SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 814-00149
AMERICAN CAPITAL STRATEGIES, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-145-1377
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2 BETHESDA METRO CENTER, 14TH FLOOR
BETHESDA, MARYLAND 20814
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(301) 951-6122
(REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. The number of shares
of the issuer's Common Stock, $.01 par value, outstanding as of November 8, 2000
was 24,826,395.
AMERICAN CAPITAL STRATEGIES, LTD.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999....................................1
Schedules of Investments as of September 30, 2000
(unaudited) and December 31, 1999........................2
Statements of Operations for the three and nine
months ended September 30, 2000
and 1999 (unaudited).....................................7
Statements of Shareholders' Equity for the nine
months ended September 30, 2000 and
September 30, 1999 (unaudited)...........................8
Statements of Cash Flows for the nine months ended
September 30, 2000 and September 30, 1999
(unaudited)..............................................9
Financial Highlights for the nine months ended
September 30, 2000 and September 30, 1999
(unaudited)..............................................10
Notes to Unaudited Financial Statements
(unaudited)..............................................11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Introduction......................................................14
Results of Operations.............................................16
Financial Condition, Liquidity and Capital
Resources.........................................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................20
Item 2. Changes in Securities.............................................20
Item 3. Defaults upon Senior Securities...................................20
Item 4. Submission of Matters to a Vote of Security Holders...............20
Item 5. Other Information.................................................20
Item 6. Exhibits and Reports on Form 8-K..................................20
Signature.....................................................................21
i
PART I. FINANCIAL INFORMATION
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- ------------
(Unaudited)
Assets
Cash and cash equivalents $ 32,140 $ 2,037
Investments at fair value (cost of $469,813 and $305,264, respectively) 510,203 377,554
Investment in unconsolidated operating subsidiary 1,805 4,893
Due from unconsolidated operating subsidiary 9,244 2,331
Interest receivable 5,010 2,417
Other 5,118 6,140
--------- ---------
Total assets $ 563,520 $ 395,372
========= =========
Liabilities and Shareholders' Equity
Revolving credit facility $ 135,613 $ 78,545
Accrued dividends payable 11,905 547
Other 6,339 4,535
--------- ---------
Total liabilities 153,857 83,627
Shareholders' equity
Undesignated preferred stock, $0.01 par value, 5,000 shares authorized,
0 issued and outstanding -- --
Common stock, $.01 par value, 70,000 shares authorized, 24,806 and 18,252
issued and outstanding, respectively 248 183
Capital in excess of par value 382,694 255,922
Notes receivable from sale of common stock (26,210) (23,052)
Undistributed net realized earnings 7,289 1,080
Unrealized appreciation of investments 45,642 77,612
--------- ---------
Total shareholders' equity 409,663 311,745
--------- ---------
Total liabilities and shareholders' equity $ 563,520 $ 395,372
========= =========
See accompanying notes.
1
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
SENIOR DEBT--11.41% INDUSTRY COST FAIR VALUE
- ------------------- -------- ---- --------------
BIW Connector Systems, LLC Manufacturing $ 2,766 $ 2,766
JAG Industries, Inc. (2) Manufacturing 1,188 1,188
Chance Coach, Inc. (2) Bus Manufacturer 1,711 1,711
Cycle Gear, Inc. Motor Cycle Accessories 750 750
EuroCaribe Packing Company, Inc. (2) Meat Processing 6,729 6,729
Patriot Medical Technologies, Inc. (2) Repair Services 2,983 2,983
Tube City Olympic of Ohio, Inc. Mill Services 8,930 8,930
MBT International Inc. (2) Musical Instrument Distributor 3,600 3,600
Caswell-Massey Holdings Corp. Toiletries 2,000 2,000
Warner Power, LLC Power Systems and Electric Ballasts 5,562 5,562
Fulton Bellows & Components, Inc. (2) Bellows Manufacturer 12,300 12,300
Biddeford Textile Corp. Electric Blanked Manufacturer 1,430 1,430
Chromas Technologies (2) Printing Press Manufacturer 8,452 8,452
-------- --------
Subtotal 58,401 58,401
SUBORDINATED DEBT--59.41%
- -------------------------
BIW Connector Systems, LLC Manufacturing 6,231 6,231
Westwind Group Holdings, Inc. Restaurant 3,026 1,688
JAG Industries, Inc. (2) Manufacturing 2,430 2,430
Chance Coach, Inc. (2) Bus Manufacturer 7,973 7,973
The L.A. Studios, Inc. Audio Production 2,532 2,532
Decorative Surfaces International, Inc. (2) Decorative Paper & Vinyl Mfg. 6,716 6,716
New Piper Aircraft, Inc. Aircraft Manufacturing 18,161 18,161
Electrolux, LLC Vacuum Cleaners 9,309 9,309
Cycle Gear, Inc. Motor Cycle Accessories 3,736 3,736
Confluence Holdings Corp. Canoes & Kayaks 9,236 9,236
EuroCaribe Packing Company, Inc. (2) Meat Processing 8,996 6,996
Starcom Holdings, Inc. Electrical Contractor 19,128 19,128
Centennial Broadcasting, Inc. Radio Stations 18,306 18,306
Lion Brewery, Inc. (2) Malt Beverages 5,986 5,986
Auxi-Health, Inc. Home Health Care 11,921 11,921
Patriot Medical Technologies, Inc. (2) Repair Services 2,512 2,512
Tube City, Inc. Mill Services 6,341 6,341
Erie County Plastics Corporation Molded Plastic Manufacturing 8,904 8,904
Aeriform Corporation Packaged Industrial Gas 8,198 8,198
MBT International, Inc. (2) Musical Instrument Distributor 6,715 6,715
Dixie Trucking Company, Inc. (2) Overnight Shorthaul Delivery 4,075 4,075
Caswell-Massey Holdings Corp. Toiletries 1,725 1,725
Transcore Holdings, Inc. Transportation Info. Mgmt. Services 22,771 22,771
The Inca Group (2) Manufacturer of Steel Products 15,607 15,607
Crosman Corporation Small Arms 3,814 3,814
Parts Plus Group Auto Parts Distributor 4,155 4,155
IGI, Inc. Veterinary Vaccines 5,228 5,228
Warner Power, LLC Power Systems and Electric Ballasts 3,937 3,937
A.H. Harris & Sons, Inc. Construction Material Distribution 4,751 4,751
Fulton Bellows & Components, Inc. (2) Bellows Manufacturer 6,745 6,745
A&M Cleaning Products, Inc. Household Cleaning Products 5,020 5,020
Goldman Industrial Group Machine Tools, Metal Cutting Types 27,242 27,242
JAAGIR, LLC IT Staffing and Consulting 2,762 2,762
Cornell Companies, Inc. Private Corrections 28,898 28,898
Chromas Technologies (2) Printing Press Manufacturer 4,429 4,429
-------- --------
Subtotal 307,516 304,178
SUBORDINATED DEBT WITH NON-DETACHABLE WARRANTS--3.85%
- -----------------------------------------------------
Case Logic 9.6% of Co. Storage Products Designer and
Marketer 19,706 19,706
-------- --------
Subtotal 19,706 19,706
(1) Non-income producing
(2) Affiliate
See accompanying notes.
2
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS -- CONTINUED
SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
CONVERTIBLE PREFERRED STOCK--3.51% INDUSTRY COST FAIR VALUE
- ----------------------------------- -------- ----- -----------
Chance Coach, Inc. (2) 12% dividend convertible into 20% of Co. Bus Manufacturer $ 2,000 $ 2,793
Decorative Surfaces International, Inc. (2) prime rate plus 4%
dividend convertible into 2.9% of Co. Decorative Paper & Vinyl Mfg. 803 803
Patriot Medical Technologies, Inc. (2) 8% dividend
convertible into 16.9% of Co. Repair Services 1,082 1,082
MBT International, Inc. (1)(2) convertible into 53.1% of Co. Musical Instrument Distributor 2,250 2,250
Transcore Holdings, Inc. (2) redeemable preferred Transportation Info. Mgmt. Services 555 555
Parts Plus Group (1) convertible into 1.9% of Co. Auto Parts Distributor 556 556
Fulton Bellows & Components, Inc. (1)(2) convertible
into 40% of Co. Bellows Manufacturer 3,000 3,000
A&M Cleaning Products, Inc. (1) redeemable preferred Household Cleaning Products 434 434
Auxi Health, Inc. (2) convertible into 55.8% of Co. Home Health Care 2,500 2,500
Chromas Technologies (2) convertible preferred 10% of Co. Printing Press Manufacturer 4,000 4,000
--------- ---------
Subtotal 17,180 17,973
COMMON STOCK AND MEMBERSHIP INTEREST WARRANTS(1)-- 19.31%
- ----------------------------------------------------------
BIW Connector Systems, LLC 8% of LLC Manufacturing 652 1,754
Westwind Group Holdings, Inc. 5% of Co. Restaurant 350 --
JAG Industries, Inc. (2) 75% of Co. Manufacturing 505 --
Chance Coach, Inc. (2) 43.2% of Co. Bus Manufacturer 4,041 5,950
The L.A. Studios, Inc. 17% of Co. Audio Production 902 1,176
Decorative Surfaces International, Inc. (2) 42.3% of Co. Decorative Paper & Vinyl Mfg. 4,571 4,394
New Piper Aircraft, Inc. 4% of Co. Aircraft Manufacturing 2,231 3,578
Cycle Gear, Inc. 34% of Co. Motor Cycle Accessories 374 884
Confluence Holdings Corp. 18.4% of Co. Canoes & Kayaks 1,499 1,499
EuroCaribe Packing Company, Inc. (2) 37.1% of Co. Meat Processing 1,110 --
Starcom Holdings, Inc. 17.5% of Co. Electrical Contractor 3,914 5,597
Lion Brewery, Inc. (2) 54% of Co. Malt Beverages 675 5,534
Auxi Health, Inc. 17.9% of Co. Home Health Care 2,599 1,856
Patriot Medical Technologies, Inc. (2) 14.9% of Co. Repair Services 612 612
Tube City, Inc. 14.75% of Co. Mill Services 2,523 3,040
Erie County Plastics Corporation 8% of Co. Molded Plastic Manufacturing 1,170 1,170
MBT International, Inc. (2) 30.6% of Co. Musical Instrument Distributor 1,214 1,214
Dixie Trucking Company, Inc. (2) 32% of Co. Overnight Shorthaul Delivery 141 327
Caswell-Massey Holdings Corp. 24% of Co. Toiletries 552 1,236
Transcore Holdings, Inc. 10.2% of Co. Transportation Info. Mgmt. Services 4,686 5,129
The Inca Group (2) 57.3% of Co. Manufacturer of Steel Products 3,060 4,136
Crosman Corporation 3.5% of Co. Small Arms 330 330
Parts Plus Group 2.4% of Co. Auto Parts Distributor 333 333
IGI, Inc. 16.7% of Co. Veterinary Vaccines 2,003 1,908
o2wireless Solutions Inc. 10.5% of Co. Wireless Communication Network Services 2,521 34,570
Warner Power, LLC (2) 53.1% of LLC Power Systems and Electric Ba;;asts 1,629 2,032
A.H. Harris & Sons, Inc. 6.5% of Co. Construction Material Distribution 267 267
Fulton Bellows & Components, Inc. (2) 20% of Co. Bellows Manufacturer 1,305 1,305
A&M Cleaning Products, Inc. 21.9% of Co. Household Cleaning Products 1,643 2,237
Goldman Industrial Group 15.0% of Co. Machine Tools, Metal Cutting Types 2,822 2,822
JAAGIR, LLC 4.0% of Co. IT Staffing and Consulting 271 271
Cornell Companies, Inc. 2.2% of Co. Private Corrections 1,102 1,556
Biddeford Textiles Corp. 10% of Co. Electric Blanket Manufacturer 1,100 1,100
Chromas Technologies (2) 25% of Co. Printing Press Manufacturer 1,071 1,071
--------- ---------
Subtotal 53,778 98,888
(1) Non-income producing
(2) Affiliate
See accompanying notes.
3
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS -- CONTINUED
SEPTEMBER 30, 2000
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
COMMON STOCK AND MEMBERSHIP INTERESTS(1)--2.21% INDUSTRY COST FAIR VALUE
- ----------------------------------------------- -------- ----- ----------
Chance Coach, Inc. (2) 20.5% of Co. Bus Manufacturer $ 1,896 $ 2,793
Electrolux, LLC 2.5% of Co. Vacuum Cleaners 246 2,000
Confluence Holdings Corp. 6.0% of Co. Canoes & Kayaks 537 537
Starcom Holdings, Inc. 2.8% of Co. Electrical Contractor 616 896
The Inca Group (2) 27.7% of Co. Manufacturer of Steel Products 1,700 2,010
Capital.com, Inc. (2) 85% of Co. Internet-based Financial Portal 1,492 1,492
Wrenchead.com, Inc. 1% of Co. Internet-based Auto Parts Distributor -- 104
ACS Equities, LP (2) 90% of LP Investment Partnership 5,245 --
Chromas Technologies (2) 35% of Co. Printing Press Manufacturer 1,500 1,500
-------- --------
Subtotal 13,232 11,332
-------- --------
469,813 510,478
INTEREST RATE BASIS SWAP AGREEMENTS--(0.05)%
- --------------------------------------------
No. of Notional Expiration Receive Pay
Contracts Amount Date Date Rate
- --------- -------- ---------- ------- ----
6 $113,325 4/10/04 Floating Floating -- (275)
-------- --------
Total Investments $469,813 $510,203
======== ========
INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY--0.35%
- --------------------------------------------------------
American Capital Financial Services (1)(2) 100% of Co. Investment Banking 403 1,805
-------- --------
Totals $470,216 $512,008
======== ========
(1) Non-income producing
(2) Affiliate
See accompanying notes.
4
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
SENIOR DEBT--9.53% INDUSTRY COST FAIR VALUE
- ------------------- --------- ----- ----------
BIW Connector Systems, LLC Manufacturing $ 3,404 $ 3,404
JAG Industries, Inc. (2) Manufacturing 1,200 1,200
Chance Coach, Inc. (2) Bus Manufacturer 1,071 1,071
Cycle Gear, Inc. Motor Cycle Accessories 750 750
EuroCaribe Packing Company, Inc. (2) Meat Processing 6,276 6,276
Patriot Medical Technologies, Inc. (2) Repair Services 3,250 3,250
Tube City Olympic of Ohio, Inc. Mill Services 9,700 9,700
MBT International Inc. (2) Musical Instrument Distributor 4,200 4,200
Caswell-Massey Holdings Corp. Toiletries 2,000 2,000
Warner Power, LLC Power Systems and Electric Ballasts 4,610 4,610
--------- --------
Subtotal 36,461 36,461
SUBORDINATED DEBT--55.35%
- -------------------------
BIW Connector Systems, LLC Manufacturing 6,829 6,829
Westwind Group Holdings, Inc. Restaurant 2,984 2,984
JAG Industries, Inc. (2) Manufacturing 2,385 2,385
Chance Coach, Inc. (2) Bus Manufacturer 7,520 7,520
The L.A. Studios, Inc. Audio Production 2,466 2,466
Decorative Surfaces International, Inc. (2) Decorative Paper & Vinyl Mfg. 5,606 5,606
New Piper Aircraft, Inc. Aircraft Manufacturing 18,023 18,023
Electrolux, LLC Vacuum Cleaners 7,849 7,849
Cycle Gear, Inc. Motor Cycle Accessories 2,262 2,262
Confluence Holdings Corp. Canoes & Kayaks 8,812 8,812
EuroCaribe Packing Company, Inc. (2) Meat Processing 8,971 8,971
Starcom Holdings, Inc. Electrical Contractor 18,929 18,929
Centennial Broadcasting, Inc. Radio Stations 16,975 16,975
Lion Brewery, Inc. (2) Malt Beverages 5,975 5,975
Auxi-Health, Inc. Home Health Care 10,136 10,136
Patriot Medical Technologies, Inc. (2) Repair Services 2,487 2,487
Tube City, Inc. Mill Services 6,017 6,017
Erie County Plastics Corporation Molded Plastic Manufacturing 8,858 8,858
Aeriform Corporation Packaged Industrial Gas 7,774 7,774
MBT International, Inc. (2) Musical Instrument Distributor 6,439 6,439
Dixie Trucking Company, Inc. (2) Overnight Shorthaul Delivery 4,064 4,064
Caswell-Massey Holdings Corp. Toiletries 1,670 1,670
Transcore Holdings, Inc. Transportation Info. Mgmt. Services 5,656 5,656
The Inca Group (2) Manufacturer of Steel Products 11,177 11,177
Crosman Corporation Small Arms 3,702 3,702
Parts Plus Group Auto Parts Distributor 4,119 4,119
IGI, Inc. Veterinary Vaccines 5,037 5,037
o2wireless Solutions Inc. Wireless Communication Network Services 10,348 10,348
Warner Power, LLC Power Systems and Electric Ballasts 3,871 3,871
A.H. Harris & Sons, Inc. Construction Material Distribution 4,733 4,733
-------- --------
Subtotal 211,674 211,674
PREFERRED STOCK--2.00%
- ----------------------
Chance Coach, Inc. (2) 12% dividend convertible into 20% of Co. Bus Manufacturer 2,000 2,793
Decorative Surfaces International, Inc. (2) prime rate
plus 4% dividend convertible into 2.9% of Co. Decorative Paper & Vinyl Mfg. 728 728
Patriot Medical Technologies, Inc. (2) 8% dividend
convertible into 16.9% of Co. Repair Services 1,020 1,020
MBT International, Inc. (1)(2) convertible into 53.1% of Co. Musical Instrument Distributor 2,250 2,250
Transcore Holdings, Inc. (2) 8% dividend redeemable Transportation Info. Mgmt. Services 306 306
Parts Plus Group (1) convertible into 1.9% of Co. Auto Parts Distributor 556 556
-------- --------
Subtotal 6,860 7,653
(1) Non-income producing
(2) Affiliate
See accompanying notes.
5
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS -- CONTINUED
DECEMBER 31, 1999
(IN THOUSANDS EXCEPT PER SHARE DATA)
COMMON STOCK AND MEMBERSHIP INTEREST WARRANTS(1)--11.48% INDUSTRY COST FAIR VALUE
- --------------------------------------------------------- -------- ---- ----------
BIW Connector Systems, LLC 8% of LLC Manufacturing $ 652 $ 451
Westwind Group Holdings, Inc. 5% of Co. Restaurant 350 244
JAG Industries, Inc. (2) 75% of Co. Manufacturing 505 --
Chance Coach, Inc. (2) 43.2% of Co. Bus Manufacturer 4,041 5,950
The L.A. Studios, Inc. 17% of Co. Audio Production 902 902
Decorative Surfaces International, Inc. (2) 42.3% of Co. Decorative Paper & Vinyl Mfg. 4,571 4,394
New Piper Aircraft, Inc. 4% of Co. Aircraft Manufacturing 2,231 2,884
Cycle Gear, Inc. 27.6% of Co. Motor Cycle Accessories 374 374
Confluence Holdings Corp. 18% of Co. Canoes & Kayaks 1,319 1,217
EuroCaribe Packing Company, Inc. (2) 37.1% of Co. Meat Processing 1,110 1,046
Starcom Holdings, Inc. 17.5% of Co. Electrical Contractor 3,914 3,914
Lion Brewery, Inc. (2) 54% of Co. Malt Beverages 675 1,863
Auxi Health, Inc. 20% of Co. Home Health Care 2,599 1,856
Patriot Medical Technologies, Inc. (2) 14.9% of Co. Repair Services 612 612
Tube City, Inc. 14.75% of Co. Mill Services 2,523 2,523
Erie County Plastics Corporation 8% of Co. Molded Plastic Manufacturing 1,170 1,170
MBT International, Inc. (2) 30.6% of Co. Musical Instrument Distributor 1,214 1,214
Dixie Trucking Company, Inc. (2) 32% of Co. Overnight Shorthaul Delivery 141 141
Caswell-Massey Holdings Corp. 24% of Co. Toiletries 552 552
Transcore Holdings, Inc. 7.3% of Co. Transportation Info. Mgmt. Services 1,694 1,694
The Inca Group (2) 66.5% of Co. Manufacturer of Steel Products 3,060 3,060
Crosman Corporation 3.5% of Co. Small Arms 330 330
Parts Plus Group 2.4% of Co. Auto Parts Distributor 333 333
IGI, Inc. 16.7% of Co. Veterinary Vaccines 2,003 2,587
o2wireless Solutions Inc. Wireless Communication Network Servicse 2,698 2,698
Warner Power, LLC (2) 53.1% of LLC Power Systems and Electric Ballasts 1,629 1,629
A.H. Harris & Sons, Inc. 3.5% of Co. Construction Material Distribution 267 267
--------- --------
Subtotal 41,469 43,905
COMMON STOCK AND MEMBERSHIP INTERESTS(1)--20.40%
- ------------------------------------------------
Chance Coach, Inc. (2) 20.5% of Co. Bus Manufacturer 1,896 2,793
Electrolux, LLC 2.5% of Co. Vacuum Cleaners 246 1,144
Confluence Holdings Corp. 0.7% of Co. Canoes & Kayaks 45 17
Starcom Holdings, Inc. 2.8% of Co. Electrical Contractor 616 616
The Inca Group (2) 18.5% of Co. Manufacturer of Steel Products 850 850
Capital.com, Inc. (2) 85% of Co. Internet-based Financial Portal 1,492 72,500
Wrenchead.com, Inc. 1% of Co. Internet-based Auto Parts -- 104
Distributor
ACS Equities, LP (2) 90% of LP Investment Partnership 3,655 --
-------- --------
Subtotal 8,800 78,024
305,264 377,717
-------- --------
INTEREST RATE BASIS SWAP AGREEMENTS--(0.04)%
- --------------------------------------------
No. of Notional Expiration Receive Pay
Contracts Amount Date Rate Rate
- --------- -------- ---------- ------- ----
4 $61,325 4/10/04 Floating Floating -- (163)
-------- --------
Total Investments $305,264 $377,554
======== ========
INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY---1.28%
- ---------------------------------------------------------
American Capital Financial Services (1)(2) 100% of Co. Investment Banking 403 4,893
-------- --------
Totals $305,667 $382,447
======== ========
(1) Non-income producing
(2) Affiliate
See accompanying notes.
6
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
Operating income:
Interest and dividend income $ 15,980 $ 8,414 $ 40,112 $ 20,758
Loan fees 976 729 3,255 2,060
-------- -------- -------- --------
Total operating income 16,956 9,143 43,367 22,818
Operating expenses:
Salaries and benefits 687 411 1,615 909
General and administrative 522 382 1,646 1,035
Interest 2,107 1,349 6,351 3,245
-------- -------- -------- --------
Total operating expenses 3,316 2,142 9,612 5,189
Operating income before equity in loss of
unconsolidated operating subsidiary 13,640 7,001 33,755 17,629
Equity in loss of unconsolidated operating
subsidiary (1,308) (337) (3,088) (1,153)
-------- -------- -------- --------
Net operating income 12,332 6,664 30,667 16,476
Net realized gain on investments 4,303 -- 4,538 867
(Decrease) increase in net unrealized
appreciation of investments (43,941) 3,570 (31,970) 6,077
-------- -------- -------- --------
Net (decrease) increase in shareholders' equity
resulting from operations $(27,306) $ 10,234 $ 3,235 $ 23,420
======== ======== ======== ========
Net operating income per common share:
Basic $ 0.51 $ 0.45 $ 1.47 $ 1.33
Diluted $ 0.50 $ 0.43 $ 1.44 $ 1.28
(Loss) earnings per common share:
Basic $ (1.12) $ 0.69 $ 0.16 $ 1.89
Diluted $ (1.10) $ 0.66 $ 0.15 $ 1.81
Weighted average shares of Basic 24,359 14,869 20,854 12,395
common stock outstanding Diluted 24,872 15,619 21,360 12,920
See accompanying notes
7
AMERICAN CAPITAL STRATEGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
Notes Unrealized
Capital in Receivable Undistributed Appreciation Total
Common Stock Excess of From Sale of Net Realized (Depreciation) Shareholders'
Shares Amount Par Value Common Stock Earnings of Investments Equity
------ ------ --------- ------------ ------------- -------------- -------------
Balance at December 31, 1998 11,081 $111 $145,245 $ (300) $ (116) $ 7,783 $ 152,723
====== ==== ======== ======== ======== ======== =========
Issuance of common stock 5,605 56 89,150 -- -- -- 89,206
Issuance of common stock under
stock option plans 1,499 15 22,431 (22,446) -- -- --
Issue of common stock under the
Dividend Reinvestment Plan 20 -- 339 -- -- -- 339
Issuance of restricted stock 10 -- 166 -- -- -- 166
Net increase in shareholders'
equity resulting from operations -- -- -- -- 17,343 6,077 23,420
Distributions -- -- -- -- (17,287) -- (17,287)
------ ---- -------- -------- -------- -------- ---------
Balance at September 30, 1999 18,215 $182 $257,331 $(22,746) $ (60) $ 13,860 $ 248,567
====== ==== ======== ======== ======== ======== =========
Balance at December 31, 1999 18,252 $183 $255,922 $(23,052) $ 1,080 $ 77,612 $ 311,745
====== ==== ======== ======== ======== ======== =========
Issuance of common stock under
stock option plans 213 2 4,318 (4,320) -- -- --
Issue of common stock under the
Dividend Reinvestment Plan 16 -- 373 -- -- -- 373
Issuance of common stock 6,325 63 122,081 -- -- -- 122,144
Repayments of notes receivable
from sale of common stock -- -- -- 1,162 -- -- 1,162
Net increase in shareholders'
equity resulting from -- -- -- -- 35,205 (31,970) 3,235
operations
Distributions -- -- -- -- (28,996) -- (28,996)
------ ---- -------- -------- -------- -------- ---------
Balance at September 30, 2000 24,806 $248 $382,694 $(26,210) $ 7,289 $ 45,642 $ 409,663
====== ==== ======== ======== ======== ======== =========
See accompanying notes.
8
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
Operating activities
Net increase in shareholders' equity resulting from operations $ 3,235 $ 23,420
Adjustments to reconcile net increase in shareholders' equity
resulting from operations to net cash provided by operating
activities:
Unrealized depreciation (appreciation) of investments 31,970 (6,077)
Net realized gain on investments (4,538) (867)
Accretion of loan discounts (2,949) (1,613)
Amortization of deferred finance costs 813 554
Increase in interest receivable (2,593) (1,521)
Increase in accrued payment-in-kind dividends and interest (3,021) (2,068)
Receipt of note for prepayment penalties (884) --
Increase in due from unconsolidated operating subsidiary (6,913) (1,567)
Decrease (increase) in other assets 523 (2,579)
Increase in other liabilities 1,804 129
Equity in loss of unconsolidated operating subsidiary 3,088 1,153
--------- ---------
Net cash provided by operating activities 20,535 8,964
Investing activities
Proceeds from sale or maturity of investments 2,004 28,885
Principal repayments 16,162 26,092
Purchase of investments (171,283) (122,338)
Issuance of employee notes receivable -- (1,269)
Purchase of securities -- (12,900)
--------- ---------
Net cash used in investing activities (153,117) (81,530)
Financing activities
Drawings on revolving credit facilities, net 57,068 39,840
Repayment of short-term notes payable -- (5,000)
Increase in deferred financing costs -- (2,011)
Issuance of common stock 123,359 89,372
Distributions paid (17,742) (10,598)
--------- ---------
Net cash provided by financing activities 162,685 111,603
--------- ---------
Net increase in cash and cash equivalents 30,103 39,037
Cash and cash equivalents at beginning of period 2,037 6,149
--------- ---------
Cash and cash equivalents at end of period $ 32,140 $ 45,186
========= =========
Supplemental Disclosures:
- -------------------------
Cash paid for interest $ 4,359 $ 2,697
Non-cash Financing Activities:
- ------------------------------
Notes receivable issued in exchange for common stock $ 4,320 $ 22,446
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 --
Issuance of common stock in conjunction with dividend 373 339
reinvestment
See accompanying notes.
9
AMERICAN CAPITAL STRATEGIES, LTD.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
Per Share Data (1)
Net asset value at beginning of the period $ 17.08 $ 13.80
Net operating income 1.47 1.33
Realized gain on investments 0.22 0.08
(Decrease) increase in net unrealized appreciation on investments (1.53) 0.48
-------- --------
Net increase in shareholders' equity resulting from operations $ 0.16 $ 1.89
Issuance of common stock 0.58 0.71
Distribution of net investment income (1.43) (1.27)
Effect of dilution (0.12) (1.49)
-------- --------
Net asset value at end of period $ 16.51 $ 13.64
Per share market value at beginning of period $ 22.750 $ 17.250
Per share market value at end of period $ 23.688 $ 18.500
Total return (2) 10.41% 14.62%
Shares outstanding at end of period 24,806 18,215
Ratio/Supplemental Data
Net assets at end of period $409,663 $248,508
Ratio of operating expenses to average net assets 2.66% 2.59%
Ratio of net operating income to average net assets 8.50% 8.24%
(1) Basic per share data.
(2) Amounts were not annualized for the results of the nine month periods
ended September 30, 2000 and 1999.
See accompanying notes.
10
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 1. UNAUDITED INTERIM FINANCIAL STATEMENTS
Interim financial statements of American Capital Strategies, Ltd. (the
"Company") are prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and pursuant to the
requirements for reporting on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain disclosures accompanying annual financial statements
prepared in accordance with GAAP are omitted. In the opinion of management, all
adjustments, consisting solely of normal recurring accruals, necessary for the
fair presentation of financial statements for the interim periods have been
included. The current period's results of operations are not necessarily
indicative of results that ultimately may be achieved for the year. The interim
financial statements and notes thereto should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K, as
filed with the Securities and Exchange Commission.
NOTE 2. ORGANIZATION
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), was incorporated in 1986 to provide financial advisory services to
and invest in middle market companies. On August 29, 1997, the Company completed
an initial public offering ("IPO") of 10,382,437 shares of common stock ("Common
Stock"), and became a non-diversified closed end investment company that has
elected to be treated as a business development company ("BDC") under the
Investment Company Act of 1940, as amended ("1940 Act"). On October 1, 1997, the
Company began operations so as to qualify to be taxed as a regulated investment
company ("RIC") as defined in Subtitle A, Chapter 1, under Subchapter M of the
Internal Revenue Code of 1986 as amended (the "Code"). As contemplated by these
transactions, the Company materially changed its business plan and format from
structuring and arranging financing for buyout transactions on a fee for
services basis to primarily being a lender to and investor in middle market
companies. As a result of the changes, the Company is operating as a holding
company whose predominant source of operating income has changed from financial
performance and advisory fees to interest and dividends earned from investing
the Company's assets in debt and equity of businesses. The Company's investment
objectives are to achieve current income from the collection of interest and
dividends, as well as long-term growth in its shareholders' equity through
appreciation in value of the Company's equity interests.
The Company continues to provide financial advisory services to
businesses through American Capital Financial Services, Inc. ("ACFS"), a
wholly-owned subsidiary. The Company is headquartered in Bethesda, Maryland, and
has offices in New York, Boston, Pittsburgh, San Francisco, Chicago, Dallas and
Los Angeles. The Company's reportable segments are its investing operations as a
business development company and the financial advisory operations of its
wholly-owned subsidiary, ACFS (see Note 4). The Company has no foreign
operations.
NOTE 3. CAPITAL.COM
Capital.com, an Internet finance portal, was launched in July 1999
under the name AmericanCapitalOnline.com. In December 1999, the assets of
AmericanCapitalOnline.com were contributed to Capital.com, Inc., a newly formed
entity, and the site was renamed Capital.com. The total cost of the assets
contributed to Capital.com by the Company was $1,492. During December, 1999, a
subsidiary of First Union Corporation ("First Union") invested $15,000 in
Capital.com in exchange for a 15% common equity stake and warrants to acquire up
to an additional 5% of the common equity at a nominal price. The warrants are
exercisable based on a subsequent valuation of Capital.com in connection with a
subsequent investment or offer to invest within a year of First Union's stock
purchase. If the subsequent valuation results in a value of Capital.com of
$100,000 or more, the warrants will be extinguished. If the subsequent valuation
results in a value of Capital.com of $75,000 or less, all the warrants will be
exercisable. If the subsequent valuation results in a value between $75,000 and
$100,000, a pro-rata portion of the warrants will be exercisable.
In considering the appropriate valuation of this investment at December 31,
1999 and September 30, 2000, in addition to the value implied by First Union's
investment for a 15% equity interest, management and the Board of Directors
considered several factors including:
* The valuation of comparable public company entities;
* The very early development stage of Capital.com;
11
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 3. CAPITAL.COM (CONTINUED)
* 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 $72,500 at December 31,
1999. Reflecting general declines in the valuation of Internet companies, the
Company wrote down the value of its investment to $63,500. At September 30,
2000, the Company valued its investment in Capital.com at its original cost of
$1,500, a depreciation of $62,000 from its June 30, 2000 valuation. This
depreciation is attributed to numerous factors arising during the quarter ended
September 30, 2000, including the unfavorable financing environment for Internet
companies, substantial declines in the valuations of comparable public companies
and tremendous declines in the valuations of comparable private companies. Since
the Company's original investment in the third quarter of 1999, the Company has
experienced net depreciation of $0 of its investment in Capital.com, which is
comprised of $71,000 of appreciation in the three months ended December 31,
1999, and $71,000 of gross depreciation in the nine months ended September 30,
2000.
NOTE 4. INVESTMENT IN UNCONSOLIDATED OPERATING SUBSIDIARY
As discussed in Note 2, ACFS is an operating subsidiary of the Company
and is accounted for under the equity method effective October 1, 1997.
Condensed financial information for ACFS is as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Assets
Investments in ACS Equities, LP, at
fair value $10,365 $10,365
Other assets, net 5,449 3,572
------- -------
Total assets $15,814 $13,937
======= =======
Liabilities and Shareholder's Equity
Deferred income taxes $ 110 $ 2,007
Due to parent 9,244 2,331
Other liabilities 4,655 4,706
Shareholder's equity 1,805 4,893
------- -------
Total liabilities and shareholder's equity $15,814 $13,937
======= =======
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Operating income $ 1,574 $ 1,528 $ 3,671 $ 3,543
Operating expense 3,683 2,257 8,652 6,082
------- ------- ------- -------
Net operating loss (2,109) (729) (4,981) (2,539)
Realized gains on investments -- -- 1 925
Increase (decrease) in net unrealized
appreciation of investments -- 186 -- (246)
Other income 801 206 1,892 707
------- ------- ------- -------
Net loss $(1,308) $ (337) $(3,088) $(1,153)
======= ======= ======= =======
12
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
NOTE 5. BORROWINGS
As of September 30, 2000, the Company had $135,613 in borrowings
outstanding under a debt funding facility. The facility expires in April 2001,
at which time all outstanding principal is due and payable. Interest on
borrowings under this facility is charged at one month LIBOR (6.62% at September
30, 2000) plus 150 basis points. During the nine months ended September 30,
2000, the company had weighted average outstanding borrowings of $87,960 and the
weighted average interest rate, including amortization of deferred finance
costs, was 9.62%.
NOTE 6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share.
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------ ------------------ ------------------
Numerator for basic and diluted
(loss) earnings per share $(27,306) $10,234 $ 3,235 $23,420
Denominator for basic-weighted
average shares 24,359 14,869 20,854 12,395
Employee stock options 139 70 87 185
Warrants 18 82 18 72
Contingently issuable shares 356 598 401 268
-------- ------- ------- -------
Dilutive potential shares 513 750 506 525
-------- ------- ------- -------
Denominator for diluted weighted
average shares 24,872 15,619 21,360 12,920
-------- ------- ------- -------
Basic (loss) earnings per common
share $ (1.12) $ 0.69 $ 0.16 $ 1.89
Diluted (loss) earnings per common
share $ (1.10) $ 0.66 $ 0.15 $ 1.81
NOTE 7. INTEREST RATE RISK MANAGEMENT
The Company enters into interest rate basis swap agreements with
financial institutions as part of its strategy to manage interest rate risks and
to fulfill its obligation under the terms of its debt funding facility. The
Company uses interest rate swap agreements for hedging and risk management only
and not for speculative purposes. The Company is a party in six interest rate
basis swap agreements with an aggregate notional amount of $113,325. Pursuant to
these swap agreements, the Company pays a variable rate equal to the prime
lending rate (9.50% at September 30, 2000) and receives a rate of the one month
LIBOR plus a weighted average spread of 2.71%. The swaps have a remaining
maturity of approximately four years. At September 30, 2000, the fair value of
the interest rate basis swap agreements represented a liability of $275.
NOTE 8. SUBSEQUENT EVENTS
On November 9, 2000, the Company issued 2,700 shares of common stock
for an aggregate purchase price of $58,700 and granted the underwriters the
option to purchase up to 405 additional shares of common stock within thirty
days for an aggregate purchase price of $8,800. The net proceeds from the sale
of the 2,700 shares of common stock will be $55,800. The Company will use the
proceeds from the offerings to repay outstanding borrowings under its debt
funding facility.
13
AMERICAN CAPITAL STRATEGIES, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS
INCLUDING, BUT NOT LIMITED TO, STATEMENTS REGARDING ANTICIPATED ACTIVITY ARE
FORWARD LOOKING IN NATURE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
ACTUAL RESULTS MAY DIFFER MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING: CHANGES IN THE ECONOMIC
CONDITIONS IN WHICH THE COMPANY OPERATES NEGATIVELY IMPACTING THE FINANCIAL
RESOURCES OF THE COMPANY; CERTAIN OF THE COMPANY'S COMPETITORS WITH
SUBSTANTIALLY GREATER FINANCIAL RESOURCES THAN THE COMPANY REDUCING THE NUMBER
OF SUITABLE INVESTMENT OPPORTUNITIES OFFERED TO THE COMPANY OR REDUCING THE
YIELD NECESSARY TO CONSUMMATE THE INVESTMENT; INCREASED COSTS RELATED TO
COMPLIANCE WITH LAWS, INCLUDING ENVIRONMENTAL LAWS; GENERAL BUSINESS AND
ECONOMIC CONDITIONS AND OTHER RISK FACTORS DESCRIBED IN THE COMPANY'S REPORTS
FILED FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY
CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING
STATEMENTS, WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE.
THE FOLLOWING ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND THE NOTES THERETO. AS DISCUSSED IN NOTE 2, THE COMPANY
COMPLETED AN INITIAL PUBLIC OFFERING ("IPO") OF ITS COMMON STOCK ON AUGUST 29,
1997 AND ON OCTOBER 1, 1997 BEGAN TO OPERATE SO AS TO QUALIFY TO BE TAXED AS A
REGULATED INVESTMENT COMPANY ("RIC").
PORTFOLIO COMPOSITION
The Company's primary business is investing in and lending to
businesses through investments in senior debt, subordinated debt with detachable
common stock warrants, preferred stock, and common stock. The total portfolio
value of investments in publicly and non-publicly traded securities, was
$510,203 and $377,554 at September 30, 2000 and December 31, 1999, respectively.
During the three months ended September 30, 2000, the Company originated
investments totaling $77,625 and advanced $850 previously committed under
working capital facilities. Included in the $77,625 is $2,054 in funds committed
but undrawn under credit facilities. During the nine months ended September 30,
2000, the Company originated investments totaling $170,825, including $3,854 in
funds committed but undrawn under credit facilities, and advanced $4,300
previously committed under working capital facilities. The weighted average
effective interest rate on total capital invested as of September 30, 2000 was
14.3%. Summaries of the composition of the Company's portfolio of publicly and
non-publicly traded securities, excluding government securities, at September
30, 2000 and December 31, 1999 at cost and fair value are shown in the following
table:
COST SEPTEMBER 30, 2000 DECEMBER 31, 1999
- ---- ------------------ -----------------
Senior debt 12.6% 11.9%
Subordinated debt 66.0% 69.4%
Subordinated debt with non-detachable warrants 4.2% 0.0%
Convertible preferred stock 2.5% 2.2%
Common stock warrants 12.7% 13.6%
Common stock 2.0% 2.9%
FAIR VALUE SEPTEMBER 30, 2000 DECEMBER 31, 1999
- ---------- ------------------ -----------------
Senior debt 11.4% 9.7%
Subordinated debt 59.0% 56.0%
Subordinated debt with non-detachable warrants 3.8% 0.0%
Convertible preferred stock 2.4% 2.0%
Common stock warrants 20.2% 11.6%
Common stock 3.2% 20.7%
On a fair value basis, the concentration of the portfolio in common
stock at December 31, 1999 was due to the valuation of 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%
15
common equity stake and warrants to acquire up to an additional 5% of the common
equity at a nominal price. The warrants are exercisable based on a subsequent
valuation of Capital.com in connection with a subsequent investment or offer to
invest within a year of First Union's stock purchase. If the subsequent
valuation results in a value of Capital.com of $100,000 or more, the warrants
will be extinguished. If the subsequent valuation results in a value of
Capital.com of $75,000 or less, all the warrants will be exercisable. If the
subsequent valuation results in a value between $75,000 and $100,000, a pro-rata
portion of the warrants will be exercisable.
In considering the appropriate valuation of this investment at December 31,
1999 and September 30, 2000, in addition to the value implied by First Union's
investment for a 15% equity interest, management and the Board of Directors
considered several factors including:
* The valuation of comparable public company entities;
* The very early development stage of Capital.com;
* An estimated value for the warrants issued to First Union and the
uncertainty of a subsequent valuation of Capital.com affecting the
number of shares for which such warrants could be exercised:
* The valuation implied by comparable private company transactions.
Based on all these factors and others that were considered, the Board of
Directors valued the investment in Capital.com at $72,500 at December 31, 1999.
Reflecting general declines in the valuation of Internet companies, the Company
wrote down the value of its investment to $63,500. At September 30, 2000, the
Company valued its investment in Capital.com at its original cost of $1,500, a
depreciation of $62,000 from its June 30, 2000 valuation. This depreciation is
attributed to numerous factors arising during the quarter ended September 30,
2000, including the unfavorable financing environment for Internet companies,
substantial declines in the valuations of comparable public companies and
tremendous declines in the valuations of comparable private companies. Since the
Company's original investment in the third quarter of 1999, the Company has
experienced net depreciation of $0 of its investment in Capital.com, which is
comprised of $71,000 of appreciation in the three months ended Devember 31,
1999, and $71,000 of gross depreciation in the nine months ended September 30,
2000.
The following table shows the portfolio composition by industry
grouping at cost and at fair value:
COST SEPTEMBER 30, 2000 DECEMBER 31, 1999
- ---- ------------------ -----------------
Manufacturing 60.8% 56.6%
Service 9.4% 3.5%
Wholesale & Retail 7.8% 11.5%
Information Technology 6.0% 2.5%
Healthcare 5.2% 6.5%
Construction 5.1% 7.7%
Media 3.9% 5.5%
Transportation 0.9% 1.4%
Telecommunications 0.6% 4.3%
Internet 0.3% 0.5%
FAIR VALUE SEPTEMBER 30, 2000 DECEMBER 31, 1999
- ---------- ------------------ -----------------
Manufacturing 58.0% 46.2%
Service 8.2% 2.8%
Wholesale & Retail 7.3% 9.3%
Telecommunications 6.7% 3.5%
Information Technology 5.5% 2.0%
Construction 5.0% 6.2%
16
Healthcare 4.5% 5.2%
Media 3.6% 4.5%
Transportation 0.9% 1.1%
Internet 0.3% 19.2%
Management expects that the largest percentage of the Company's
investments will continue to be in manufacturing companies, however, management
intends to continue to diversify the Company's portfolio and will explore new
investment opportunities in a variety of industries.
RESULTS OF OPERATIONS
The Company's financial performance, as reflected in its Statements of
Operations, is composed of three primary elements. The first element, "Net
operating income," is primarily the interest and dividends earned from investing
in debt and equity securities and the equity in earnings of its unconsolidated
operating subsidiary less the operating expenses of the Company. The second
element is "(Decrease) increase in net unrealized appreciation of investments,"
which is the net change in the estimated fair value of the Company's portfolio
assets at the end of the period compared with their estimated fair values at the
beginning of the period or their stated costs, as appropriate. The third element
is "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 three and nine months ended September 30,
2000 and September 30, 1999 are as follows:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Operating income $ 16,956 $ 9,143 $ 43,367 $ 22,818
Operating expenses 3,316 2,142 9,612 5,189
Equity in loss of unconsolidated
operating subsidiary (1,308) (337) (3,088) (1,153)
-------- -------- -------- --------
Net operating income 12,332 6,664 30,667 16,476
Net realized gain on investments 4,303 -- 4,538 867
(Decrease) increase in unrealized
appreciation of investments (43,941) 3,570 (31,970) 6,077
-------- -------- -------- --------
Net (decrease) increase in
shareholders' equity resulting from
operations $(27,306) $ 10,234 $ 3,235 $ 23,420
======== ======== ======== ========
Total operating income is comprised of two components: interest and
dividend income and loan fees. For the Third Quarter 2000, the Company recorded
$15,554 in interest and dividends on non-publicly traded securities and $426 in
interest on bank deposits, repurchase agreements, and shareholder loans,
compared to $8,060 in interest and dividends on non-publicly traded securities
and $354 in interest on government agency securities, bank deposits, repurchase
agreements and shareholder loans recorded in the three months ended September
30, 1999 ("Third Quarter 1999"). For the nine months ended September 30, 2000
(the "2000 YTD Period"), the Company recorded $38,958 in interest and dividends
on non-publicly traded securities and $1,154 in interest on bank deposits,
repurchase agreements, and shareholder loans; for the nine months ended
September 30, 1999 ("1999 YTD Period"), the Company recorded $20,193 in interest
and dividends on non-publicly traded securities and $565 in interest on
government agency securities, bank deposits, repurchase agreements and
shareholder loans.
17
Total operating income for the three months ended September 30, 2000
("Third Quarter 2000") increased 7,813, or 85%, compared to the three months
ended September 30, 1999. The increase in operating income for the Third Quarter
2000 is a result of the Company closing 26 investments in private companies
totaling $229,500 between September 30, 1999 and September 30, 2000, an increase
in the prime lending rate from 8.25% at September 30, 1999 to 9.50% at September
30, 2000, and an increase in loan fees. As a result of the investment
originations between September 30, 1999 and September 30, 2000, interest and
dividend income increased approximately $7,306 compared to the Third Quarter
1999. In addition, the rise in the prime lending rate contributed excess
interest income of approximately $260 for the Third Quarter 2000 compared to the
same period in 1999. See discussion of interest rate sensitivity below under
INTEREST RATE RISK. Loan fees increased from $729 in the Third Quarter 1999 to
$976 in Third Quarter 2000 primarily due to the increase in investment
origination volume from $48,400 during the Third Quarter 1999 to $77,600 in the
Third Quarter 2000. Loan fees as a percentage of originations, exclusive of
prepayment penalties, decreased from 1.5% in the Third Quarter 1999 to 1.3% in
the Third Quarter 2000.
For the 2000 YTD Period, total operating income increased $20,549, or
90%, over the same period in 1999. The increase in operating income for the 2000
YTD Period is a result of the Company's investment originations between
September 30, 1999 and September 30, 2000 noted above, the increase in the prime
lending rate, and the increase in loan fees. Interest and dividend income
increased approximately $19,354 compared to the 1999 YTD Period due to the
investment originations between September 30, 1999 and September 30, 2000. In
addition, the rise in the prime lending rate contributed excess interest income
of approximately $573 for the 2000 YTD Period compared to the same period in
1999. For the 2000 YTD Period, loan fees increased to $3,255 from $2,060 during
the same period in 1999. The increase is due to an increase in investment
origination volume from $111,500 during the 1999 YTD Period to $170,800 during
the 2000 YTD Period, and an increase in prepayment penalties of $352 due to $884
in prepayment penalties recognized on the repayment of the Company's
subordinated debt investment in Electrolux, LLC. Under the terms of the
transaction, the Company received a 180-day note in exchange for the retirement
of the original subordinated note plus the prepayment penalties in exchange for
the former note. The remaining term of the original subordinated note was six
and one half years at the time of prepayment. The transaction was accounted for
as a repayment of the subordinated note and an origination of a new note. For
the 2000 YTD Period, loan fees as a percentage of originations, exclusive of
prepayment penalties, remained unchanged at 1.4% during the same period in 1999.
Operating expenses for the Third Quarter 2000 increased $1,174, or 55%,
over the same period in 1999. The increase is primarily due to the increase in
interest expense from $1,349 during the Third Quarter 1999 to $2,107 during the
Third Quarter 2000. Interest expense increased due to both an increase in
weighted average outstanding borrowings from $56,823 in the Third Quarter 1999
to $95,206 in the Third Quarter 2000 and an increase in effective borrowing
rate, including amortization of deferred loan costs, from 6.97% at September 30,
1999 to 7.2% at September 30, 2000. For the 2000 YTD Period, interest expense
increased $3,106, or 96%, over the same period in 1999. The increase was
attributable to the interest rate increase noted above and the increase in the
weighted average outstanding borrowings from $46,530 during the nine months
ended September 30, 1999 to $87,960 during the 2000 YTD period. General and
administrative expenses increased from $382 in the Third Quarter 1999 to $522 in
the Third Quarter 2000. For the 2000 YTD Period, general and administrative
expenses increased from $1,035 in the 1999 YTD Period to $1,646 in the 2000 YTD
Period. The increase for the three months ended September 30, 2000 was due to
higher marketing expenses incurred to support the Company's increased
origination platform, and increased rent expenses relating to the Company's move
to a larger Bethesda corporate office during the fourth quarter of 1999. The
increase for the nine months ended September 30, 2000 was due to the higher
marketing and rent expenses mentioned above, and due to increased public
reporting expense incurred due to the Company's expanding shareholder base, and
recruiting expenses incurred relating to the Company's increase in total
employees from 36 to 60. For the Third Quarter 2000 and the 2000 YTD Period,
salaries and benefits expense increased $276 and $706, respectively, over the
comparable periods in 1999. The increase is attributable to the increase in the
number of employees from 36 at September 30, 1999 to 60 at September 30, 2000
and an increase in incentive compensation awarded in the Third Quarter 2000.
Incentive compensation increased approximately $103 and $303, respectively,
during the Third Quarter 2000 and the 2000 YTD Period due to both the higher
headcount and improved performance.
Equity in loss of unconsolidated operating subsidiary, which represents
ACFS's results, for the Third Quarter 2000 increased from a loss of $337 in
Third Quarter 1999 to a loss of $1,308 in Third Quarter 2000. For the Third
Quarter 2000, ACFS's results included $1,574 of operating income, $3,683 of
operating expenses, and $801 in other income. For the Third Quarter 1999, ACFS's
results included $1,528 of operating income, $2,257 of operating expenses, $186
of net unrealized appreciation of investments, and $206 in other income. For the
2000 YTD Period, ACFS's results included $3,671 of operating income, $8,652 of
operating expenses, $1 of realized gains on investments, and $1,892 of other
income; for the 1999 YTD Period, ACFS's results included $3,543 of operating
income, $6,082 of operating expenses, $925 of realized gains on investments,
$246 of net unrealized depreciation of investments, and $707 of other income.
The increase in ACFS's operating income was primarily due to an increase in loan
processing fees generated by the higher investment originations during the
quarter. For the 2000 YTD
18
Period, operating income slightly increased from $3,543 in the 1999 YTD Period
to $3,671. There was both an increase in loan processing fees during the 2000
YTD period and an increase in investment banking fees compared to the 1999 YTD
Period. Operating expenses for the Third Quarter 2000 increased $1,426, or 63%,
compared to the same period in 1999. For the 2000 YTD Period, operating expenses
increased $2,570, or 42%, compared to the same period in 1999. The increase in
operating expenses for both the three and nine month periods was due to the
increase in salaries and benefits caused by the increase in the number of
employees from 36 at September 30, 1999 to 60 at September 30, 2000, all of whom
are also employees of the Company, and the increase in incentive compensation
awarded for the Third Quarter 2000. Incentive compensation, driven by both the
increase in headcount and certain performance measures, increased $587 and
$1,387 compared to the three and nine months ended September 30, 1999. The
higher operating income, offset by higher operating expenses, resulted in an
$971 increase in ACFS's net loss in the Third Quarter 2000 compared to the Third
Quarter 1999, and a $1,935 increase in the net loss in the 2000 YTD Period
compared to the 1999 YTD Period.
During the Third Quarter 2000, one of the Company's portfolio
companies, o2wireless Solutions, Inc. (formerly named Clear Communications
Group), completed an initial public offering. In conjunction with the offering,
o2wireless Solutions repaid the Company's $13,000 subordinated note. In
addition, the Company exercised and sold 180 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.
The change in unrealized depreciation of investments is based on
portfolio asset valuations determined by the Company's Board of Directors.
Unrealized depreciation of investments for the Third Quarter 2000 increased
$47,511 over the Third Quarter 1999. Unrealized appreciation for the Third
Quarter 2000 was comprised of valuation increases of $21,500 on investments in
nine portfolio companies, including $16,755 of appreciation on the Company's
common stock warrant investment in o2wireless Solutions, Inc. and $1,524 on its
investment in Lion Brewery, Inc. The unrealized appreciation was offset by
valuation decreases of $65,400 on investments in four portfolio companies,
including depreciation of $62,00 on the Company's investment in Capital.com. For
the 2000 YTD Period, unrealized depreciation was comprised of valuation
increases of $47,010 on investments in seventeen companies, including $32,049 on
the Company's investment in o2wireless, and valuation decreases of $78,980 on
investments in five companies, including $71,000 on the Company's investment in
Capital.com.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At September 30, 2000, the Company had $32,140 in cash and cash
equivalents. In addition, the Company had outstanding debt secured by assets of
the Company of $135,613 under a $225,000 debt funding facility. During the nine
months ended September 30, 2000, the Company funded investments using draws on
the debt funding facility.
As a RIC, the Company is required to distribute annually 90% or more of
its net operating income and net realized short-term capital gains to
shareholders. While the Company provides shareholders with the option of
reinvesting their distributions in the Company, the Company anticipates having
to issue debt or equity securities in addition to the above borrowings to expand
its investments in middle market companies. The terms of the future debt and
equity issuances can not be determined and there can be no assurances that the
debt or equity markets will be available to the Company on terms it deems
favorable.
PORTFOLIO CREDIT QUALITY
The Company grades all loans on a scale of 1 to 4. This system is
intended to reflect the performance of the borrower's business, the collateral
coverage of the loans and other factors considered relevant.
Under this system, management believes that loans with a grade of 4
involve the least amount of risk in the Company's portfolio. The borrower is
performing above expectations and the trends and risk factors are generally
favorable. Management believes that loans graded 3 involve an acceptable level
of risk that is similar to the risk at the time of origination. The borrower is
performing as expected and the risk factors are neutral to favorable. All new
loans are initially graded 3. Loans graded 2 involve a borrower performing below
expectations and the loan risk has increased since origination. The borrower may
be out of compliance with debt covenants, however, loan payments are not more
than 120 days past due. For loans graded 2, the Company's management will
increase procedures to monitor the borrower and will write down the fair value
of the loan if it is deemed to be impaired. A loan grade of 1 indicates that the
borrower is performing materially below expectations and the loan risk has
substantially increased since origination. Some or all of the debt covenants are
out of compliance and payments are delinquent. Loans graded 1 are not
anticipated to be repaid in full and the Company will reduce the fair market
value of the loan to the amount it anticipates will be recovered.
19
To monitor and manage the investment portfolio risk, management tracks
the weighted average portfolio grade. The weighted average portfolio grade was
3.3 and 3.2 at September 30, 2000 and December 31, 1999, respectively. In
addition, at September 30, 2000 all of the Company's outstanding loans were
paying as agreed. At September 30, 2000 and December 31, 1999, the Company's
portfolio was graded as follows:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
----------------------------------- --------------------------------------
INVESTMENTS AT PERCENTAGE OF INVESTMENTS AT PERCENTAGE OF TOTAL
GRADE FAIR VALUE TOTAL PORTFOLIO FAIR VALUE PORTFOLIO
----- -------------- --------------- -------------- -------------------
4 $180,391 37.9% $ 65,638 21.5%
3 264,950 55.6% 223,898 73.4%
2 30,944 6.5% 15,577 5.1%
1 -- -- -- --
-------- ------- -------- -------
476,284 100.0% 305,113 100.0%
The amounts at September 30, 2000, and December 31, 1999 do not include
the Company's investments in Capital.com, Wrenchead.com, o2wireless Solutions,
Inc., and ACS Equities, LP as the Company has only invested in the equity
securities of these companies.
INTEREST RATE RISK
Because the Company funds a portion of its investments with borrowings
under its debt funding facility, the Company's net operating income is affected
by the spread between the rate at which it invests and the rate at which it
borrows. At September 30, 2000, approximately 69% of the Company's interest
bearing assets provided fixed rate returns and approximately 31% of the
company's interest bearing assets provided floating rate returns. The Company
attempts to match fund its liabilities and assets by financing floating rate
assets with floating rate liabilities and fixed rate assets with fixed rate
liabilities or equity. At September 30, 2000, the Company had floating rate
investments in debt securities with a face amount of $132 million and had total
borrowings outstanding of $136 million. All of the Company's outstanding debt at
September 30, 2000 has a variable rate of interest based on one-month LIBOR,
while all floating rate investments have an interest rate based on the prime
lending rate. A change in floating interest rates would have the following
annual impact on the investment portfolio at September 30, 2000:
Annual increase (decrease) in
----------------------------------
Change in floating Net operating Net operating
Interest Rate Interest income Interest expense Income Income per share
------------------ --------------- ---------------- ------------- ----------------
+ 200 basis points $ 2,646 $ 2,712 $(66) $(0.00)
+ 100 basis points 1,323 1,356 (33) (0.00)
- 100 basis points (1,323) (1,356) 33 0.00
- 200 basis points (2,646) (2,712) 66 0.00
In addition to match funding the assets and liabilities between fixed
and floating rates, the Company also enters into interest rate basis swap
agreements to match the floating rate basis of its assets and liabilities and to
fulfill its obligation under the terms of its debt funding facility. At
September 30, 2000, the Company had entered into six interest rate basis swap
agreements under which the Company pays a floating rate based on the prime rate
and receives a weighted average interest rate based on one month LIBOR plus 271
basis points. The total notional amount of the swap agreements is $113,325 and
the agreements have a remaining term of approximately four years. The Company
intends to use derivative instruments for non-trading and non-speculative
purposes only.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company, nor any of the Company's subsidiaries, is
currently subject to any material litigation nor, to the Company's knowledge, is
any material litigation threatened against the Company or any subsidiary, other
than routine litigation and administrative proceedings arising in the ordinary
course of business. Such proceedings are not expected to have a material adverse
effect on the business, financial conditions, or results of operation of the
Company or any subsidiary.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
(b) The registrant has not filed any reports on a Current Report on
Form 8-K during the quarter for which this report 10-Q is filed.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN CAPITAL STRATEGIES, LTD.
By: /s/ John R. Erickson
---------------------------------
John R. Erickson
Vice President and
Chief Financial Officer
Date: November 14, 2000
22