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As filed with the Securities and Exchange Commission on March 29, 2000
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 814-00149
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AMERICAN CAPITAL STRATEGIES, LTD.
Delaware 52-1451377
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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2 Bethesda Metro Center
14th Floor
Bethesda, Maryland 20814
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(Address of principal executive offices)
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(301) 951-6122
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(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $0.01 par value per share NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter earlier period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X|. No | |.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
On March 27, 2000, the aggregate market value of the Registrant's
common stock held by nonaffiliates of the Registrant was approximately
$450,638,000 based upon a closing price of the Registrant's common stock of
$24.69 per share as reported on the NASDAQ Stock Market on that date. (For this
computation, the registrant has excluded the market value of all shares of its
Common Stock reported as beneficially owned by executive officers and directors
of the registrant and certain other stockholders; such an exclusion shall not be
deemed to constitute an admission that any such person is an "affiliate" of the
registrant.) On March 27, 2000, there were 18,253,708 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. The Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 3, 2000 is
incorporated by reference into certain sections of Part III herein.
Certain exhibits previously filed with the Securities and Exchange
Commission are incorporated by reference into Part IV of this report.
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PART I
Item 1. Business of the Company
Background
American Capital Strategies, Ltd., a Delaware corporation (the
"Company"), was incorporated in 1986 to provide financial advisory services to
and invest in middle market companies. On August 29, 1997, the Company completed
an initial public offering ("IPO") of 10,382,437 shares of its Common Stock and
became a non-diversified, closed end investment company that has elected to be
treated as a business development company ("BDC") under the Investment Company
Act of 1940, as amended (the "1940 Act"). On October 1, 1997, the Company began
operations so as to qualify to be taxed as a regulated investment company
("RIC") as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal
Revenue Code of 1986 as amended (the "Code"). As contemplated by these
transactions, the Company materially changed its business plan and format from
structuring and arranging financing for buyout transactions on a fee for
services basis to primarily being a lender to and investor in middle market
companies. On May 26, 1999, the Company filed a shelf registration statement
(the "Shelf Registration Statement") with the United States Securities and
Exchange Commission ("SEC") with respect to the Company's debt and equity
securities. The Shelf Registration Statement allows the Company to sell its
registered debt or equity securities on a delayed or continuous basis in an
amount up to $250 million. As of August 5, 1999, the Company completed the sale
of 5,605,000 shares of its Common Stock (including the over-allotment option
granted to the underwriters) through the Shelf Registration Statement (the
"Secondary Offering") in the amount of $95 million.
The Company is a buyout and specialty finance company that is
principally engaged in providing senior debt, subordinated debt and equity to
middle market companies in need of capital for management buyouts including ESOP
buyouts, growth, acquisitions, liquidity and restructuring. The Company's
ability to fund the entire capital structure is an advantage in completing
middle market transactions. The Company generally invests up to $25 million in
each transaction and through its subsidiary, American Capital Financial
Services, Inc. ("ACFS"), will arrange and secure capital for larger
transactions. The Company's primary business objectives are to increase its net
operating income and net asset value by investing its assets in senior debt,
subordinated debt with detachable warrants and equity of middle market companies
with attractive current yields and potential for equity appreciation. The
Company's loans typically range from $5 million to $25 million, mature in five
to ten years, and require monthly or quarterly interest payments at fixed rates
or variable rates based on the prime rate, plus a margin. The Company prices its
debt and equity investments based on its analysis of each transaction. As of
December 31, 1999, the weighted average effective yield on the Company's
investments was 13.9%. From its formation in 1986 through the IPO, the Company
arranged 29 financing transactions aggregating over $400 million and invested in
the equity securities of eight of those transactions. From the IPO through
December 31, 1999, the Company invested $347 million in debt and equity
securities of middle market companies including over $16 million in funds
committed but undrawn under credit facilities.
In most cases, the Company receives rights to require the business to
purchase the warrants and stock held by the Company ("Put Rights") under various
circumstances including, typically, the repayment of the Company's loans or debt
securities. The Company may use its Put Rights to dispose of its equity interest
in a business, although the Company's ability to exercise Put Rights may be
limited or nonexistent if a business is illiquid. In most cases, the Company
also receives the right to representation on the businesses' board of directors.
At December 31, 1999, the Company had board seats on 25 out of 33 businesses and
had board observation rights on 4 of the remaining businesses in which it has
made investments.
The Company generally acquires equity interests in the companies from
which it has purchased debt securities with the goal of enhancing its overall
return. As of December 31, 1999, the Company had a weighted average ownership
interest of 25% in its portfolio companies. The Company is prepared to be a
long-term partner to its portfolio companies thereby positioning the Company to
participate in their future financing needs. The opportunity to liquidate its
investments and realize a gain may occur if the business recapitalizes its
equity, either through a sale to new owners or a public offering of its equity
or if the Company exercises its Put Rights. The Company generally does not have
the right to require that a business undergo an initial public offering by
registering securities under the Securities Act of 1933, but the Company
generally does have the right to sell its equity interests in a public offering
by the business to the extent permitted by the underwriters.
The Company makes available significant managerial assistance to its
portfolio companies. Such assistance typically involves closely monitoring the
operations of the company, hiring additional senior management, if needed, being
available for consultation with its officers, developing the business plan and
providing financial guidance and participating on its board of directors.
Providing assistance to its borrowers serves as a means of influence for the
Company as well as an opportunity for the Company to assist in maximizing the
value of the portfolio company.
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Prior to the IPO, the Company established itself as a leading firm in
structuring and obtaining funding for management and employee buyouts of
subsidiaries, divisions and product lines being divested by larger corporations
through the use of an ESOP. The selling entities have included Sunbeam
Corporation, the U.S. Office of Personnel Management, American Premier
Underwriters, Inc. (formerly Penn Central Corporation), Campbell Soup Company,
Union Carbide Corporation, National Forge Company, Inc., Air Products Company,
Ampco-Pittsburgh Corporation and British Petroleum Company. In most of the ESOP
transactions structured by the Company, the employees agree to restructure their
wages and benefits so that overall cash compensation is reduced while
contributions of stock are made to an ESOP. The resulting company is structured
so that the fair market value of stock contributed to the ESOP can be deducted
from corporate income before paying taxes. Restructuring employee compensation
together with the ESOP tax advantages has the effect of improving the cash flow
of the ESOP company. The Company is a leading firm in structuring and
implementing ESOP employee buyouts. The Company believes that its ESOP knowledge
and experience and its ability to fund transactions positions the Company
favorably in the market place.
The Company provides financial advisory services and structuring of
transactions through its wholly-owned subsidiary, ACFS. The typical advisory
engagement includes a monthly retainer and a performance fee contingent upon
closing of the transaction or event which is the subject of the engagement.
Management believes that future growth of ACFS is attainable through adding
additional professionals, by gaining additional market share and by realizing
the benefits of what is expected to be an increasing client base, which should
expand as a result of its relationship with the Company.
The Company believes that, through the structuring and advisory
business, it has established an extensive referral network comprised of venture
capitalists, investment bankers, attorneys, accountants, commercial bankers,
unions, business and financial brokers, and existing ESOP companies. The Company
has also developed an extensive set of Internet sites that generates financing
requests and provides businesses an efficient tool for learning about the
Company and its capabilities.
The Company has a marketing department headed by a vice president of
marketing dedicated to maintaining contact with members of the referral network
and receiving opportunities for the Company to consider. During 1999, the vice
president of marketing received information concerning in excess of 2,500
transactions for consideration. Many of those transactions did not meet the
Company's criteria for initial consideration, but the opportunities that met
those criteria were sent to the Company's principals for further review and
consideration. The vice president of marketing and ACFS are continuing the
relationships with the referral network and the Company utilizes the referral
network and ACFS's client base as its primary sources of investment
opportunities.
The Company's executive offices are located at 2 Bethesda Metro Center,
14th Floor, Bethesda, MD 20814 and its telephone number is (301) 951-6122. In
addition to its executive offices, the Company maintains offices in New York,
Boston, Pittsburgh, San Francisco, Chicago and Dallas.
Internet Strategy
The Company believes that the Internet is a significant medium for
information and business commerce that provides numerous opportunities for the
Company. The Company has been active in developing a series of web sites
concerning the Company and its products specifically and finance generally.
These sites have provided numerous investment leads to the Company and through
December 31, 1999, investments in 2 portfolio companies aggregating $29 million
had been sourced through these web sites. The Company has developed a strategy
to utilize the Internet to expand its core business, add value to its portfolio
companies and enhance the liquidity of its assets and thereby add value to its
stockholders. The Company's strategy is as follows:
o Financial Portal For Middle Market Companies. In the third quarter
of 1999, the Company commenced operation of a financial portal
website designed for middle market business to learn about
corporate finance, value their business, build financial models,
develop financing memoranda, find professionals to assist in the
financing process, find sources of capital and research financing
terms, criteria and the availability of a variety of financing
options, including financing by the Company. In December 1999, the
portal site was renamed "Capital.com" and the assets conveyed to a
new portfolio company known as Capital.com, Inc. ("Capital.com").
Contemporaneously with these events, a subsidiary of First Union
Corporation invested $15 million for a 15% to 20% equity interest
in Capital.com. The Company expects this site to generate
additional opportunities to provide financing to middle market
companies.
o Retail Internet Site For Products Manufactured By Portfolio
Companies. The Company is in the early stages of developing web
sites to market retail products manufactured by certain of its
portfolio companies directly to consumers. Additionally, the
Company intends to target for investment as possible portfolio
companies manufacturing companies that manufacture products that
may be sold through a retail Internet site. The strategy will
entail a series of marketing joint ventures with these portfolio
companies. The Company believes that these sites will provide
incremental business to some of its portfolio companies and may
thereby enhance the Company's return on its investment with
respect to such
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portfolio companies. This initiative may lead to the creation of a
new Internet marketing subsidiary of the Company with the
potential for appreciation that would benefit the holders of its
Common Stock.
o Private Securities Auction Site. The Company has commenced
developing a web site to auction certain securities of private
companies to institutional investors. This site is in an early
stage of development and will require the Company to meet numerous
regulatory requirements, including requirements of the Commission,
prior to commencing operation of the site. There is no assurance
that such requirements can or will be met. The Company believes
that it can use its expertise in originating securities to become
a market maker in such securities and that the Internet will
provide an efficient medium to make such a market and to
communicate with and sell securities to qualified investors.
Lending and Investment Decision Criteria
The Company reviews certain criteria in order to make investment
decisions. The criteria listed below provide a general guide for the Company's
lending and investment decisions, although not all criteria are required to be
favorable in order for the Company to make an investment.
Operating History. The Company focuses on target companies that have
stable operating histories and are profitable or near profitable at existing
operating levels. The Company reviews the target company's ability to service
and repay debt based on its historical results of operations. The Company
considers factors such as market shares, customer concentration, recession
history, competitive environment and ability to sustain margins. The Company
does not expect to lend or invest in start-up or other early stage companies.
Growth. The Company considers a target company's ability to increase
its cash flow. Anticipated growth is a key factor in determining the value
ascribed to any warrants and equity interests acquired by the Company.
Liquidation Value of Assets. Although the Company does not operate as
an asset-based lender, liquidation value of the assets collateralizing the
Company's loans is an important factor in many credit decisions. Emphasis is
placed both on tangible assets (accounts receivable, inventory, plant, property
and equipment) as well as intangible assets such as customer lists, networks,
databases and recurring revenue streams.
Experienced Management Team. The Company requires that each portfolio
company have a management team that is experienced and properly incentivized
through a significant ownership interest in the portfolio company. The Company
requires that a potential recipient of the Company's financing have a management
team who have demonstrated the ability to execute the portfolio company's
objectives and implement its business plan.
Exit Strategy. Prior to making an investment, the Company analyzes the
potential for the target company to experience a liquidity event that will allow
the Company to realize value for its equity position. Liquidity events include,
among other things, a private sale of the Company's financial interest, a sale
of the portfolio company, an initial public offering or a purchase by the
portfolio company or one of its stockholders of the Company's equity position.
Operations
Marketing and Origination Process. The Company and ACFS have 24
professionals responsible for originating loans and investments and providing
financial assistance to middle market companies and intend to hire additional
professionals during the next twelve months. To discover potential financing
opportunities, the Company has a dedicated marketing department headed by a vice
president who manages an extensive referral network comprised of venture
capitalists, investment bankers, unions, attorneys, accountants, commercial
bankers, business and financial brokers and prospective or existing ESOP
companies. The Company also uses its Internet sites and those of its portfolio
company, Capital.com, Inc., to attract financing opportunities.
Approval Process. The Company's financial professionals review
informational packages in search of potential financing opportunities and
conduct a due diligence investigation of each applicant that passes an initial
screening process. This due diligence investigation generally includes one or
more on-site visits, a review of the target company's historical and prospective
financial information, interviews with management, employees, customers and
vendors of the applicant, and background checks and research on the applicant's
product, service or particular industry. The Company engages professionals such
as environmental consultants, accountants, lawyers, risk managers and management
consultants to perform elements of the due diligence review as it deems
appropriate. Upon completion of a due diligence investigation, one of the
Company's principals prepares an investment committee report summarizing the
target company's historical and projected financial statements, industry and
management team and analyzing
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its conformity to the Company's general investment criteria. The principal then
presents this profile to the Company's Investment Committee. The Company's
Investment Committee and the Company's Board of Directors must approve each
financing.
Portfolio Management. In addition to the review at the time of original
underwriting, the Company attempts to preserve and enhance the earnings quality
of its portfolio companies through proactive management of its relationships
with its clients. This process includes attendance at portfolio company board
meetings, management consultation and review and management of covenant
compliance. The Company's investment and finance personnel regularly review
portfolio company monthly financial statements to assess cash flow performance
and trends, periodically evaluate the operations of the client, seek to identify
industry or other economic issues that may adversely affect the client, and
prepare quarterly summaries of the aggregate portfolio quality for management
review.
Loan Grading
The Company has implemented a system to evaluate and classify all loans
based on their current risk profile. The system requires the Director of
Reporting and Compliance to grade a loan on a scale of one to four. Loans graded
four involve the least amount of risk of loss, while loans graded one have an
unacceptable level of risk and a high probability of loss. The loan grade is
then reviewed and approved by the Investment Committee and the Board of
Directors. This system is intended to reflect the performance of the portfolio
company's business, the collateral coverage of the loans and other factors
considered relevant. For more information regarding the Company's loan grading
practices, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Portfolio Credit Quality."
Competition
The Company competes with a large number of private equity funds and
venture capital companies, investment banks and other equity and non-equity
based investment funds; and other sources of financing, including traditional
financial services companies such as commercial banks. Many of the Company's
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company does. For example, some
competitors may have a lower cost of funds and access to funding sources that
are not available to the Company. In addition, certain of the Company's
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships and build their market shares. There is no assurance that the
competitive pressures the Company faces will not have a material adverse effect
on our business, financial condition and results of operations. Also, as a
result of this competition, the Company may not be able to take advantage of
attractive investment opportunities from time to time and there can be no
assurance that the Company will be able to identify and make investments that
satisfy its investment objectives or that the Company will be able to fully
invest its available capital.
Employees
As of December 31, 1999, the Company had 39 employees, 24 of whom are
professionals working on financings for middle market companies. The Company
believes that the relations with its employees are excellent.
The Company's Operations as a BDC and RIC
As a BDC, the Company may not acquire any asset other than Qualifying
Assets unless, at the time the acquisition is made, Qualifying Assets represent
at least 70% of the value of the Company's total assets. The principal
categories of Qualifying Assets relevant to the business of the Company are the
following:
o securities purchased in transactions not involving any public
offering from the issuer of such securities, which issuer is an
eligible portfolio company. An eligible portfolio company is
defined as any issuer that (a) is organized and has its principal
place of business in the United States, (b) is not an investment
company other than a small business investment company
wholly-owned by the BDC, and (c) does not have any class of
publicly-traded securities with respect to which a broker may
extend credit;
o securities received in exchange for or distributed with respect to
securities described above, or pursuant to the exercise of
options, warrants or rights relating to such securities; and
o cash, cash items, Government securities, or high quality debt
securities maturing in one year or less from the time of
investment.
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The Company may not change the nature of its business so as to cease to
be, or withdraw its election as, a BDC unless authorized by vote of the holders
of the majority, as defined in the 1940 Act, of the Company's outstanding voting
securities. Since the Company made its BDC election, it has not made any
substantial change in its structure or in the nature of its business.
Since October 1, 1997, the Company has operated so as to qualify as a
RIC under the Code. Generally, in order to qualify as a RIC, the Company must
continue to qualify as a BDC and distribute to stockholders in a timely manner,
at least 90% of its "investment company taxable income" as defined by the Code.
Also, the Company must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale of
stock or other securities or other income derived with respect to its business
of investing in such stock or securities as defined by the Code. Additionally,
the Company must diversify its holdings so that (a) at least 50% of the value of
the Company's assets consists of cash, cash items, government securities,
securities of other RICs and other securities if such other securities of any
one issuer do not represent more than 5% of the Company's assets and 10% of the
outstanding voting securities of the issuer and (b) no more than 25% of the
value of the Company's assets (including those owned by ACFS) are invested in
the securities of one issuer (other than U.S. government securities and
securities of other RICs), or of two or more issuers that are controlled by the
Company and are engaged in the same or similar or related trades or businesses.
If the Company qualifies as a RIC, it will not be subject to federal income tax
on the portion of its taxable income and net capital gains it distributes in a
timely fashion to stockholders. In addition, with respect to each calendar year,
if the Company distributes or is treated as having distributed (including
amounts retained but designated as deemed distributed) in a timely manner 98% of
its capital gain net income for each one-year period ending on October 31, and
distributes 98% of its net ordinary income for such calendar year (as well as
any income not distributed in prior years), it will not be subject to the 4%
nondeductible federal excise tax imposed with respect to certain undistributed
income of RICs.
If the Company fails to satisfy the 90% distribution requirement or
otherwise fails to qualify as a RIC in any taxable year, it will be subject to
tax in such year on all of its taxable income, regardless of whether the Company
makes any distribution to its stockholders. In addition, in that case, all of
the Company's distributions to its stockholders will be characterized as
ordinary income (to the extent of the Company's current and accumulated earnings
and profits).
Our wholly-owned subsidiary, ACFS, is an ordinary corporation that is
subject to corporate level federal income tax.
Temporary Investments
Pending investment in other types of Qualifying Assets, the Company has
invested its otherwise uninvested cash primarily in cash, cash items, government
securities, agency paper or high quality debt securities maturing in one year or
less from the time of investment in such high quality debt investments
("Temporary Investments") so that at least seventy percent (70%) of its assets
are Qualifying Assets. Typically, the Company invests in U.S. Treasury bills.
Additionally, the Company may invest in repurchase obligations of a "primary
dealer" in government securities (as designated by the Federal Reserve Bank of
New York) or of any other dealer whose credit has been established to the
satisfaction of the Board of Directors. There is no percentage restriction on
the proportion of the Company's assets that may be invested in such repurchase
agreements. A repurchase agreement involves the purchase by an investor, such as
the Company, of a specified security and the simultaneous agreement by the
seller to repurchase it at an agreed upon future date and at a price which is
greater than the purchase price by an amount that reflects an agreed-upon
interest rate. Such interest rate is effective for the period of time during
which the investor's money is invested in the arrangement and is related to
current market interest rates rather than the coupon rate on the purchased
security. The Company requires the continual maintenance by its custodian or the
correspondent in its account with the Federal Reserve/Treasury Book Entry System
of underlying securities in an amount at least equal to the repurchase price. If
the seller were to default on its repurchase obligation, the Company might
suffer a loss to the extent that the proceeds from the sale of the underlying
securities were less than the repurchase price. A seller's bankruptcy could
delay or prevent a sale of the underlying securities.
Leverage
For the purpose of making investments and to take advantage of
favorable interest rates, the Company has issued, and intends to continue to
issue, senior debt securities and other evidences of indebtedness, up to the
maximum amount permitted by the 1940 Act, which currently permits the Company,
as a BDC, to issue senior debt securities and preferred stock (collectively,
"Senior Securities") in amounts such that the Company's asset coverage, as
defined in the 1940 Act, is at least 200% after each issuance of Senior
Securities. Such indebtedness may also be incurred for the purpose of effecting
share repurchases. As a result, the Company is exposed to the risks of leverage.
Although the Company has no current intention to do so, it has retained the
right to issue preferred stock. As permitted by the 1940 Act, the Company may,
in addition, borrow amounts up to five percent (5%) of its total assets for
temporary purposes.
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Investment Objectives and Policies
The Company's investment objectives are to achieve a high level of
current income from the collection of interest and advisory fees, as well as
long-term growth in its stockholders' equity through the appreciation in value
of the Company's equity interests in the portfolio companies in which it
invests. The following restrictions, along with these investment objectives, are
the Company's only fundamental policies--that is, policies that may not be
changed without the approval of the holders of the majority, as defined in the
1940 Act, of the Company's outstanding voting securities. The percentage
restrictions set forth below other than the restriction pertaining to the
issuance of Senior Securities, as well as those contained elsewhere herein,
apply at the time a transaction is effected, and a subsequent change in a
percentage resulting from market fluctuations or any cause other than an action
by the Company will not require the Company to dispose of portfolio securities
or to take other action to satisfy the percentage restriction.
The Company will at all times conduct its business so as to retain its
status as a BDC. In order to retain that status, the Company may not acquire any
assets (other than non-investment assets necessary and appropriate to its
operations as a BDC) if after giving effect to such acquisition the value of its
"Qualifying Assets" amounts to less than 70% of the value of its total assets.
For a summary definition of "Qualifying Assets," see "The Company's Operations
as a BDC and RIC." The Company believes that most of the securities it proposes
to acquire (provided that the Company controls, or through its officers or other
participants in the financing transaction, makes significant managerial
assistance available to the issuers of these securities), as well as Temporary
Investments, will generally be Qualifying Assets. Securities of public
companies, on the other hand, are generally not Qualifying Assets unless they
were acquired in a distribution, in exchange for or upon the exercise of a right
relating to securities that were Qualifying Assets.
The Company may invest up to 100% of its assets in securities acquired
directly from issuers in privately-negotiated transactions. With respect to such
securities, the Company may, for the purpose of public resale, be deemed an
"underwriter" as that term is defined in the 1933 Act. The Company may invest up
to 50% of its assets to acquire securities of issuers for the purpose of
acquiring control (up to 100% of the voting securities) of such issuers. The
Company will not concentrate its investments in any particular industry or group
of industries. Therefore, the Company will not acquire any securities (except
upon the exercise of a right related to previously acquired securities) if, as a
result, 25% or more of the value of its total assets (including assets held by
ACFS) consists of securities of companies in the same industry.
The Company may issue Senior Securities to the extent permitted by the
1940 Act for the purpose of making investments, to fund share repurchases, or
for temporary or emergency purposes. A business development company may issue
Senior Securities up to an amount so that the asset coverage, as defined in the
1940 Act, is at least 200% immediately after each issuance of Senior Securities.
The Company will not (a) act as an underwriter of securities of other
issuers (except to the extent that it may be deemed an "underwriter" of
securities purchased by it that must be registered under the 1933 Act before
they may be offered or sold to the public); (b) purchase or sell real estate or
interests in real estate or real estate investment trusts (except that the
Company may purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments and may own the
securities of companies or participate in a partnership or partnerships that are
in the business of buying, selling or developing real estate); (c) sell
securities short; (d) purchase securities on margin (except to the extent that
it may purchase securities with borrowed money); (e) write or buy put or call
options (except to the extent of warrants or conversion privileges in connection
with its acquisition financing or other investments, and rights to require the
issuers of such investments or their affiliates to repurchase them under certain
circumstances); (f) engage in the purchase or sale of commodities or commodity
contracts, including futures contracts (except where necessary in working out
distressed loan or investment situations); or (g) acquire more than 3% of the
voting stock of, or invest more than 5% of its total assets in any securities
issued by, any other investment company, except as they may be acquired as part
of a merger, consolidation or acquisition of assets. With regard to that portion
of the Company's investments in securities issued by other investment companies
it should be noted that such investments may subject the Company's stockholders
to additional expenses.
Investment Advisor
The Company has no investment advisor and is internally managed by its
executive officers under the supervision of the Board of Directors.
Item 2. Properties
Neither the Company nor any of its subsidiaries owns any real estate or
other physical properties materially important to the operation of the Company
or any of its subsidiaries. The Company leases an aggregate of approximately
22,174 square feet of office space in four locations for terms ranging up to six
years.
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Item 3. Legal Proceedings
Although the Company may, from time to time, be involved in litigation
and claims arising out of its operations in the normal course of business, as of
December 31, 1999, the Company was not presently a party to any material pending
legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year ended December 31, 1999,
there were no matters submitted to a vote of the Company's security holders
through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since the IPO, the Company has distributed, and currently intends to
continue to distribute in the form of dividends, a minimum of 90% of its net
operating income and 98% of its net realized short-term capital gains, if any,
on a quarterly basis to its stockholders. Net realized long-term capital gains
may be retained to supplement the Company's equity capital and support growth in
its portfolio, unless the Board of Directors determines in certain cases to make
a distribution. There is no assurance that the Company will achieve investment
results or maintain a tax status that will permit any specified level of cash
distributions or year-to-year increases in cash distributions.
The Company's Common Stock is quoted on the Nasdaq Stock Market under
the symbol ACAS. As of March 21, 2000, the Company had 268 stockholders of
record and approximately 7,600 beneficial owners. The following table sets forth
the range of high and low sales prices of the Company's Common Stock as reported
on the Nasdaq Stock Market and the dividends declared by the Company for the
period from August 29, 1997, when public trading of the Common Stock commenced
pursuant to the IPO, through March 27, 2000.
Sale Price
----------
Dividend
High Low Declared
---- --- --------
1997
Third Quarter (beginning August 29, 1997) $ 20.25 $ 18.50 $ 0.00
Fourth Quarter $ 20.75 $ 16.50 $ 0.21
1998
First Quarter $ 22.50 $ 17.25 $ 0.25
Second Quarter $ 24.63 $ 21.25 $ 0.29
Third Quarter $ 24.25 $ 10.13 $ 0.32
Fourth Quarter $ 18.44 $ 9.19 $ 0.48
1999
First Quarter $ 19.00 $ 14.00 $ 0.41
Second Quarter $ 21.25 $ 16.00 $ 0.43
Third Quarter $ 20.00 $ 16.25 $ 0.43
Fourth Quarter $ 23.13 $ 17.88 $ 0.47
2000
First Quarter (through March 27, 2000) $ 26.81 $ 20.88 $ 0.45
8
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.
(In thousands except per share data)
Three Months || Nine Months
Year Ended Year Ended Ended || Ended Year Ended Year Ended
December 31, December 31, December 31, || September 30, December 31, December 31,
1999 1998 1997 || 1997 1996 1995
---------- ---------- ---------- || ---------- --------- ----------
Total operating income $ 33,405 $ 16,979 $ 2,797 || $ 2,901 $ 2,746 $ 2,706
Total operating expenses 7,251 1,709 551 || 2,651 2,862 2,928
---------- ---------- ---------- || ---------- ---------- ----------
||
Operating income (loss) before equity in ||
(loss) earnings of unconsolidated ||
operating subsidiary 26,154 15,270 2,246 || 250 (116) (222)
Equity in (loss) earnings of unconsolidated ||
operating subsidiary (1,493) (482) 24 || -- -- --
---------- ---------- ---------- || ---------- ---------- ----------
||
Net operating income (loss) 24,661 14,788 2,270 || 250 (116) (222)
Realized gain on investments 2,711 -- -- || -- -- 66
Increase in unrealized appreciation on ||
investments 69,829 2,127 167 || 5,321 484 371
---------- ---------- ---------- || ---------- ---------- ----------
||
Income before income taxes 97,201 16,915 2,437 || 5,571 368 215
Provision for income taxes -- -- -- || 2,128 159 57
---------- ---------- ---------- || ---------- ---------- ----------
||
Net increase in shareholders' equity ||
resulting from operations 97,201 16,915 2,437 || 3,443 209 158
========== ========== ========== || ========== ========== ==========
||
Per share data: ||
Net operating income: ||
Basic $ 1.79 $ 1.34 $ 0.21 ||
Diluted $ 1.73 $ 1.29 $ 0.20 ||
Net increase in shareholders' equity ||
resulting from operations: ||
Basic $ 7.07 $ 1.53 $ 0.22 ||
Diluted $ 6.80 $ 1.48 $ 0.21 ||
Cash dividends $ 1.74 $ 1.34 $ 0.21 ||
||
Balance Sheet Data: ||
Total assets $ 395,372 $ 270,019 $ 150,705 || $ 154,322 $ 5,432 $ 4,382
Total shareholders' equity 311,745 152,723 150,652 || 150,539 3,372 2,946
||
Other Data: ||
Number of portfolio companies at period
end 33 15 3 ||
Principal amount of loan originations $ 139,433 $ 116,864 $ 16,817 ||
Principal amount of loan repayments $ 30,731 $ 1,719 $ 93 ||
Return on equity (1) (2) 41.9% 11.2% 6.5% ||
Weighted average yield on investments 13.9% 13.0% 12.2% ||
(1) Amounts are annualized for the three months ended December 31, 1997.
(2) Return represents net increase in shareholders' equity resulting from
operations.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(In thousands except per share data)
Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained herein that are not historical facts
including, but not limited to, statements regarding anticipated activity are
forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could cause actual
results to differ materially are the following: changes in the economic
conditions in which the Company operates negatively impacting the financial
resources of the Company; certain of the Company's competitors with
substantially greater financial resources than the Company reducing the number
of suitable investment opportunities offered to the Company or reducing the
yield necessary to consummate the investment; volatility in the value of equity
investments including Internet properties, such as Capital.com; increased costs
related to compliance with laws, including environmental laws; general business
and economic conditions and other risk factors described in the Company's
reports filed from time to time with the Securities and Exchange Commission. The
Company cautions readers not to place undue reliance on any such forward looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
financial statements and the notes thereto. As discussed in Notes 1 and 2, the
Company completed an initial public offering ("IPO") of its common stock on
August 29, 1997, and on October 1, 1997, began to operate so as to qualify to be
taxed as a regulated investment company ("RIC"). After the IPO, the Company
changed its primary business plan and format from structuring and arranging
financing for buyout transactions on a fee for services basis to being a lender
to and investor in middle market companies. As a result of the changes, the
Company's predominant source of operating income has changed from financial
performance and advisory fees to interest and dividends earned from investing
the Company's assets in debt and equity of businesses. Additionally, pursuant to
RIC accounting requirements, effective October 1, 1997, the Company's accounting
for its operating subsidiary, American Capital Financial Services, Inc.
("ACFS"), changed from a consolidated basis to the equity method. The financial
results of the Company for the periods through September 30, 1997 are not
comparable to periods commencing October 1, 1997 and are not expected to be
representative of the financial results of the Company in the future.
Accordingly, those periods are discussed separately.
Portfolio Composition
The Company's primary business is investing in and lending to
businesses through investments in senior debt, subordinated debt with detachable
common stock warrants, preferred stock, and common stock. The total portfolio
value of investments in publicly and non-publicly traded securities, excluding
government securities, was $377,554 and $165,035 at December 31, 1999 and 1998,
respectively. During the years ended December 31, 1999 and 1998, the Company
made investments totaling $175,823 and $150,249, including $13,500 and $7,384 in
funds committed but undrawn under credit facilities, respectively. The weighted
average effective interest rate on the investment portfolio was 13.9% and 13.0%
at December 31, 1999 and 1998, respectively. Summaries of the composition of the
Company's portfolio of publicly and non-publicly traded securities, excluding
government securities, at December 31, 1999 and 1998 at cost and fair value are
shown in the following table:
COST December 31, 1999 December 31, 1998
- ---- ----------------- -----------------
Senior debt 11.9% 15.2%
Subordinated debt 69.4% 66.4%
Convertible preferred stock 2.2% 3.3%
Common stock warrants 13.6% 12.6%
Common stock 2.9% 2.5%
FAIR VALUE December 31, 1999 December 31, 1998
- ---------- ----------------- -----------------
Senior debt 9.7% 15.0%
Subordinated debt 56.0% 65.5%
Convertible preferred stock 2.0% 3.3%
Common stock warrants 11.6% 13.4%
Common stock 20.7% 2.8%
10
On a fair value basis, the Company's portfolio composition was weighted
more heavily toward common stock at December 31, 1999 than at December 31, 1998
due to the value of the Capital.com investment of $72,500. At December 31, 1999,
Capital.com accounted for 19% of the total portfolio value of investments in
publicly and non-publicly traded securities (see discussion of Capital.com under
Results of Operations).
The following table shows the portfolio composition by industry
grouping at cost and at fair value:
COST December 31, 1999 December 31, 1998
- ---- ----------------- -----------------
Manufacturing 56.6% 65.9%
Wholesale & Retail 11.5% 7.4%
Construction 7.7% 10.1%
Healthcare 6.5% --
Media 5.5% 9.2%
Telecommunications 4.3% --
Service 3.5% 2.0%
Information Technology 2.5% --
Transportation 1.4% 5.4%
Internet 0.5% --
FAIR VALUE December 31, 1999 December 31, 1998
- ---------- ----------------- -----------------
Manufacturing 46.2% 66.1%
Internet 19.2% --
Wholesale & Retail 9.3% 7.4%
Construction 6.2% 10.0%
Healthcare 5.2% --
Media 4.5% 9.1%
Telecommunications 3.5% --
Service 2.8% 2.0%
Information Technology 2.0% --
Transportation 1.1% 5.4%
Management expects that the largest percentage of its investments will
continue to be in manufacturing companies, however, the Company intends to
continue to diversify its portfolio and will explore new investment
opportunities in a variety of industries.
Results of Operations
The Company's financial performance, as reflected in its Statements of
Operations, is composed of three primary elements. The first element is "Net
operating income (loss)," which for periods prior to October 1, 1997 ("pre-RIC")
is the difference between the Company's revenue earned from arranging financing
for middle market companies and other financial advisory work and its total
operating expenses including ESOP contributions, depreciation and interest
expense. For periods prior to October 1, 1997, ESOP contributions represented a
significant component of total operating expenses. Net operating income (loss)
for periods commencing October 1, 1997 ("post-RIC") is primarily the interest
and dividends earned from investing in debt and equity securities and the equity
in earnings of its unconsolidated operating subsidiary less the operating
expenses of the Company. The second element is "Change in unrealized
appreciation of investments," which is the net change in the estimated fair
value of the Company's portfolio assets at the end of the period compared with
their estimated fair values at the beginning of the period or their stated
costs, as appropriate. The third element is "Realized gain on investments,"
which reflects the difference between the proceeds from a sale or maturity of a
portfolio investment and the cost at which the investment was carried on the
Company's balance sheet.
11
As discussed above, as a RIC, the Company is required to account for
investments in operating subsidiaries under the equity method, regardless of
ownership interest. Accordingly, the Company's investment in ACFS, which prior
to RIC status was consolidated, is presented on the equity method effective
October 1, 1997.
The operating results for the years ended December 31, 1999 and 1998
are as follows:
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Operating income $ 33,405 $ 16,979
Operating expenses 7,251 1,709
Equity in loss of unconsolidated operating subsidiary (1,493) (482)
------------- -------------
Net operating income 24,661 14,788
Net realized gain on investments 2,711 --
Increase in unrealized appreciation of investments 69,829 2,127
------------ -------------
Net increase in shareholders' equity resulting from operations $ 97,201 $ 16,915
============ =============
Total operating income for the year ended December 31, 1999, increased
$16,426, or 97%, over the year ended December 31, 1998. The increase is a result
of the company closing 24 investments in private companies totaling $162 million
and selling investments in 2 portfolio companies during 1999. Total operating
income for 1999 consisted of $2,044 in loan fees, $528 in prepayment fees,
$29,893 in interest and dividends on non-publicly traded securities, and $940 in
interest on government agency securities, bank deposits, repurchase agreements,
and shareholder loans. Total operating income for 1998 consisted of $2,549 in
loan processing fees and $11,020 in interest and dividends on non-publicly
traded securities and $3,410 in interest on government agency securities, bank
deposits and repurchase agreements.
Operating expenses for 1999 increased $5,542, or 324%, over 1998. The
increase is primarily due to an increase in interest expense from $57 in 1998 to
$4,716 in 1999. Interest expense increased due to an increase in the Company's
weighted average borrowings from $1,031 in 1998 to $48,608 in 1999. In addition,
the weighted average interest rate on outstanding borrowings, including
amortization of deferred finance costs, increased from 5.9% in 1998 to 9.7% in
1999. Operating expenses for 1999 consisted of $1,045 in salaries and benefits,
$1,490 in general and administrative expenses, and $4,716 in interest expense.
Operating expenses also increased due to increases in salaries and benefits from
$843 in 1998 to $1,045 in 1999 due to an increase in employees from 30 at
December 31, 1998 to 39 at December 31, 1999.
Equity in loss of unconsolidated operating subsidiary, which represents
ACFS's results, increased from a loss of $482 in 1998 to a loss of $1,493 in
1999. For the year ended December 31, 1999, ACFS's results included $6,030 of
operating income, $9,114 of operating expenses, $925 of realized gains, $246 of
unrealized depreciation of investments, and $912 of other income. The realized
gain was a result of the sale of ACFS's common stock investment in Four-S Baking
Company ("Four-S") and the unrealized depreciation was due to the reversal of
previously recorded unrealized appreciation of ACFS's Four S investment, netted
against unrealized gains on other investments. For the year ended December 31,
1998, ACFS's results included $5,227 of operating income, $6,451 of operating
expenses, $481 of unrealized appreciation of investments, and $261 in other
income. The decrease in ACFS's earnings for 1999 was primarily attributable to
the increase in salaries and benefits caused by an increase in employees from 30
to 39.
During 1999, the Company recorded a realized gain of $2,395 from the
prepayment of $8,000 of subordinated debt by Specialty Transportation Services,
Inc. ("STS") and the sale of the Company's common stock and warrant investments
in STS, and a realized gain of $316 on the sale of its investment in Four-S.
Total proceeds from the repayment of the STS subordinated debt and the sale of
the Company's equity interest in STS totaled $11,000 ; the realized gain on the
subordinated debt was a result of the realization of unamortized loan discounts
and the gains on the warrants and equity were equal to the excess cash received
over the cost basis of the securities. In addition, STS paid ACFS a $1,000 fee
to terminate an investment banking contract between STS and ACFS. Total proceeds
from the sale of the Four-S securities, which included senior debt, subordinated
debt, preferred stock, common stock warrants, and common stock, were $7,200. The
realized gain for the Four-S transactions was comprised of the realization of
unamortized loan discounts. The Company did not record any realized gains on
investments in 1998.
During 1999, the Company paid federal income taxes of $309 on retained
realized gains recorded on the Four-S and STS transactions during the tax year
ended September 30, 1999; $1,844 of gains on the STS sale were realized
subsequent to September 30, 1999. The payment was treated as a deemed
distribution because it was paid on behalf of the Company's shareholders. As a
result, the Company did not record income tax expense. The Company may elect to
retain future realized gains and pay taxes on behalf of the shareholders.
12
The increase in unrealized appreciation of investments is based on
portfolio asset valuations determined by the Company's Board of Directors. The
increase in unrealized appreciation of investments was $69,829 in 1999, compared
to $2,717 in 1998. The increase was primarily due to the increase in the
valuation of Capital.com of $71,008 (see further discussion of Capital.com
below). Excluding Capital.com, the Company experienced unrealized depreciation
of investments of $1,179, which consisted of valuation increases of $6,254 at
seven portfolio companies, valuation decreases of $6,719 at eight portfolio
companies, valuation decreases of $163 related to interest rate basis swaps used
to manage interest rate risk, and $551 of unrealized depreciation resulting from
the reversal of previously recorded unrealized appreciation of the Company's
investments in Four-S and STS. The increase in unrealized appreciation of
investments for the year ended December 31, 1998 was $2,127, which consisted of
valuation increases of $2,324 at nine portfolio companies and valuation
decreases of $197 at three portfolio companies.
Capital.com, an Internet finance portal, was launched in July 1999
under the name of AmericanCapitalOnline.com. In December 1999, the assets of
AmericanCapitalOnline.com were contributed to Capital.com, Inc., a newly formed
entity, and the site was renamed Capital.com. The total cost of the assets
contributed to Capital.com by the Company was $1,492. During December, 1999, a
subsidiary of First Union Corporation ("First Union") invested $15,000 in
Capital.com in exchange for a 15% common equity stake and warrants to acquire up
to an additional 5% of the common equity at a nominal price. The warrants are
exercisable based on a subsequent valuation of Capital.com in connection with a
subsequent investment or offer to invest within a year of First Union's stock
purchase. If the subsequent valuation results in a value of Capital.com of
$100,000 or more, the warrants will be extinguished. If the subsequent valuation
results in a value of Capital.com of $75,000 or less, all the warrants will be
exercisable. If the subsequent valuation results in a value between $75,000 and
$100,000, a pro-rata portion of the warrants will be exercisable.
In considering the appropriate valuation of this investment at December
31, 1999, in addition to the value implied by First Union's investment for a 15%
equity interest, management and the Board of Directors considered several
factors including:
o The valuation of comparable public company entities;
o The very early development stage of Capital.com;
o An estimated value for the warrants issued to First Union and the
uncertainty of a subsequent valuation of Capital.com affecting the
number of shares for which such warrants could be exercised.
Based on all these factors and others that were considered, the Board
of Directors valued the investment in Capital.com at $72,500 at December 31,
1999. This investment represents 18% of total assets and 23% of total
shareholders' equity at December 31, 1999 and the change in unrealized
appreciation represents 73% of the net increase in shareholders' equity
resulting from operations for 1999. Realization of this valuation in subsequent
periods is subject to a high degree of uncertainty including the ability of
Capital.com to attract and retain financial and service providers, develop and
maintain a significant customer base that will support the on going investment
and capital needs of the business, attract additional investors in the business,
and develop and execute an exit strategy for investors. The outcome of these
matters is highly uncertain. Inability to achieve these or other factors could
negatively impact future valuations of Capital.com and such differences could be
material.
The post-RIC operating results for the three months ended December 31,
1997 are summarized as follows:
Three Months Ended
December 31, 1997
-----------------
Operating income $ 2,797
Operating expenses 551
Equity in earnings of unconsolidated operating subsidiary 24
---------------
Net operating income 2,270
Increase in unrealized appreciation of investments 167
---------------
Net increase in shareholders' equity resulting from operations $ 2,437
===============
Total operating income consisted of approximately $700 in loan
processing fees and $200 in interest on non-publicly traded securities and
$1,897 in interest on government agency securities and overnight repurchase
agreements. The loan fees were earned as a result of closing three investments
in private companies totaling $21 million during the period.
13
Operating expenses for the period consisted of $243 in salaries and
benefits and $308 in general and administrative expenses.
Equity in earnings of unconsolidated operating subsidiary represents
ACFS's results including the portfolio companies. For the three months ended
December 31, 1997, ACFS's results included $414 of operating income, $987 of
operating expenses, $605 of unrealized appreciation of investments and $8 in tax
provisions.
The increase in unrealized appreciation of investments as discussed in
Note 2 to the financial statements is determined by the Company's Board of
Directors. The change in unrealized appreciation of investments for the three
month period is $167 which consists of an increase of $52 in the valuation of
the government agency securities and an increase of $115 in the valuation of the
investments in private companies.
The pre-RIC operating results for the nine months ended September 30,
1997 are as follows:
Nine Months Ended
September 30,
1997
----
Operating income $ 2,901
Operating expenses 2,651
-----------
Net operating income 250
Increase in unrealized appreciation of investments 5,321
Provision for income taxes 2,128
-----------
Net increase in shareholders' equity resulting from operations $ 3,443
===========
Total operating income was $2,901 for the nine months ended September
30, 1997, consisting of financial advisory fees of $1,122 , financial
performance fees of $798, other operating income of $428, and interest income
earned on investment securities and overnight repurchase agreements of $553.
Total operating expenses for the nine months ended September 30, 1997,
were $2,651. Operating expenses consisted of salaries and benefits of $1,221,
general and administrative expenses of $1,547, and interest expense of $60. In
addition, during the nine months ended September 30, 1997, the Company changed
its evaluation of collectibility of a receivable from Martino's Bakery, Inc.,
due to Martino's improved financial condition, restructuring of repayment terms,
and subsequent payment history. Therefore, the Company recorded a reversal in
its provision for doubtful accounts totaling $177. During the nine months ended
September 30, 1996, the Company had accrued $164 as a provision for doubtful
accounts related to two companies, one of which was Martino's Bakery, Inc.
For the nine months ended September 30, 1997, the Company recorded net
increases in unrealized appreciation of investments in its portfolio companies
of $5,321. Included in unrealized appreciation of investments during the first
nine months of 1997 was $4,400 associated with an investment in Biddeford
Textile Coorporation, formerly the blanket operation of the electric blanket
manufacturing division of Sunbeam Products, Inc. Also included in unrealized
appreciation of investments during the first nine months of 1997 was
appreciation of $731 associated with the Company's investment in Mobile Tool
International, Inc., appreciation of $356 associated with Four-S, and
depreciation of $138 associated with Martino's Bakery, Inc.
The following table sets forth the components of the increase in
unrealized appreciation of investments for the nine months ended September 30,
1997:
Nine Months Ended
September 30,
1997
----
Government Securities $ (27)
Erie Forge and Steel, Inc --
Four S Baking Company, Inc 355
Indiana Steel & Wire Corporation --
Martino's Bakery, Inc. (138)
Mobile Tool International, Inc. 731
Biddeford Textile Corporation 4,400
---------
Increase in unrealized appreciation of investments $ 5,321
=========
14
The Company recorded a provision for income taxes for the nine months
ended September 30, 1997, of $2,128. Unrealized appreciation (depreciation) of
investments does not affect the actual tax paid by the Company. However, under
GAAP, the Company provides for income taxes based on its GAAP pretax income,
which includes unrealized appreciation (depreciation) of investments. Actual
income taxes paid may differ substantially from the provision for income taxes.
The Company accounted for this difference by recognition of a deferred tax
liability in the Pre-RIC balance sheet of ACFS.
Financial Condition, Liquidity, and Capital Resources
At December 31, 1999, the Company had $2,037 in cash and cash
equivalents. In addition, the Company had outstanding debt secured by assets of
the Company of $78,545 under a $225,000 debt funding facility. During 1999, the
Company funded its investments with proceeds from a debt funding facility, short
term borrowings, and a follow-on equity offering from which it received net
proceeds of approximately $90,000.
On March 31, 1999, the Company closed a maximum $100,000 debt funding
facility; this facility was increased to a $125,000 on June 17, 1999, and to
$225,000 on December 10, 1999. In connection with the closing, the Company
established ACS Funding Trust I (the "Trust"), an affiliated business trust and
contributed or sold to the Trust approximately $157,000 in loans. The Company
subsequently contributed an additional $100,000 in loans to the Trust. Subject
to certain conditions precedent, the Company will remain servicer of the loans.
Simultaneously with the initial contribution, the Trust entered into a loan
agreement with First Union Capital Markets Corp., as deal agent, and certain
other parties providing for loans in an amount up to 50% of the eligible loan
balance subject to certain concentration limits. The transfer of assets to the
Trust and the related borrowings by the Trust have been treated as a financing
arrangement by the Company under Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The term of the facility is two years and
interest on borrowings had been charged at LIBOR (6.47% at December 31, 1999)
plus 2.50%; the interest rate was decreased to LIBOR plus 1.50% on December 10,
1999. The full amount of principal is due at the end of the term and interest is
payable monthly. The Company has used borrowings under this facility to repay
debt and to make investments in the debt and equity securities of middle market
companies; the Company intends to continue to use this facility in this fashion.
As of December 31, 1999, the Company has $78,545 of borrowings outstanding under
this facility.
Portfolio Credit Quality
The Company has implemented a system under which it grades all loans on
a scale of 1 to 4. This system is intended to reflect the performance of the
borrower's business, the collateral coverage of the loans and other factors
considered relevant.
Under this system, management believes that loans with a grade of 4
involve the least amount of risk in the Company's portfolio. The borrower is
performing above expectations and the trends and risk factors are generally
favorable. Management believes that loans graded 3 involve an acceptable level
of risk that is similar to the risk at the time of origination. The borrower is
performing as expected and the risk factors are neutral to favorable. All new
loans are initially graded 3. Loans graded 2 involve a borrower performing
slightly below expectations and the loan risk has increased since origination.
The borrower may be out of compliance with debt covenants, however, loan
payments are not more than 120 days past due. For loans graded 2, the Company's
management will increase procedures to monitor the borrower and the fair value
generally will be lowered. A loan grade of 1 indicates that the borrower is
performing materially below expectations and the loan risk has substantially
increased since origination. Some or all of the debt covenants are out of
compliance and payments are delinquent. Loans graded 1 are not anticipated to be
repaid in full and the Company will reduce the fair value of the loan to the
amount it anticipates will be recovered.
To monitor and manage the investment portfolio risk, management tracks
the weighted average investment grade. The weighted average investment grade was
3.2 at both December 31, 1999 and 1998. In addition, all of the Company's
outstanding loans are performing and paying as agreed as of December 31, 1999.
At December 31, 1999 and 1998, the Company's investment portfolio was graded as
follows:
December 31, 1999 December 31, 1998
----------------- -----------------
Percentage of Percentage of
Investments at Total Investments at Total
Grade Fair Value Portfolio Fair Value Portfolio
----- ---------- --------- ---------- ---------
4 $ 65,638 21.5% $ 26,036 15.8%
3 223,898 73.4% 138,999 84.2%
2 15,577 5.1% -- 0.0%
1 -- -- -- --
------------ --------- ------------ ----------
305,113 100.0% 165,035 100.0%
15
The amounts at December 31, 1999 do not include the Company's
investments in Capital.com, Wrenchead.com, and ACS Equities, LP for which the
Company has only invested in the equity securities of these companies.
Impact of the Year 2000
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. The Company created a Year 2000 Compliance Committee to address the
Year 2000 compliance of the Company's information technology and non-information
technology systems, the systems of third parties, and the systems of the
portfolio companies. The Company also engaged outside technology consultants to
assist with its Year 2000 project.
All of the software used by the Company in its information technology
systems is provided by outside vendors. The Company replaced its accounting
software package during 1999 and purchased upgrades of various other software
products.
Subsequent to December 31, 1999, the Company's internal
information-technology systems did not experience any significant Year 2000
related difficulties. In addition to the internal technology systems, the
Company has not experienced any Year 2000 related problems with its
non-information technology systems, such as telecommunications systems, or with
third parties that do not share information systems with the Company, such as
banks, landlords, telecommunication providers and other vendors.
During 1999, the Company evaluated the Year 2000 readiness of its
portfolio companies. Beginning in the summer of 1998, the Company had required
that each portfolio company expressly warrant in its loan agreement that it is
or will be Year 2000 compliant prior to December 31, 1999. The Company had also
submitted questionnaires to all of its portfolio companies to determine their
exposure to the Year 2000 problem and the adequacy of their plans to address the
issues. Based on the correspondence received from the portfolio companies,
management concluded that the portfolio companies were adequately addressing the
Year 2000 problem. Subsequent to December 31, 1999, the Company is not aware of
any Year 2000 related problems at any of its portfolio companies.
The total cost of the Company's Year 2000 project was approximately
$100. The Company does not expect to incur any further cost related to the Year
2000 issue. This amount includes the cost of additional software, reviewing the
portfolio companies' readiness, and outside systems professionals working on the
Company's Year 2000 compliance.
Impact of Inflation
Management believes that inflation can influence the value of the
Company's investments through the impact it may have on the capital markets, the
valuations of business enterprises and the relationship of the valuations to
underlying earnings.
Interest Rate Risk
Because the Company funds a portion of its investments with borrowings
under its debt funding facility, the Company's net operating income is affected
by the spread between the rate at which it invests and the rate at which it
borrows. At December 31, 1999, approximately 75% of the Company's interest
bearing assets provided fixed rate returns and approximately 25% of the
company's interest bearing assets provided floating rate returns. All of the
Company's outstanding debt at December 31, 1999 has a variable rate of interest
based on LIBOR. A change in the floating interest rate would have the following
annual impact on the investment portfolio at December 31, 1999:
Increase (decrease) in
------------------------------------------------------
Change in floating Net operating
Interest Rate Interest income Interest expense Income
------------- --------------- ---------------- -----------
+ 2% $ 1,442 $ 1,571 $ (129)
+ 1% 721 785 (64)
- 1% (721) (785) 64
- 2% (1,442) (1,571) 129
16
In order to maintain the low sensitivity to changes in interest rates
evidenced above, the Company also enters into interest rate basis swap
agreements. At December 31, 1999, the Company had entered into in 4 interest
rate basis swap agreements with a total notional amount of $61,325. The Company
intends to use derivative instruments for non-trading and non-speculative
purposes only.
Item 7a Qualitative and Quantitative Disclosures About Market Risk
Not applicable.
17
Item 8. Financial Statements and Supplementary Data
Report of Independent Auditors
Board of Directors
American Capital Strategies, Ltd.
We have audited the accompanying balance sheets of American Capital Strategies,
Ltd., including the schedules of investments, as of December 31, 1999 and 1998,
the related statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1999 and 1998, the three months ended December 31,
1997, and the nine months ended September 30, 1997, and the financial highlights
for the years ended December 31, 1999 and 1998, and the three months ended
December 31, 1997. These financial statements and the financial highlights are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Capital Strategies,
Ltd. at December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years ended December 31, 1999 and 1998, the three months
ended December 31, 1997, and the nine months ended September 30, 1997, and the
financial highlights for the years ended December 31, 1999 and 1998, and the
three months ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
McLean, Virginia
February 2, 2000
18
AMERICAN CAPITAL STRATEGIES, LTD.
BALANCE SHEETS
(In thousands except per share data)
December 31, December 31,
1999 1998
------------- ---------
Assets
Cash and cash equivalents $ 2,037 $ 6,149
Investments at fair value (cost of $305,264 and $252,718, respectively) 377,554 254,983
Investment in unconsolidated operating subsidiary 4,893 6,386
Due from unconsolidated operating subsidiary 2,331 778
Interest receivable 2,417 1,561
Other 6,140 162
--------------- ---------------
Total assets $ 395,372 $ 270,019
=============== ===============
Liabilities and Shareholders' Equity
Notes payable $ -- $ 85,948
Revolving credit facility 78,545 30,000
Accrued dividends payable 547 1,222
Other 4,535 126
-------------- --------------
Total liabilities 83,627 117,296
Shareholders' equity:
Undesignated preferred stock, $0.01 par value, 5,000 shares authorized,
0 issued and outstanding -- --
Common stock, $.01 par value, 70,000 shares authorized, and 18,252 and
11,081 issued and outstanding, respectively 183 111
Capital in excess of par value 255,922 145,245
Notes receivable from sale of common stock (23,052) (300)
Undistributed (distributions in excess of) net realized earnings 1,080 (116)
Unrealized appreciation of investments 77,612 7,783
--------------- ---------------
Total shareholders' equity 311,745 152,723
--------------- ---------------
Total liabilities and shareholders' equity $ 395,372 $ 270,019
=============== ===============
See accompanying notes.
19
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
December 31, 1999
(In thousands except per share data)
Industry Cost Fair Value
-------- ---- ----------
Senior Debt--9.53%
- ------------------
BIW Connector Systems, LLC Manufacturing $ 3,404 $ 3,404
JAG Industries, Inc. (2) Manufacturing 1,200 1,200
Chance Coach, Inc. (2) Bus Manufacturer 1,071 1,071
Cycle Gear, Inc. Motor Cycle Accessories 750 750
EuroCaribe Packing Company, Inc. (2) Meat Processing 6,276 6,276
Patriot Medical Technologies, Inc. (2) Repair Services 3,250 3,250
Tube City Olympic of Ohio, Inc. Mill Services 9,700 9,700
MBT International Inc. (2) Musical Instrument Distributor 4,200 4,200
Caswell-Massey Holdings Corp. Toiletries 2,000 2,000
Warner Power, LLC Power Systems and Electric
Ballasts 4,610 4,610
--------- --------
Subtotal 36,461 36,461
Subordinated Debt--55.35%
- -------------------------
BIW Connector Systems, LLC Manufacturing 6,829 6,829
Westwind Group Holdings, Inc. Restaurant 2,984 2,984
JAG Industries, Inc. (2) Manufacturing 2,385 2,385
Chance Coach, Inc. (2) Bus Manufacturer 7,520 7,520
The L.A. Studios, Inc. Audio Production 2,466 2,466
Decorative Surfaces International, Inc. (2) Decorative Paper & Vinyl Mfg. 5,606 5,606
New Piper Aircraft, Inc. Aircraft Manufacturing 18,023 18,023
Electrolux, LLC Vacuum Cleaners 7,849 7,849
Cycle Gear, Inc. Motor Cycle Accessories 2,262 2,262
Confluence Holdings Corp. Canoes & Kayaks 8,812 8,812
EuroCaribe Packing Company, Inc. (2) Meat Processing 8,971 8,971
Starcom Holdings, Inc. Electrical Contractor 18,929 18,929
Centennial Broadcasting, Inc. Radio Stations 16,975 16,975
Lion Brewery, Inc. (2) Malt Beverages 5,975 5,975
Auxi-Health, Inc. Home Health Care 10,136 10,136
Patriot Medical Technologies, Inc. (2) Repair Services 2,487 2,487
Tube City, Inc. Mill Services 6,017 6,017
Erie County Plastics Corporation Molded Plastic Manufacturing 8,858 8,858
Aeriform Corporation Packaged Industrial Gas 7,774 7,774
MBT International, Inc. (2) Musical Instrument Distributor 6,439 6,439
Dixie Trucking Company, Inc. (2) Overnight Shorthaul Delivery 4,064 4,064
Caswell-Massey Holdings Corp. Toiletries 1,670 1,670
Transcore Holdings, Inc. Transportation Info. Mgmt.
Services 5,656 5,656
The Inca Group (2) Manufacturing 11,177 11,177
Crosman Corporation Small Arms 3,702 3,702
Parts Plus Group Auto Parts Distributor 4,119 4,119
IGI, Inc. Veterinary vaccines 5,037 5,037
Clear Communications Group Communications Networks 10,348 10,348
Warner Power, LLC Power Systems and Electric
Ballasts 3,871 3,871
A.H. Harris & Sons, Inc. Construction Material
Distribution 4,733 4,733
--------- --------
Subtotal 211,674 211,674
Convertible Preferred Stock--2.00%
- ----------------------------------
Chance Coach, Inc. (2) 12% dividend convertible into 20% of Co. Bus Manufacturer 2,000 2,793
Decorative Surfaces International, Inc. (2) prime rate plus 4%
dividend convertible into 2.9% of Co. Decorative Paper & Vinyl 728 728
Mfg.
Patriot Medical Technologies, Inc. (2) 8% dividend convertible into Repair Services 1,020 1,020
16.9% of Co.
MBT International, Inc. (1)(2) convertible into 53.1% of Co. Musical Instrument Distribution 2,250 2,250
Transcore Holdings, Inc. (2) 8% dividend convertible into 0.7% of Co. Transportation Service 306 306
Parts Plus Group (1) convertible into 1.9% of Co. Auto Parts Distributor 556 556
--------- --------
Subtotal 6,860 7,653
See accompanying notes.
20
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS -- CONTINUED
December 31, 1999
(In thousands except per share data)
Industry Cost Fair Value
-------- ---- ----------
Common Stock and Membership Interest Warrants(1)--11.48%
- --------------------------------------------------------
BIW Connector Systems, LLC 8% of LLC Manufacturing $ 652 $ 451
Westwind Group Holdings, Inc. 5% of Co. Restaurant 350 244
JAG Industries, Inc. (2) 75% of Co. Manufacturing 505 --
Chance Coach, Inc. (2) 43.2% of Co. Bus Manufacturer 4,041 5,950
The L.A. Studios, Inc. 17% of Co. Audio Production 902 902
Decorative Surfaces International, Inc. (2) 42.3% of Co. Decorative Paper & Vinyl Mfg. 4,571 4,394
New Piper Aircraft, Inc. 4% of Co. Aircraft Manufacturing 2,231 2,884
Cycle Gear, Inc. 27.6% of Co. Motor Cycle Accessories 374 374
Confluence Holdings Corp. 18% of Co. Canoes & Kayaks 1,319 1,217
EuroCaribe Packing Company, Inc. (2) 37.1% of Co. Meat Processing 1,110 1,046
Starcom Holdings, Inc. 17.5% of Co. Electrical Contractor 3,914 3,914
Lion Brewery, Inc. (2) 54% of Co. Malt Beverages 675 1,863
Auxi Health, Inc. 20% of Co. Home Health Care 2,599 1,856
Patriot Medical Technologies, Inc. (2) 14.9% of Co. Repair Services 612 612
Tube City, Inc. 14.75% of Co. Mill Services 2,523 2,523
Erie County Plastics Corporation 8% of Co. Molded Plastic Manufacturing 1,170 1,170
MBT International, Inc. (2) 30.6% of Co. Musical Instrument
Distributor 1,214 1,214
Dixie Trucking Company, Inc. (2) 32% of Co. Overnight Shorthaul Delivery 141 141
Caswell-Massey Holdings Corp. 24% of Co. Toiletries 552 552
Transcore Holdings, Inc. 6.6% of Co. Transportation Info. Mgmt.
Services 1,694 1,694
The Inca Group (2) 66.5% of Co. Manufacturing 3,060 3,060
Crosman Corporation 3.5% of Co. Small Arms 330 330
Parts Plus Group 2.4% of Co. Auto Parts Distributor 333 333
IGI, Inc. 16.7% of Co. Veterinary Vaccines 2,003 2,587
Clear Communications Group 11.5% of Co. Communications Networks 2,698 2,698
Warner Power, LLC (2) 53.1% of LLC Power Systems and Electric 1,629 1,629
A.H. Harris & Sons, Inc. 3.5% of Co. Construction Material 267 267
--------- --------
Subtotal 41,469 43,905
Common Stock and Membership Interests(1)--20.40%
- ------------------------------------------------
Chance Coach, Inc. (2) 20.5% of Co. Bus Manufacturer 1,896 2,793
Electrolux, LLC 2.5% of Co. Vacuum Cleaners 246 1,144
Confluence Holdings Corp. 0.7% of Co. Canoes & Kayaks 45 17
Starcom Holdings, Inc. 2.8% of Co. Electrical Contractor 616 616
The Inca Group (2) 18.5% of Co. Manufacturing 850 850
Capital.com, Inc. (2) 85% of Co. Internet-based Financial Portal 1,492 72,500
Wrenchead.com, Inc. 1% of Co. Internet-based Auto Parts
Distributor -- 104
ACS Equities, LP (2) 90% of LP Investment partnership 3,655 --
--------- --------
Subtotal 8,800 78,024
--------- --------
305,264 377,717
Interest Rate Basis Swap Agreements--(0.04)%
- --------------------------------------------
No. of Notional Expiration Receive
Contracts Amount Date Rate Pay Rate
- --------- ------ ---- ---- --------
4 $ 61,325 4/10/04 Floating Floating -- (163)
--------- --------
Total Investments 305,264 377,554
========= ========
Investment in Unconsolidated Operating Subsidiary---1.28%
- ---------------------------------------------------------
American Capital Financial Services(1)(2)100% of Co. Investment Banking 403 4,893
--------- --------
Totals $ 305,667 $382,447
========= ========
(1) Non-income producing
(2) Affiliate
See accompanying notes.
21
AMERICAN CAPITAL STRATEGIES, LTD.
SCHEDULE OF INVESTMENTS
December 31, 1998
(In thousands except per share data)
Industry Cost Fair Value
-------- ---- ----------
Senior Debt--9.47%
- ------------------
Four S Baking Company (2) Baking $ 1,266 $ 1,266
BIW Connector Systems, LLC Manufacturing 3,404 3,404
Chance Coach, Inc. (2) Bus Manufacturer 1,286 1,286
JAG Industries, Inc. (2) Manufacturing 1,200 1,200
Confluence Holdings Corp. Canoes & Kayaks 9,675 9,675
Cycle Gear, Inc. Motor Cycle Accessories 750 750
EuroCaribe Packing Company, Inc. (2) Meat Processing 7,181 7,181
------------- -------------
Subtotal 24,762 24,762
Subordinated Debt--41.37%
- -------------------------
Four S Baking Company (2) Baking 1,588 1,588
BIW Connector Systems, LLC. Manufacturing 6,710 6,710
Westwind Group Holdings, Inc. Restaurant 2,932 2,932
JAG Industries, Inc. (2) Manufacturing 2,335 2,335
Specialty Transportation Services, Inc. (2) Waste Hauler 7,368 7,368
Chance Coach, Inc. (2) Bus Manufacturer 7,060 7,060
The L.A. Studios, Inc. Audio Production 2,393 2,393
Decorative Surfaces International, Inc. (2) Decorative Paper & Vinyl Mfg. 10,490 10,490
New Piper Aircraft, Inc. Aircraft Manufacturing 17,858 17,858
Electrolux, LLC Vacuum Cleaners 7,264 7,264
Cycle Gear, Inc. Motor Cycle Accessories 633 633
Confluence Holdings Corp. Canoes & Kayaks 4,701 4,701
EuroCaribe Packing Company, Inc. (2) Meat Processing 8,905 8,905
Starcom Holdings, Inc. Electrical Contractor 12,839 12,839
Centennial Broadcasting, Inc. Radio Stations 15,040 15,040
------------- -------------
Subtotal 108,116 108,116
Convertible Preferred Stock--2.10%
- ----------------------------------
Four S Baking Company (2) 15% dividend convertible into Baking 2,756 2,756
10.89 of Co. Bus Manufacturer 2,000 2,079
Chance Coach, Inc. (2) 12% dividend convertible into 20% of Co. Decorative Paper & Vinyl Mfg. 646 646
Decorative Surfaces International, Inc. (2) prime rate ------------- -------------
plus 4% divided convertible into 2.9% of Co.
Subtotal 5,402 5,481
Common Stock and Membership Interests Warrants(1)--8.43%
- --------------------------------------------------------
Four S Baking Company (2) 3.26% of Co. Baking 462 600
BIW Connector Systems, LLC 8% of LLC Manufacturing 652 540
Westwind Group Holdings, Inc. 5% of Co. Restaurant 350 421
JAG Industries, Inc. (2) 75% of Co. Manufacturing 505 465
Specialty Transportation Services, Inc. (2) Up to 39.1% Waste Hauler 694 784
Chance Coach, Inc. (2) 43.7% of Co. Bus Manufacturer 4,041 4,543
The L.A. Studios, Inc. 17% of Co. Audio Production 902 857
Decorative Surfaces International, Inc. (2) 42.3% of Co. Decorative Paper & Vinyl Mfg. 4,571 5,596
New Piper Aircraft, Inc. 4% of Co. Aircraft Manufacturing 2,231 2,231
Cycle Gear, Inc. 16.5% of Co. Motor Cycle Accessories 374 374
Confluence Holdings Corp. 18% of Co. Canoes & Kayaks 1,319 1,319
EuroCaribe Packing Company, Inc. (2) 37% of Co. Meat Processing 1,110 1,110
Starcom Holdings, Inc. 17.5% of Co. Electrical Contractor 3,171 3,171
------------- -------------
Subtotal 20,382 22,011
Common Stock and Membership Interests(1)--1.78%
- ------------------------------------------------
Four-S Baking Company (2) 5.5% of Co. Baking 966 1,004
Specialty Transportation Services, Inc. (2) 9.1% of Co. Waste Hauler 500 784
Chance Coach, Inc. (2) 18.3% of Co. Bus Manufacturer 1,896 2,131
Electrolux, LLC 2.5% of Co. Vacuum Cleaners 246 246
Starcom Holdings, Inc. 2.8% Electrical Contractor 500 500
------------- -------------
Subtotal 4,108 4,665
Subtotal--non-publicly traded securities--63.15% 162,770 165,035
Government Securities--34.41%
- -----------------------------
FHLB Discount Note due 1/4/99 89,948 89,948
------------- -------------
Total Investments 252,718 254,983
Investment in Unconsolidated Operating Subsidiary--2.44%
- --------------------------------------------------------
American Capital Financial Services(1)(2)--100% of Co. Investment Banking 403 6,386
------------- -------------
Totals $ 253,121 $ 261,369
============= =============
(1) Non-income producing
(2) Affiliate
See accompanying notes.
22
AMERICAN CAPITAL STRATEGIES, LTD.
STATEMENTS OF OPERATIONS
(In thousands except per share data)
Year Year Three Months || Nine Months
Ended Ended Ended || Ended
December 31, December 31, December 31, || September 30,
1999 1998 1997 || 1997
------------- ------------- ------------- || -------------
Operating income: ||
||
Interest and dividend income $ 30,833 $ 14,430 $ 2,123 || $ 553
Loan fees 2,572 2,549 654 || --
Financial advisory and performance fees -- -- -- || 1,920
Other -- 20 || 428
------------- ------------- ------------- || -------------
||
Total operating income 33,405 16,979 2,797 || 2,901
||
Operating expenses: ||
||
Salaries and benefits 1,045 843 243 || 1,221
General and administrative 1,490 809 308 || 1,514
Interest 4,716 57 -- || 60
Other -- -- -- || (144)
------------- ------------- ------------- || -------------
||
Total operating expenses 7,251 1,709 551 || 2,651
------------- ------------- ------------- || -------------
||
Operating income before equity in (loss) earnings ||
of unconsolidated operating subsidiary 26,154 15,270 2,246 || 250
Equity in (loss) earnings of unconsolidated ||
operating subsidiary (1,493) (482) 24 || --
------------- ------------- ------------- || -------------
||
Net operating income 24,661 || 250
Net realized gain on investments 2,711 -- -- || --
Increase in unrealized appreciation of investments 69,829 2,12