ACS Funding Trust I and Norwest Bank Minnesota, N.A., dated as of March
31, 1999, incorporated herein by reference to Exhibit 10.6 on Form 10-Q
for the quarter ended March 31, 1999, filed May 17, 1999, as amended by
an Amendment No. 1 dated as of December 20, 2001, filed amended
herewith.
*10.3 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, as amended by an Amendment No. 1
dated as of December 20, 2001, filed amended herewith.
10.4 ACAS Transfer Agreement between American Capital Strategies, Ltd., and
ACAS Funding Trust 2000-1, dated as of December 20, 2000, filed
herewith.
41
EXHIBIT DESCRIPTION
10.5 Transfer And Servicing Agreement, among ACAS Business Loan Trust
2000-1, ACAS Business Loan LLC, 2000-1, Wells Fargo Bank Minnesota,
National Association, American Capital Strategies, Ltd. dated as of
December 20, 2000, filed herewith.
10.6 Indenture between Wells Fargo Bank Minnesota, National Association, as
Indenture Trustee and ACAS Business Loan Trust, dated as of December
20, 2000, filed herewith.
10.7 Limited Liability Company Operating Agreement of ACAS Business Loan
LLC, 2000-1 by and among American Capital Strategies, Ltd., William
Holloran and Evelyne S. Steward, filed herewith.
+*10.8 American Capital Strategies, Ltd., 2000 Employee Stock Option Plan,
incorporated by reference to Appendix II to the Definitive Proxy
Statement for the 2000 Annual Meeting filed on April 5, 2000.
+*10.9 American Capital Strategies, Ltd., 2000 Disinterested Director Stock
Option Plan, incorporated by reference to Appendix II to the Definitive
Proxy Statement for the 2000 Annual Meeting filed on April 5, 2000.
*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.
- -----------------
* 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
42
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
Executive Vice President and
Chief Financial Officer
Date: March 29, 2001
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.
NAME TITLE DATE
/s/ MALON WILKUS Chairman and Chief Executive Officer March 29, 2001
- --------------------------------
Malon Wilkus
/S/ DAVID GLADSTONE Vice Chairman and Director March 29, 2001
- --------------------------------
David Gladstone
/S/ ADAM BLUMENTHAL President, Chief Operating Officer, and March 29, 2001
- -------------------------------- Director
Adam Blumenthal
/S/ JOHN R. ERICKSON Executive Vice President and Chief Financial March 29, 2001
- -------------------------------- Officer (Principal Financial and Accounting
John R. Erickson Officer)
/S/ KENNETH PETERSON Director March 29, 2001
- --------------------------------
Kenneth Peterson
/S/ ALVIN N. PURYEAR Director March 29, 2001
- --------------------------------
Alvin N. Puryear
/S/ NEIL M. HAHL Director March 29, 2001
- --------------------------------
Neil M. Hahl
/S/ PHILIP R. HARPER Director March 29, 2001
- --------------------------------
Philip R. Harper
/S/ STAN LUNDINE Director March 29, 2001
- --------------------------------
Stan Lundine
/S/ MARY BASKIN Director March 29, 2001
- --------------------------------
Mary Baskin