| AMERICAN CAPITAL STRATEGIES LTD Item 1A Risk Factors You should carefully consider the risks described below and all other information contained in this annual report on Form 10-K, including our consolidated financial statements and the related notes thereto before making a decision to purchase our common stock |
| The risks and uncertainties described below are not the only ones facing us |
| Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance |
| If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected |
| If that happens, the trading price of our common stock could decline, and you may lose all or part of your investment |
| We have a limited operating history upon which you can evaluate our business Although we commenced operations in 1986, we materially changed our business plan and format in August 1997 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, which we generally consider to be companies with sales between dlra10 million and dlra750 million |
| Therefore, we have only a limited history of operations as a lender to and investor in middle market companies upon which you can evaluate our business |
| While we generally have been profitable since August 1997, there can be no assurance that we will remain profitable in future periods, nor can we offer investors any assurance that we will successfully implement our growth strategy |
| In addition, we have limited operating results under our business plan that would demonstrate the effect of a general economic recession on our business |
| Moreover, we have begun, or have announced plans to begin, investing in other investment categories, including CMBS, CDOS, earlier stage technology companies and, through our investment in ECAS, in European-based businesses |
| We have limited or no operating history in making such investments |
| We make loans to and investments in middle market borrowers who may default on their loans or provide no return on our investments We invest in and lend to middle market businesses |
| There is generally no publicly available information about these businesses |
| Therefore, we rely on our principals, associates, analysts and consultants to investigate these businesses |
| The portfolio companies in which we invest may have significant variations in operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with 14 ______________________________________________________________________ products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, may otherwise have a weak financial position or may be adversely effected by changes in the business cycle |
| Our portfolio companies may not meet net income, cash flow and other coverage tests typically imposed by senior lenders |
| Numerous factors may affect a portfolio company’s ability to repay its loan, including the failure to meet its business plan, a downturn in its industry or negative economic conditions |
| A deterioration in a portfolio company’s financial condition and prospects may be accompanied by deterioration in the collateral for the loan |
| We also make unsecured, subordinated loans and invest in equity securities, which involve a higher degree of risk than senior loans |
| Middle market businesses typically have narrower product lines and smaller market shares than large businesses |
| They tend to be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns |
| In addition, portfolio companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel |
| These businesses may also experience substantial variations in operating results |
| Typically, the success of a middle market business also depends on the management talents and efforts of one or two persons or a small group of persons |
| The death, disability or resignation of one or more of these persons could have a material adverse impact on us |
| In addition, middle market businesses often need substantial additional capital to expand or compete and will have borrowed money from other lenders |
| Our senior loans generally are secured by the assets of our borrowers |
| Our subordinated loans are often secured by the assets of the borrower but our rights to payment and our security interest are usually subordinated to the payment rights and security interests of the senior lender |
| Therefore, we may be limited in our ability to enforce our rights to collect our loans and to recover any of the loan balance through a foreclosure of collateral |
| Often, a deterioration in a borrower’s financial condition and prospects is accompanied by a deterioration in the value of the collateral securing its loan |
| In certain cases, our involvement in the management of our portfolio companies may subject us to additional defenses and claims from borrowers and third parties |
| These conditions may make it difficult for us to obtain repayment of our loans |
| There is uncertainty regarding the value of our privately held securities A majority of our portfolio securities are not publicly traded |
| We value these securities based on a determination of their fair value made in good faith by our board of directors |
| Due to the uncertainty inherent in valuing securities that are not publicly traded, as set forth in our financial statements, our determinations of fair value may differ materially from the values that would exist if a ready market for these securities existed |
| Our determinations of the fair value of our investments have a material impact on our net earnings through the recording of unrealized appreciation or depreciation of investments as well as our assessment of interest income recognition |
| Our net asset value could be materially affected if our determinations regarding the fair value of our investments are materially different from the values that would exist if a ready market existed for these securities |
| We may not realize gains from our equity investments When we sponsor the buyout of a portfolio company, we invest in the equity securities of the portfolio company |
| Also, when we make a loan, we may receive warrants to acquire stock issued by the borrower, and we may make direct equity investments |
| Our goal ultimately is to dispose of these equity interests and realize gains |
| These equity interests may not appreciate in value and, in fact, may depreciate in value |
| Accordingly, we may not be able to realize gains from our equity interests |
| The lack of liquidity of our privately held securities may adversely affect our business Most of our investments consist of securities acquired directly from their issuers in private transactions |
| Some of these securities are subject to restrictions on resale (including in some instances legal restrictions) or 15 ______________________________________________________________________ otherwise are less liquid than public securities |
| The illiquidity of our investments may make it difficult for us to obtain cash equal to the value at which we record our investments if the need arises |
| We have invested in a limited number of portfolio companies A consequence of a limited number of investments is that the aggregate returns realized by us may be substantially adversely affected by the unfavorable performance of a small number of such investments or a substantial write-down of any one investment |
| Beyond our regulatory and income tax guidelines, we do not have stringent fixed guidelines for industry diversification, and investments could potentially be concentrated in relatively few industries |
| We have limited public information regarding the companies in which we invest Consistent with our operation as a BDC, our portfolio consists primarily of securities issued by privately held companies |
| There is generally little or no publicly available information about such companies, and we must rely on the diligence of our employees and the consultants we hire to obtain the information necessary for our decision to invest in them |
| There can be no assurance that our diligence efforts will uncover all material information about the privately held business necessary to make a fully informed investment decision |
| Our portfolio companies may be highly leveraged Leverage may have important adverse consequences to these companies and to us as an investor |
| These companies may be subject to restrictive financial and operating covenants |
| The leverage may impair these companies’ ability to finance their future operations and capital needs |
| As a result, these companies’ flexibility to respond to changing business and economic conditions and to business opportunities may be limited |
| A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used |
| Our business is dependent on external financing Our business requires a substantial amount of cash to operate |
| We historically have obtained the cash required for operations through the sale of debt by special purpose affiliates to which we have contributed loan assets originated by us, borrowings by us and the sale of our equity |
| Our ability to continue to rely on such sources or other sources of capital depends on numerous legal, economic, structural and other factors |
| Senior Securities |
| We or our affiliates have issued, and intend to continue to issue, debt securities and other evidences of indebtedness, up to the maximum amount permitted by the 1940 Act |
| We have also retained the right to issue preferred stock |
| As a BDC, the 1940 Act permits us to issue debt securities and preferred stock (collectively, “Senior Securities”) in amounts such that our asset coverage, as defined in the 1940 Act, is at least 200prca after each issuance of Senior Securities |
| As permitted by the 1940 Act, we may, in addition, borrow amounts up to five percent of our total assets for temporary purposes |
| Term Debt Securities |
| Trusts affiliated with us have issued, and we or our affiliates may issue in the future, term debt securities (the “Term Debt Notes”) to institutional investors |
| As of December 31, 2005, the outstanding balance of the Term Debt Notes issued to institutional investors was dlra1dtta2 billion |
| These notes are secured by loans from our portfolio companies with a principal balance of dlra1dtta7 billion as of December 31, 2005 |
| While we have not guaranteed the repayment of Term Debt Notes, we must repurchase the loans if certain representations are breached |
| These affiliated trusts are consolidated in our financial statements so that both the assets and liabilities are reflected in our consolidated financial statements |
| Unsecured Debt |
| We have issued long-term unsecured notes to institutional investors in private placement offerings |
| As of December 31, 2005, we had dlra368 million outstanding in unsecured notes |
| 16 ______________________________________________________________________ Revolving Debt Funding Facilities |
| We depend in part on our three revolving credit facilities to generate cash for funding our investments, two of which are commercial paper conduit securitization facilities and the third facility is an unsecured revolving line of credit (the “Revolving Facility”) |
| Our conduit facilities are secured by loans to our portfolio companies, which have been contributed to separate affiliated trusts |
| While we have not guaranteed the repayment of either conduit facility, we must repurchase the loans if certain representations are breached |
| As of December 31, 2005, the aggregate commitment of each of our conduit facilities was dlra1 billion (the “AFT I Facility”) and dlra125 million (the “AFT II Facility”), respectively |
| Collectively, the AFT I Facility, AFT II Facility and Revolving Facility are referred to as the Debt Facilities |
| The AFT I Facility terminates in August 2006 unless the conduit facility is extended |
| The AFT II Facility terminates in June 2006 unless the facility is extended |
| The Revolving Facility is a dlra255 million unsecured revolving credit facility |
| Our ability to make draws under the Revolving Facility expires in June 2007, unless extended |
| Short-Term Financings |
| We have undertaken various short-term financings involving repurchase agreements, where we sell at a discount to face value senior loans, unissued tranches of Term Debt Notes, or commercial mortgage pass-through certificates that we have originated and agree to repurchase them at a future date |
| As of December 31, 2005, we had dlra110 million in such borrowings outstanding |
| A failure to renew our existing Debt Facilities, to continue short-term financings or senior loan sales, to increase our capacity under our existing facilities, to sell additional Term Debt Notes or to add new or replacement debt facilities could have a material adverse effect on our business, financial condition and results of operations |
| See the description of the Term Debt Notes and the Debt Facilities under “Management’s Discussion and Analysis of Financial Condition And Results of Operations—Financial Condition, Liquidity and Capital Resources |
| ” Common Stock |
| Because we are subject to regulatory restrictions on the the amount of debt we can issue, we are dependent on the issuance of equity as a financing source |
| We are restricted to issuing equity at prices equal to or above our net asset value at the time of issuance |
| There can be no assurances that we can issue equity when necessary |
| If additional funds are raised through the issuance of our common stock or debt securities convertible into or exchangeable for our common stock, the percentage ownership of our stockholders at the time would decrease and they may experience additional dilution |
| In addition, any convertible or exchangeable securities may have rights, preferences and privileges more favorable than those of our common stock |
| The following table is designed to illustrate the effect on return to a holder of our common stock of the leverage created by our use of borrowing, at the weighted average interest rate 5dtta32prca for the year ended December 31, 2005 and assuming hypothetical annual returns on our portfolio of minus 15 to plus 15 percent |
| As can be seen, leverage generally increases the return to stockholders when the portfolio return is positive and decreases return when the portfolio return is negative |
| Actual returns may be greater or less than those appearing in the table |
| Assumed Return on Portfolio (Net of Expenses)(1) –15dtta0 % –10dtta0 % –5dtta0 % — 5dtta0 % 10dtta0 % 15dtta0 % Corresponding Return to Common Stockholders(2) –33dtta3 % –24dtta0 % –14dtta7 % –5dtta4 % 3dtta9 % 13dtta3 % 22dtta6 % _______ (1) The assumed portfolio return is required by regulation of the Securities and Exchange Commission and is not a prediction of, and does not represent, our projected or actual performance |
| (2) In order to compute the “Corresponding Return to Common Stockholders,” the “Assumed Return on Portfolio” is multiplied by the total value of our assets at the beginning of the period to obtain an assumed 17 ______________________________________________________________________ return to us |
| From this amount, all interest expense accrued during the period is subtracted to determine the return available to stockholders |
| The return available to stockholders is then divided by the total value of our net assets as of the beginning of the period to determine the “Corresponding Return to Common Stockholders |
| ” We may incur additional debt that could increase your investment risks We or our affiliates borrow money or issue debt securities to provide us with additional funds to invest |
| Our lenders have fixed dollar claims on our assets or the assets of our affiliates that are senior to the claims of our stockholders and, thus, our lenders have preference over our stockholders with respect to these assets |
| In particular, the assets that our affiliates have pledged to lenders under certain of our Debt Facilities were sold or contributed to separate affiliated statutory trusts prior to such pledge |
| While we own a beneficial interest in these trusts, these assets are property of the respective trusts, available to satisfy the debts of the trusts, and would only become available for distribution to our stockholders to the extent specifically permitted under the agreements governing those Debt Facilities |
| See “Risk Factors—Our Debt Facilities impose certain limitations on us |
| ” Although borrowing money for investment increases the potential for gain, it also increases the risk of a loss |
| A decrease in the value of our investments will have a sharper impact on our net asset value if we borrow money to make investments |
| Our ability to pay dividends could also be adversely impacted |
| In addition, our ability to pay dividends or incur additional indebtedness would be restricted if asset coverage is not equal to at least twice our indebtedness |
| If this happens, we may be required to sell some of our investments and repay a portion of our indebtedness at a time when a sale may be disadvantageous |
| See “Risk Factors—Our business is dependent on external financing—Common Stock |
| ” A change in interest rates may adversely affect our profitability A portion of our income will depend upon the difference between the rate at which we or our affiliated trusts borrow funds and the rate at which we loan these funds |
| We anticipate using a combination of equity and long- term and short-term borrowings to finance our investment activities |
| Certain of our borrowings may be at fixed rates and others at variable rates |
| As of December 31, 2005, we had total borrowings outstanding of dlra2dtta5 billion, including dlra2dtta1 billion of borrowings that have a variable rate of interest generally based on LIBOR or a commercial paper rate |
| In addition, as a result of our use of interest rate swaps, approximately 20prca of the loans in our portfolio were at fixed rates and approximately 80prca were at floating rates as of December 31, 2005 |
| We typically undertake to hedge against the risk of adverse movement in interest rates in our Debt Facilities against our portfolio of assets |
| Hedging activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio |
| However, our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB Statement Nodtta 133 “Accounting for Derivative Instruments and Hedging Activities |
| ” As of December 31, 2005, our interest rate agreements had a notional amount of dlra1dtta6 billion and a fair value representing a net asset of dlra16 million |
| A change in interest rates could have an impact on the fair value of our interest rate hedging agreements that could result in the recording of unrealized appreciation or depreciation in future periods |
| Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures About Market Risk |
| ” An economic downturn could affect our operating results An economic downturn may adversely affect middle market businesses, which are our primary market for investments |
| Such a downturn could also adversely affect our ability to obtain capital to invest in such companies |
| These results could have a material adverse effect on our business, financial condition and results of operations |
| 18 ______________________________________________________________________ Our Debt Facilities impose certain limitations on us In March 1999, we established the AFT I Facility as a line of credit administered by Wachovia Capital Markets, LLC The facility, which currently has an aggregate commitment of dlra1 billion as of December 31, 2005, is not available for further draws after August 2006 unless the facility is extended prior to such date for an additional 364-day period with the consent of the lenders |
| If the facility is not extended, any principal amounts then outstanding will be amortized over a 24-month period through a termination date in August 2008 |
| The AFT I Facility contains customary default provisions, as well as the following default provisions: a cross-default on our debt of dlra2dtta5 million or more, a minimum net worth requirement of dlra1 billion plus seventy-five percent (75prca) of any new equity and subordinated debt, a default triggered by a change of control and a default arising from the termination or resignation of any two of the following executive officers: Malon Wilkus, Ira Wagner and John Erickson |
| In June 2004, we established the AFT II Facility as a line of credit administered by an affiliate of the Bank of Montreal |
| The facility has an aggregate commitment of dlra125 million |
| Our ability to make draws under the facility expires in June 2006 unless the facility is extended prior to such date for an additional 364-day period at the discretion of the lender |
| If the facility is not extended, any remaining outstanding principal amount will be amortized over a 24-month period beginning in June 2006 |
| The facility contains customary default provisions, as well as the following default provisions: a cross-default on our debt of dlra2dtta5 million or more, a minimum net worth requirement of dlra1 billion plus seventy-five percent (75prca) of any new equity and subordinated debt, a default triggered by a change of control and a default arising from the termination or resignation of any two of the following executive officers: Malon Wilkus, Ira Wagner and John Erickson |
| Our Revolving Facility is a dlra255 million unsecured revolving line of credit administered by Wachovia that may be expanded through new or additional commitments up to dlra500 million in accordance with the terms and conditions set forth in the agreement as amended |
| Our ability to make draws under the Revolving Facility expires in June 2007 unless the Revolving Facility is extended for an additional one-year period prior to such date with the consent of the lenders |
| If the Revolving Facility is not renewed, any principal amounts then outstanding will be due in June 2007 |
| The Revolving Facility contains customary default provisions as well as the following default provisions: a cross-default on our debt of dlra5 million or more, a minimum net worth requirement of dlra1 billion plus seventy-five percent (75prca) of any new equity and subordinated debt, a default in the event of a change of control and a default arising from the termination or resignation of any two of the following executive officers: Malon Wilkus, Ira Wagner and John Erickson |
| Trusts affiliated with us have outstanding dlra1dtta2 billion in Term Debt Notes to institutional investors as of December 31, 2005 |
| These securities contain customary default provisions, as well as the following default provisions: a failure on our part, as the originator of the loans securing the Term Debt Notes or as the servicer of these loans, to make any payment or deposit required under related agreements within two business days after the date the payment or deposit is required to be made, or if we alter or amend our credit and collection policy in a manner that could have a material adverse effect on the holders of the Term Debt Notes |
| The occurrence of an event of default under our Debt Facilities could lead to termination of those facilities Our Debt Facilities contain certain default provisions, some of which are described in the immediately preceding paragraphs |
| An event of default under our Debt Facilities could result, among other things, in termination of further funds availability under that facility, an accelerated maturity date for all amounts outstanding under that facility and the disruption of all or a portion of the business financed by that facility |
| This could reduce our revenues and, by delaying any cash payment allowed to us under our facility until the lender has been paid in full, reduce our liquidity and cash flow |
| We may experience fluctuations in our quarterly results We could experience fluctuations in our quarterly operating results due to a number of factors including, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, the 19 ______________________________________________________________________ degree to which we encounter competition in our markets, the ability to find and close suitable investments and general economic conditions |
| As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods |
| ” We may fail to continue to qualify for our pass-through tax treatment We have operated since October 1, 1997 so as to qualify to be taxed as a RIC under Subchapter M of the Code and, provided we meet certain requirements under the Code, we can generally avoid corporate level federal income taxes on income distributed to you and other stockholders as dividends |
| We would cease to qualify for this favorable pass-through tax treatment if we are unable to comply with the source of income, diversification or distribution requirements contained in Subchapter M of the Code, or if we cease to operate so as to qualify as a BDC under the 1940 Act |
| If we fail to qualify to be taxed as a RIC or to distribute our income to stockholders on a current basis, we would be subject to corporate level taxes which would significantly reduce the amount of income available for distribution to stockholders |
| The loss of our current tax treatment could have a material adverse effect on the total return, if any, obtainable from an investment in our common stock |
| ” There is a risk that you may not receive dividends Since our initial public offering, we have distributed more than 90prca of our investment company taxable income, including 90prca of our net realized short-term capital gains to our stockholders |
| Our current intention is to continue these distributions to our stockholders |
| Net realized long-term capital gains may be retained and treated as a distribution for federal tax purposes, to supplement our equity capital and support growth in our portfolio, unless our board of directors determines in certain cases to make a distribution |
| We cannot assure you that we will achieve investment results or maintain a tax status that will allow any specified level of cash distributions or year-to-year increases in cash distributions |
| Our financial condition and results of operations will depend on our ability to manage effectively any future growth We have grown significantly since our IPO in August 1997 |
| Our ability to sustain continued growth depends on our ability to identify, evaluate, finance and invest in suitable companies that meet our investment criteria |
| Accomplishing such a result on a cost-effective basis is largely a function of our marketing capabilities, our management of the investment process, our ability to provide competent, attentive and efficient services, our access to financing sources on acceptable terms and the capabilities of our technology platform |
| As we grow, we will also be required to hire, train, supervise and manage new employees |
| Failure to manage effectively any future growth could have a material adverse effect on our business, financial condition and results of operations |
| We are dependent upon our key management personnel for our future success We are dependent for the final selection, structuring, closing and monitoring of our investments on the diligence and skill of our senior management and other management members |
| Our future success depends to a significant extent on the continued service and coordination of our senior management team, particularly Malon Wilkus, our Chairman, Chief Executive Officer and President, Ira Wagner, our Executive Vice President and Chief Operating Officer and John Erickson, our Executive Vice President and Chief Financial Officer |
| The departure of any of our executive officers or key employees could materially adversely affect our ability to implement our business strategy, and the departure of any two of Malon Wilkus, Ira Wagner and John Erickson would be a default of the provisions under the Debt Facilities |
| We do not maintain key man life insurance on any of our officers or employees |
| 20 ______________________________________________________________________ We operate in a highly competitive market for investment opportunities We compete with a large number of private equity funds and mezzanine funds, investment banks and other equity and non-equity based investment funds, and other sources of financing, including traditional financial services companies such as commercial banks |
| Some of our competitors are substantially larger and have considerably greater financial resources than us |
| Competitors may have lower cost of funds and many have access to funding sources that are not available to us |
| In addition, certain of our 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 we face will not have a material adverse effect on our business, financial condition and results of operations |
| Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time and there can be no assurance that we will be able to identify and make investments that satisfy our investment objectives or that we will be able to meet our investment goals |
| Provisions of our Second Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws could deter takeover attempts Our Second Amended and Restated Certificate of Incorporation, as amended and Second Amended and Restated Bylaws and the Delaware General Corporation Law contain provisions that may have the effect of discouraging, delaying or making more difficult a change in control and preventing the removal of incumbent directors |
| The existence of these provisions may negatively impact on the price of our common stock and may discourage third-party bids |
| These provisions may reduce any premiums paid to our stockholders for shares of our common stock that they own |
| Furthermore, we are subject to Section 203 of the Delaware General Corporation Law |
| Section 203 governs business combinations with interested stockholders, and also could have the effect of delaying or preventing a change in control |
| Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business We and our portfolio companies are subject to regulation by laws at the local, state and federal level |
| These laws and regulations, as well as their interpretation, may be changed from time to time |
| Accordingly, any change in these laws or regulations or the failure to comply with these laws or regulations could have a material adverse impact on our business |
| Certain of these laws and regulations pertain specifically to business development companies |
| Our ability to invest in certain private companies may be limited In order to retain our status as a BDC, we may not acquire any assets other than Qualifying Assets unless, at the time of and after giving effect to the acquisition, at least 70prca of our total assets are Qualifying Assets |
| Under the 1940 Act, one of the categories of Qualifying Assets consists of securities issued by an “eligible portfolio company |
| ” An “eligible portfolio company” is defined in the 1940 Act as a company that, among other things, does not have any marginable securities |
| As a result, if we purchase debt or equity securities from an issuer that has marginable securities outstanding at the time of our investment, we cannot treat our newly acquired securities as Qualifying Assets |
| Regulation T under the Exchange Act identifies securities that are considered margin securities |
| In 1998, the Federal Reserve Board amended Regulation T to include a “non-equity security” within the definition of margin securities |
| Non-equity securities include debt securities |
| Thus, the staff of the SEC has raised the question as to whether a private company that has outstanding debt securities would qualify as an eligible portfolio company |
| In November 2004, the SEC issued proposed rules to expand the definition of “eligible portfolio company” to include any company that does not have a class of securities listed on a national securities exchange or association |
| 21 ______________________________________________________________________ Until the question raised by the staff of the SEC regarding the Federal Reserve Board’s 1998 amendment to its margin rules has been addressed by final legislative, administrative or judicial action, we intend to treat our investments in private companies that have outstanding privately-placed debt securities and that would otherwise be Qualifying Assets as such |
| Should our interpretation of the definition of Qualifying Assets not be upheld, it could have a material adverse impact on our business, financial condition and results of operations |
| For instance, we could lose our status as a BDC or have to change our investment objectives or policies |
| We may also be required to dispose of investments that we made based on our interpretation |
| If we need to make such dispositions quickly, it may be difficult for us to do so on favorable terms because our investments are generally illiquid |
| See “Risk Factors—The lack of liquidity of our privately held securities may adversely affect our business |
| ” We could face losses and potential liability if intrusions, viruses or similar disruptions to our technology jeopardize our confidential information or that of users of our technology Although we have implemented, and will continue to implement, security measures, our technology platform is and will continue to be vulnerable to intrusion, computer viruses or similar disruptive problems caused by transmission from unauthorized users |
| The misappropriation of proprietary information could expose us to a risk of loss or litigation |
| Failure to deploy new capital may reduce our return on equity If we fail to invest our new capital effectively our return on equity may be negatively impacted, which could reduce the price of the shares of our common stock that you own |
| The market price of our common stock may fluctuate significantly The market price and marketability of shares of our common stock may from time to time be significantly affected by numerous factors, including many over which we have no control and that may not be directly related to us |
| These factors include the following: • price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies; • significant volatility in the market price and trading volume of securities of RICs, BDCs or other companies in our sector, which is not necessarily related to the operating performance of these companies; • changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs; • changes in earnings or variations in operating results; • any shortfall in revenue or net income or any increase in losses from levels expected by securities analysts; • general economic trends and other external factors; and • loss of a major funding source |
| Fluctuations in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock and, in the event that we seek to raise capital through future equity financings, our ability to raise such equity capital |
| Future sales of our common stock may negatively affect our stock price The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur |
| These sales also might make it more difficult for us to sell additional equity securities in the future at a time and at a price that we deem appropriate |
| 22 ______________________________________________________________________ Our common stock may be difficult to resell Investors may not be able to resell shares of common stock at or above their purchase prices due to a number of factors, including: • actual or anticipated fluctuation in our operating results; • volatility in our common stock price; • changes in expectations as to our future financial performance or changes in financial estimates of securities analysts; and • departures of key personnel |
| Supplemental provisions contained in the forward sale agreements subject us to certain risks Under our forward sale agreements, each forward purchaser has the right to accelerate its forward sale agreement and require us to physically settle on a date specified by such forward purchaser if certain events occur, such as (1) in its judgment, it is unable to continue to borrow a number of shares of our common stock equal to the number of shares to be delivered by us under its forward sale agreement or the cost of borrowing the common stock has increased above a specified amount, (2) we declare any dividend or distribution on shares of our common stock payable in (i) excess of a specified amount, (ii) securities of another company, or (iii) any other type of securities (other than shares of our common stock), rights, warrants or other assets for payment at less than the prevailing market price in such forward purchaser’s judgment, (3) the net asset value per share of our outstanding common stock exceeds a specified percentage of the then applicable forward sales price, (4) our board of directors votes to approve a merger or takeover of us or similar transaction that would require our shareholders to exchange their shares for cash, securities, or other property, or (5) certain other events of default or termination events occur |
| Such forward purchaser’s decision to exercise its right to require us to settle its forward sale agreement will be made irrespective of our need for capital |
| In addition, upon certain events of bankruptcy, insolvency or reorganization relating to us, each forward sale agreement will terminate without further liability of either party |
| Following any such termination, we would not issue any shares and we would not receive any proceeds pursuant to the forward sale agreements |
| As of December 31, 2005, we had 4dtta3 million shares outstanding under our forward sale agreements that have termination dates that range from September 2006 through November 2006 |
| Each forward sale agreement will be physically settled |
| Delivery of our shares on any physical settlement of a forward sale agreement will result in dilution to our basic earnings per share and return on equity |
| Our employee option plans may not be fully compliant Certain of our employee stock option plans have a provision whereby the exercise price of options granted under the plan will be adjusted downward automatically in the amount of cash dividends paid on our common stock |
| (The compensation and corporate governance committee of the board of directors may discontinue these adjustments at any time and has discontinued such adjustments in 2005 |
| ) While we believe that such adjustments in an option’s exercise price comply with applicable laws including tax and securities law, it is possible that a court or other governmental entity could find otherwise |
| If that were to happen, we could be required to change our option plans, which could result in the reversal of the adjustments to the exercise prices of outstanding options, additional compensation to our employees for the effect of such reversals and the reversal of a portion of the option expense previously recorded by us |
| Such events could have a material impact on our financial statements |
| In addition, we may find it necessary to develop alternative incentive compensation programs in order to recruit and retain the employees we need to operate our business |
| Such alternative programs could be more expensive than our existing programs |