10-Q 1 acas10q33112.htm FORM 10-Q ACAS 10Q 3.31.12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 814-00149
 
 
AMERICAN CAPITAL, LTD.
(Exact name of registrant as specified in its charter)
Delaware
 
52-1451377
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
2 Bethesda Metro Center
14th Floor
Bethesda, Maryland 20814
(Address of principal executive offices)
(301) 951-6122
(Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange
on which registered
Common Stock, $0.01 par value per share
 
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
 
Securities registered pursuant to section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  o    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
 
  
Accelerated filer  o
Non-accelerated filer  o
 
(Do not check if a smaller reporting company)
  
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No.  x
 
The number of shares of the issuer's common stock, $0.01 par value legally outstanding as of April 30, 2012, was 332,602,529.
________________________________________________________________________________________________________________________





2


PART I. FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements

AMERICAN CAPITAL, LTD.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
 
 
March 31,
 
December 31,
 
2012
 
2011
 
(unaudited)
 
 
Assets
 
 
 
Investments at fair value
 
 
 
Non-Control/Non-Affiliate investments (cost of $2,412 and $2,781, respectively)
$
1,755

 
$
2,113

Affiliate investments (cost of $157 and $148, respectively)
127

 
107

Control investments (cost of $3,753 and $3,810, respectively)
3,497

 
2,910

Total investments at fair value (cost of $6,322 and $6,739, respectively)
5,379

 
5,130

Cash and cash equivalents
313

 
204

Restricted cash and cash equivalents
205

 
80

Interest receivable
22

 
24

Deferred tax asset, net
396

 
428

Derivative agreements at fair value
10

 
10

Other
96

 
85

Total assets
$
6,421

 
$
5,961

Liabilities and Shareholders’ Equity
 
 
 
Debt ($294 and $227 due within one year, respectively)
$
1,132

 
$
1,251

Derivative agreements at fair value
105

 
99

Other
70

 
48

Total liabilities
1,307

 
1,398

Commitments and contingencies
 
 
 
Shareholders’ equity:
 
 
 
Undesignated preferred stock, $0.01 par value, 5.0 shares authorized, 0 issued and outstanding

 

Common stock, $0.01 par value, 1,000.0 shares authorized, 332.5 and 336.4 issued and 325.6 and 329.1 outstanding, respectively
3

 
3

Capital in excess of par value
7,024

 
7,053

Distributions in excess of net realized earnings
(1,058
)
 
(999
)
Net unrealized depreciation of investments
(855
)
 
(1,494
)
Total shareholders’ equity
5,114

 
4,563

Total liabilities and shareholders’ equity
$
6,421

 
$
5,961

Net Asset Value Per Common Share Outstanding
$
15.71

 
$
13.87

 
See accompanying notes.

3


AMERICAN CAPITAL, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in millions, except per share data)
 
Three Months Ended March 31,
 
2012
 
2011
Operating Income
 
 
 
Interest and dividend income
 
 
 
Non-Control/Non-Affiliate investments
$
69

 
$
94

Affiliate investments
3

 
2

Control investments
64

 
50

Total interest and dividend income
136

 
146

Fee income
 
 
 
Non-Control/Non-Affiliate investments
2

 
7

Control investments
11

 
6

Total fee income
13

 
13

Total operating income
149

 
159

Operating Expenses
 
 
 
Interest
16

 
29

Salaries, benefits and stock-based compensation
37

 
36

General and administrative
15

 
11

Total operating expenses
68

 
76

Net Operating Income Before Income Taxes
81

 
83

Tax provision
(32
)
 

Net Operating Income
49

 
83

Net realized (loss) gain
 
 
 
Non-Control/Non-Affiliate investments
(53
)
 
12

Affiliate investments
(1
)
 

Control investments
(68
)
 
(2
)
Foreign currency transactions
1

 

Derivative agreements
(8
)
 
(13
)
Tax benefit
22

 

Total net realized loss
(107
)
 
(3
)
Net unrealized appreciation (depreciation)
 
 
 
Portfolio company investments
627

 
256

Foreign currency translation
38

 
85

Derivative agreements
(6
)
 
13

Tax provision
(21
)
 

Total net unrealized appreciation
638

 
354

Total net gain
531

 
351

Net Increase in Net Assets Resulting from Operations (“Net Earnings”)
$
580

 
$
434

 
 
 
 
Net Operating Income Per Common Share
 
 
 
Basic
$
0.15

 
$
0.24

Diluted
$
0.14

 
$
0.23

Net Earnings Per Common Share
 
 
 
Basic
$
1.75

 
$
1.25

Diluted
$
1.71

 
$
1.21

Weighted Average Shares of Common Stock Outstanding
 
 
 
Basic
330.9

 
346.1

Diluted
339.6

 
358.4

See accompanying notes.

4


AMERICAN CAPITAL, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
(in millions, except per share data)
 
 
Three Months Ended March 31,
 
2012
 
2011
Operations
 
 
 
Net operating income
$
49

 
$
83

Net realized loss
(107
)
 
(3
)
Net unrealized appreciation
638

 
354

Net earnings
580

 
434

Capital Share Transactions
 
 
 
Proceeds from issuance of common stock upon exercise of stock options
7

 
4

Repurchase of common stock
(48
)
 

Stock-based compensation
12

 
10

Net (decrease) increase in net assets resulting from capital share transactions
(29
)
 
14

Total increase (decrease) in net assets
551

 
448

Net assets at beginning of period
4,563

 
3,668

Net assets at end of period
$
5,114

 
$
4,116

 
 
 
 
Net asset value per common share outstanding
$
15.71

 
$
11.97

Common shares outstanding at end of period
325.6

 
343.9

 
See accompanying notes.

5


AMERICAN CAPITAL, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in millions)
 
Three Months Ended March 31,
 
2012
 
2011
Operating Activities
 
 
 
Net earnings
$
580

 
$
434

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Net unrealized appreciation
(638
)
 
(354
)
Net realized loss
107

 
3

Accrued payment-in-kind interest and dividends on investments
(56
)
 
(57
)
Amortization of deferred finance costs, premiums and discounts
3

 
8

Depreciation of property and equipment
2

 
2

Stock-based compensation
12

 
10

Decrease in deferred tax asset, net
32

 

Decrease in interest receivable
1

 
2

Increase in other assets
(17
)
 
(6
)
Increase (decrease) in other liabilities
22

 
(2
)
Other
(2
)
 
2

Net cash provided by operating activities
46

 
42

Investing Activities
 
 
 
Purchases and originations of investments
(73
)
 
(49
)
Repayments from portfolio company revolving credit facility investments, net
35

 
6

Principal repayments on debt investments
298

 
157

Payment of accrued PIK notes and dividend and accreted original issue discounts
51

 
43

Proceeds from sales of equity investments
47

 
63

Interest rate derivative periodic interest payments, net
(8
)
 
(13
)
Other
(2
)
 
6

Net cash provided by investing activities
348

 
213

Financing Activities
 
 
 
Payments on secured borrowings
(1
)
 
(300
)
Payments on notes payable from asset securitizations
(118
)
 
(217
)
Proceeds from issuance of common stock upon exercise of stock options
7

 
4

Repurchase of common stock
(48
)
 

(Increase) decrease in debt service escrows
(125
)
 
87

Net cash used in financing activities
(285
)
 
(426
)
Net increase (decrease) in cash and cash equivalents
109

 
(171
)
Cash and cash equivalents at beginning of period
204

 
269

Cash and cash equivalents at end of period
$
313

 
$
98

 
See accompanying notes.

6


AMERICAN CAPITAL, LTD.
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
(in millions, except per share data)
 
 
Three Months Ended March 31,
 
2012
 
2011
Per Share Data
 
 
 
Net asset value at beginning of the period
$
13.87

 
$
10.71

Net operating income(1)
0.15

 
0.24

Net realized loss(1)
(0.33
)
 
(0.01
)
Net unrealized appreciation(1)
1.93

 
1.02

Net earnings(1)
1.75

 
1.25

Issuance of common stock
(0.05
)
 
(0.02
)
Repurchase of common stock
0.12

 

Other, net(2)
0.02

 
0.03

Net asset value at end of period
$
15.71

 
$
11.97

Ratio/Supplemental Data
 
 
 
Per share market value at end of period
$
8.68

 
$
9.91

Total investment return(3)
28.97
%
 
31.08
%
Shares outstanding at end of period
325.6

 
343.9

Net assets at end of period
$
5,114

 
$
4,116

Average net assets(4)
$
4,839

 
$
3,892

Average debt outstanding(5)
$
1,183

 
$
2,001

Average debt outstanding per common share(1)
$
3.58

 
$
5.78

Portfolio turnover rate(6)
7.17
%
 
4.37
%
Ratio of operating expenses to average net assets(6)
5.65
%
 
7.92
%
Ratio of operating expenses, net of interest expense, to average net assets(6)
4.32
%
 
4.90
%
Ratio of interest expense to average net assets(6)
1.33
%
 
3.02
%
Ratio of net operating income to average net assets(6)
4.07
%
 
8.65
%
 
(1)
Weighted average basic per share data.
(2)
Represents the impact of (i) the other components in the changes in net assets, including other capital transactions such as the purchase of common stock held in deferred compensation trusts, stock-based compensation, income tax deductions related to the exercise of stock options and distribution of stock awards in excess of US GAAP expense credited to additional paid-in capital and (ii) the different share amounts used in calculating per share data as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end.
(3)
Total investment return is based on the change in the market value of our common stock taking into account dividends, if any, reinvested in accordance with the terms of our dividend reinvestment plan.
(4)
Based on the quarterly average of net assets as of the beginning and end of each period presented.
(5)
Based on a daily weighted average balance of debt outstanding during the period.
(6)
Ratios are annualized.



See accompanying notes.

7



AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2012
(unaudited)
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
NON-CONTROL / NON-AFFILIATE INVESTMENTS
 
 
 
 
 
 
 
 
Affordable Care Holding Corp.
 
Health Care Providers & Services
 
Mezzanine Debt(7)
 
15.1
%
 
6/16
 
 
 
$
71.3

 
$
70.9

 
$
71.3

 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
70,752

 
 
 
69.6

 
117.7

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
17,687,156

 
 
 
15.8

 
27.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
156.3

 
216.8

Algoma Holding Company
 
Building Products
 
Mezzanine Debt(7)
 
14.2
%
 
9/13
 
 
 
16.2

 
16.2

 
16.4

American Acquisition, LLC(9)
 
Capital Markets
 
Senior Debt(7)
 
15.5
%
 
12/12
 
 
 
7.9

 
7.9

 
7.8

AmWins Group, Inc.
 
Insurance
 
Senior Debt(7)
 
5.8
%
 
6/14
 
 
 
18.5

 
18.5

 
18.2

Avalon Laboratories Holding Corp.
 
Health Care Equipment & Supplies
 
Senior Debt(7)
 
11.0
%
 
1/14
 
 
 
15.0

 
14.9

 
14.9

Mezzanine Debt(7)
 
18.6
%
 
1/15
 
 
 
31.4

 
31.2

 
31.4

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
148,742

 
 
 
30.0

 
41.0

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
7,829

 
 
 
1.3

 
1.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
77.4

 
88.9

BBB Industries, LLC
 
Auto Components
 
Senior Debt(7)
 
9.3
%
 
6/14
 
 
 
21.2

 
21.2

 
20.7

Blue Wolf Capital Fund II, L.P.(9)
 
Capital Markets
 
Limited Partnership Interest(4)
 
 
 
 
 
 
 
 
 
6.6

 
6.1

CAMP Systems International, Inc.
 
Air Freight & Logistics
 
Senior Debt(7)
 
6.2
%
 
9/14
 
 
 
30.0

 
29.9

 
29.7

CIBT Investment Holdings, LLC
 
Commercial Services & Supplies
 
Common Stock(4)(7)
 
 
 
 
 
13,381

 
 
 
8.9

 
9.9

Delsey Holding(8)
 
Textiles, Apparel & Luxury Goods
 
Senior Debt(7)
 
8.4
%
 
2/14
 
 
 
20.6

 
20.5

 
15.7

DelStar, Inc.
 
Building Products
 
Redeemable Preferred Stock(7)
 
 
 
 
 
26,613

 
 
 
26.1

 
43.0

 
 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
29,569

 
 
 
3.8

 
3.8

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
89,020

 
 
 
16.9

 
4.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
46.8

 
51.0

Easton Bell Sports, LLC
 
Leisure Equipment & Products
 
Redeemable Preferred Stock
 
 
 
 
 
1,171

 
 
 
1.8

 
1.8

 
 
 
 
Common Units(4)
 
 
 
 
 
3,830,068

 
 
 
0.7

 
1.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.5

 
2.8

FAMS Acquisition, Inc.
 
Diversified Financial Services
 
Mezzanine Debt(7)
 
14.0
%
 
11/13
 
 
 
18.2

 
18.1

 
18.2

 
 
 
 
Mezzanine Debt(6)(7)
 
15.5
%
 
11/14
 
 
 
19.6

 
11.7

 
10.5

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
919

 
 
 
0.9

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
861,364

 
 
 
20.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
51.6

 
28.7

Flexera Software, LLC
 
Software
 
Senior Debt(7)
 
11.0
%
 
10/18
 
 
 
15.0

 
14.0

 
15.0

FPI Holding Corporation
 
Food Products
 
Senior Debt(7)
 
8.5
%
 
12/12-5/13
 
 
 
21.7

 
21.7

 
21.7

 
 
 
 
Senior Debt(6)(7)
 
15.8
%
 
6/14-6/15
 
 
 
19.0

 
12.4

 
1.2

 
 
 
 
Mezzanine Debt(6)(7)
 
20.0
%
 
6/15
 
 
 
18.2

 
8.9

 

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
4,469

 
 
 
39.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
82.1

 
22.9

Groupe Unipex(8)
 
Personal Products
 
Mezzanine Debt(7)
 
10.9
%
 
5/17
 
 
 
6.9

 
6.1

 
6.7

 
 
 
 
Common Stock Warrants(4)
 
 
 
 
 
840,001

 
 
 
0.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
7.0

 
6.7

HMSC Corporation
 
Insurance
 
Senior Debt(6)(7)
 
5.7
%
 
10/14
 
 
 
3.5

 
2.9

 
1.0

IS Holdings I, Inc.
 
Software
 
Common Stock(4)(7)
 
 
 
 
 
1,165,930

 
 
 

 
14.4

JHCI Acquisition, Inc.
 
Air Freight & Logistics
 
Senior Debt(7)
 
5.7
%
 
12/14
 
 
 
19.0

 
19.1

 
16.5

KIK Custom Products, Inc.(8)
 
Household Products
 
Senior Debt(6)(7)
 
5.2
%
 
12/14
 
 
 
22.5

 
21.3

 
15.4

LCW Holdings, LLC
 
Real Estate
 
Senior Debt(7)
 
11.0
%
 
10/12
 
 
 
6.1

 
6.1

 
6.3

 
 
 
 
Warrant(4)
 
 
 
 
 
12.5
%
 
 
 
0.8

 
3.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
6.9

 
9.6

Mitchell International, Inc.
 
IT Services
 
Senior Debt(7)
 
5.8
%
 
3/15
 
 
 
5.0

 
5.0

 
4.7

NBD Holdings Corp.
 
Diversified Financial Services
 
Convertible Preferred Stock(4)
 
 
 
 
 
84,174

 
 
 
8.6

 
2.6

 
 
 
 
Common Stock(4)
 
 
 
 
 
633,408

 
 
 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
8.7

 
2.6

Net1 Las Colinas Manager, LLC
 
Real Estate
 
Senior Debt(7)
 
7.7
%
 
10/15
 
 
 
3.1

 
3.1

 
2.8

Orion Foundry, Inc.(5)(8)
 
Internet Software & Services
 
Senior Debt(7)
 
7.8
%
 
12/15
 
 
 
13.8

 
13.6

 
5.5

 
 
 
 
Senior Debt(6)(7)
 
8.5
%
 
12/15
 
 
 
5.6

 
4.5

 
2.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
18.1

 
7.8

Pan Am International Flight Academy, Inc.
 
Professional Services
 
Mezzanine Debt(7)
 
16.5
%
 
7/14
 
 
 
44.0

 
43.9

 
44.0

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
14,938

 
 
 
14.9

 
16.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
58.8

 
60.2

PaR Systems, Inc.
 
Machinery
 
Senior Debt(7)
 
3.4
%
 
7/13
 
 
 
2.4

 
2.3

 
2.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

8


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
March 31, 2012
(unaudited)
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
Parts Holding Coörperatief U.A(8)
 
Distributors
 
Membership Entitlements(4)(7)
 
 
 
 
 
173,060

 
 
 
6.4

 
0.6

Qioptiq S.à r.l.(8)
 
Electronic Equipment, Instruments & Components
 
Mezzanine Debt(7)
 
10.0
%
 
3/18
 
 
 
34.9

 
34.7

 
34.7

Qualium I(8)
 
Capital Markets
 
Common Stock(4)(7)
 
 
 
 
 
241,879

 
 
 
2.0

 
2.0

RDR Holdings, Inc.
 
Household Durables
 
Mezzanine Debt(7)
 
15.6
%
 
10/14
 
 
 
31.0

 
30.8

 
31.0

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
133

 
 
 
13.3

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
1,541

 
 
 
192.3

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
15,414

 
 
 
32.7

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
269.1

 
31.0

Renaissance Learning, Inc.
 
Software
 
Senior Debt(7)
 
12.0
%
 
10/18
 
 
 
10.0

 
9.6

 
10.2

Roark - Money Mailer, LLC
 
Media
 
Common Membership Units(4)
 
 
 
 
 
3.5
%
 
 
 
0.9

 
1.0

Scanner Holdings Corporation
 
Computers & Peripherals
 
Mezzanine Debt(7)
 
14.0
%
 
6/14
 
 
 
17.9

 
17.8

 
17.9

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
77,640,000

 
 
 
7.8

 
15.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
78,242

 
 
 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
25.7

 
33.7

Soil Safe Holdings, LLC
 
Professional Services
 
Senior Debt(7)
 
9.8
%
 
8/13-8/14
 
 
 
36.7

 
36.6

 
36.8

 
 
 
 
Mezzanine Debt(7)
 
15.5
%
 
8/15-8/16
 
 
 
42.0

 
41.7

 
40.9

 
 
 
 
Mezzanine Debt(6)(7)
 
17.5
%
 
8/17
 
 
 
35.3

 
27.4

 
24.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
105.7

 
102.5

SPL Acquisition Corp.
 
Pharmaceuticals
 
Senior Debt(7)
 
11.0
%
 
6/14
 
 
 
46.8

 
46.6

 
46.8

 
 
 
 
Mezzanine Debt(7)
 
15.3
%
 
6/15-6/16
 
 
 
55.6

 
55.2

 
55.6

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
84,043

 
 
 
40.8

 
27.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
142.6

 
129.8

Survey Sampling International, LLC
 
Media
 
Mezzanine Debt(7)
 
15.0
%
 
7/18
 
 
 
40.9

 
40.5

 
40.5

Swank Audio Visuals, LLC
 
Commercial Services & Supplies
 
Senior Debt(7)
 
9.5
%
 
8/15
 
 
 
58.0

 
57.8

 
47.9

The Tensar Corporation
 
Construction & Engineering
 
Senior Debt(7)
 
13.0
%
 
5/13
 
 
 
83.3

 
83.1

 
83.5

 
 
 
 
Mezzanine Debt(7)
 
20.3
%
 
11/15
 
 
 
37.3

 
37.3

 
37.8

 
 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
8,263,171

 
 
 
11.3

 
23.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
131.7

 
144.5

ThreeSixty Sourcing, Inc.(8)
 
Commercial Services & Supplies
 
Common Stock Warrants(4)(7)
 
 
 
 
 
35

 
 
 
4.1

 

TransFirst Holdings, Inc.
 
Commercial Services & Supplies
 
Senior Debt(7)
 
6.3
%
 
6/15
 
 
 
54.0

 
53.7

 
47.8

Tyden Cayman Holdings Corp.(8)
 
Electronic Equipment, Instruments & Components
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
26,977

 
 
 
0.1

 
0.1

 
 
Common Stock(4)
 
 

 
 
 
3,218,667

 
 
 
3.8

 
3.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.9

 
3.8

WRH, Inc.
 
Life Sciences Tools & Services
 
Senior Debt(7)
 
4.0
%
 
9/13
 
 
 
3.9

 
3.9

 
3.9

 
 
 
Mezzanine Debt(7)
 
14.5
%
 
7/14-9/15
 
 
 
100.0

 
99.7

 
99.1

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
2,008,575

 
 
 
231.4

 
103.3

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
502,144

 
 
 
49.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
384.8

 
206.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS INVESTMENTS
 
 
 
 
 
 
 
 
Banc of America Commercial Mortgage Trust 2007-1(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.9
%
 
2/17-2/18
 
 
 
12.4

 
4.0

 
0.3

CD 2007-CD4 Commercial Mortgage Trust(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.9
%
 
4/17
 
 
 
14.0

 
8.7

 
0.1

CD 2007-CD5 Mortgage Trust(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.3
%
 
12/17
 
 
 
14.8

 
9.0

 
1.1

Citigroup Commercial Mortgage Securities Trust 2007-C6(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.9
%
 
7/17
 
 
 
67.5

 
33.1

 
8.8

COBALT CMBS Commercial Mortgage Trust 2007-C3(9)
 
Real Estate
 
Commercia1 Mortgage Pass-Through Certificates(4)(7)
 
5.2
%
 
10/17
 
 
 
11.1

 
7.8

 
0.2

Credit Suisse Commercial Mortgage Trust Series 2007-C4(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
8/17
 
 
 
20.8

 
10.8

 
2.7

GS Mortgage Securities Trust 2006-GG10(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
7/17
 
 
 
7.0

 
4.1

 

J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
7/17
 
 
 
52.3

 
9.2

 
1.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
March 31, 2012
(unaudited)
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
LB-UBS Commercial Mortgage Trust 2007-C6(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.4
%
 
8/17
 
 
 
36.6

 
20.9

 
1.3

LB-UBS Commercial Mortgage Trust 2008-C1(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.3
%
 
7/23-7/24
 
 
 
19.4

 
7.4

 
0.3

ML-CFC Commercial Mortgage Trust 2007-6(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
4/17
 
 
 
9.8

 
3.2

 
0.1

ML-CFC Commercial Mortgage Trust 2007-8(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.2
%
 
8/17
 
 
 
22.7

 
13.0

 
0.8

Wachovia Bank Commercial Mortgage Trust 2007-C31(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
5/17
 
 
 
20.0

 
10.8

 
0.7

Wachovia Bank Commercial Mortgage Trust, Series 2007-C32(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.8
%
 
10/17
 
 
 
71.0

 
42.4

 
2.3

Wachovia Bank Commercial Mortgage Trust, Series 2007-C34(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.7
%
 
10/17-9/24
 
 
 
96.2

 
38.9

 
4.8

Wachovia Bank Commercial Trust 2006-C28(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.2
%
 
11/16
 
 
 
5.0

 
2.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLO INVESTMENTS
 
 
 
 
 
 
 
 
ACAS CLO 2007-1, Ltd.(8)(9)
 
 
 
Secured Notes(7)
 
 
 
 
 
 
 
8.5

 
8.4

 
6.1

 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
25.9

 
15.4

 
18.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
23.8

 
24.8

Ares IIIR/IVR CLO Ltd.(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
20.0

 
16.7

 
14.9

Ares VIII CLO, Ltd.(8)(9)
 
 
 
Preference Shares(7)
 
 
 
 
 
6,241

 
 
 
5.0

 
2.9

Avalon Capital Ltd. 3(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
13,796

 
 
 
4.8

 
6.8

Babson CLO Ltd. 2006-II(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
15.0

 
9.9

 
15.6

BALLYROCK CLO 2006-2 LTD.(8)(9)
 
 
 
Deferrable Notes(7)
 
 
 
 
 
 
 
2.0

 
1.6

 
1.5

Cent CDO 12 Limited(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
26.4

 
14.9

 
24.5

Centurion CDO 8 Limited(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
5.0

 
2.0

 
2.7

Champlain CLO(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
1,000,000

 
 
 
1.0

 
0.7

CoLTs 2005-1 Ltd.(8)(9)
 
 
 
Preference Shares(4)(7)
 
 
 
 
 
360

 
 
 
2.0

 
0.4

CoLTs 2005-2 Ltd.(8)(9)
 
 
 
Preference Shares(7)
 
 
 
 
 
34,170,000

 
 
 
22.8

 
9.1

CREST Exeter Street Solar 2004-2(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
3,089,177

 
 
 
4.1

 
2.5

Eaton Vance CDO X PLC(8)(9)
 
 
 
Secured Subordinated Income Notes(7)
 
 
 
 
 
 
 
15.0

 
12.6

 
10.9

Essex Park CDO Ltd.(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
5,750,000

 
 
 
2.5

 
2.8

Flagship CLO V(8)(9)
 
 
 
Deferrable Notes(7)
 
 
 
 
 
 
 
1.7

 
1.4

 
1.3

 
 
 
 
Subordinated Securities(7)
 
 
 
 
 
15,000

 
 
 
8.2

 
11.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
9.6

 
12.5

Galaxy III CLO, Ltd(8)(9)
 
 
 
Subordinated Notes(4)(7)
 
 
 
 
 
 
 
4.0

 
1.5

 
0.7

LightPoint CLO IV, LTD(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
6.7

 
7.5

 
5.4

LightPoint CLO VII, Ltd.(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
9.0

 
4.8

 
6.5

LightPoint CLO VIII, Ltd.(8)(9)
 
 
 
Deferrable Notes(7)
 
 
 
 
 
 
 
7.0

 
6.5

 
6.0

Mayport CLO Ltd.(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
14.0

 
10.1

 
9.9

NYLIM Flatiron CLO 2006-1 LTD.(8)(9)
 
 
 
Subordinated Securities(7)
 
 
 
 
 
10,000

 
 
 
4.9

 
7.3

Octagon Investment Partners VII, Ltd.(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
5,000,000

 
 
 
1.6

 
2.5

Sapphire Valley CDO I, Ltd.(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
14.0

 
15.7

 
14.0

Vitesse CLO, Ltd.(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
20,000,000

 
 
 
13.5

 
14.4

Subtotal Non-Control / Non-Affiliate Investments (33% of total investments at fair value)
 
 
 
$
2,412.3

 
$
1,754.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

10


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
March 31, 2012
(unaudited)
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
AFFILIATE INVESTMENTS
 
 
 
 
 
 
 
 
American Capital Mortgage Investment Corp,(5)(9)
 
Real Estate
 
Common Stock(7)
 
 
 
 
 
2,000,100

 
 
 
$
40.0

 
$
41.8

Anchor Drilling Fluids USA, Inc.
 
Energy Equipment & Services
 
Senior Debt(7)
 
11.3
%
 
12/13
 
 
 
$
7.0

 
7.0

 
6.7

 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
859

 
 
 
1.6

 
1.0

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
3,061

 
 
 
5.0

 

 
 
 
 
 
 
 
 
 
 
 

 
 
 
13.6

 
7.7

Comfort Co., Inc.
 
Household Durables
 
Senior Debt(7)
 
11.5
%
 
3/15
 
 
 
9.4

 
9.4

 
9.6

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
110,684

 
 
 
11.8

 
11.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
21.2

 
20.9

Egenera, Inc.
 
Computers & Peripherals
 
Mezzanine Debt(6)
 
15.0
%
 
5/12
 
 
 
5.0

 
3.2

 
1.6

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
8,569,905

 
 
 
25.4

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
28.6

 
1.6

HALT Medical, Inc.
 
Health Care Equipment & Supplies
 
Senior Debt(7)
 
16.8
%
 
12/12-7/13
 
 
 
12.1

 
12.1

 
12.1

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
5,592,367

 
 
 
8.9

 
10.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
131,315

 
 
 
0.1

 
0.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
21.1

 
23.0

IEE Holding 1 S.A.(8)
 
Auto Components
 
Common Stock(4)
 
 
 
 
 
250,000

 
 
 
4.5

 
8.2

Neways Holdings, L.P.
 
Personal Products
 
Senior Debt(7)
 
16.0
%
 
8/14
 
 
 
9.2

 
9.2

 
8.8

 
 
 
 
Common Units(4)
 
 
 
 
 
10.6
%
 
 
 
9.5

 
5.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
18.7

 
14.0

Primrose Holding Corporation
 
Diversified Consumer Services
 
Common Stock(4)(7)
 
 
 
 
 
4,213

 
 
 
1.6

 
3.3

Qualitor Component Holdings, LLC
 
Auto Components
 
Redeemable Preferred Units(4)
 
 
 
 
 
3,150,000

 
 
 
3.2

 

 
 
 
Common Units(4)
 
 
 
 
 
350,000

 
 
 
0.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.5

 

Radar Detection Holdings Corp.
 
Household Durables
 
Convertible Preferred Stock(4)
 
 
 
 
 
7,075

 
 
 
0.7

 
1.9

 
 
 
Common Stock(4)
 
 
 
 
 
40,688

 
 
 
0.6

 
0.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.3

 
2.5

WFS Holding, LLC
 
Software
 
Preferred Interest
 
 
 
 
 
20,403,772

 
 
 
2.4

 
4.2

Subtotal Affiliate Investments (2% of total investments at fair value)
 
 
 
$
156.5

 
$
127.2

 
 
 
 
 
 
 
 
 
CONTROL INVESTMENTS
 
 
 
 
 
 
 
 
ACAS Equity Holdings Corp.
 
Diversified Financial Services
 
Common Stock(4)(7)
 
 
 
 
 
589

 
 
 
$
14.3

 
$

ACAS Real Estate Holdings Corporation
 
Real Estate
 
Mezzanine Debt(6)(7)
 
15.0
%
 
5/16
 
 
 
$
5.7

 
3.7

 

 
 
 
Common Stock(7)
 
 
 
 
 
100
%
 
 
 
6.0

 
11.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
9.7

 
11.7

American Capital, LLC
 
Capital Markets
 
Senior Debt(7)
 
3.2
%
 
9/16
 
 
 
6.0

 
6.0

 
6.0

 
 
 
 
Common Membership Interest(7)
 
 
 
 
 
100
%
 
 
 
92.5

 
729.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
98.5

 
735.9

American Driveline Systems, Inc.
 
Diversified Consumer Services
 
Mezzanine Debt(7)
 
13.9
%
 
7/16
 
 
 
35.3

 
35.1

 
35.2

 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
403,357

 
 
 
41.5

 
57.2

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
128,681

 
 
 
10.8

 
3.6

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
204,663

 
 
 
17.3

 
5.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
104.7

 
101.7

Auto Network Member Corp.
 
Electronic Equipment, Instruments & Components
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
1,514

 
 
 
0.1

 
1.4

 
 
Common Stock(4)(7)
 
 
 
 
 
65

 
 
 
0.7

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.8

 
1.4

Capital.com, Inc.
 
Diversified Financial Services
 
Common Stock(4)(7)
 
 
 
 
 
8,500,100

 
 
 
0.9

 

CH Holding Corp.
 
Leisure Equipment & Products
 
Senior Debt(7)
 
7.2
%
 
5/13
 
 
 
18.7

 
18.7

 
18.7

 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
21,215

 
 
 
42.8

 
7.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
61.5

 
26.2

CIBT Travel Solutions, LLC
 
Commercial Services & Supplies
 
Redeemable Preferred Stock(7)
 
 
 
 
 
10,303

 
 
 
1.2

 
1.0

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
858,410

 
 
 

 
10.9

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
188,889

 
 
 

 
1.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.2

 
13.7

CMX Inc.
 
Construction & Engineering
 
Senior Debt(6)(7)
 
3.5
%
 
5/12
 
 
 
4.5

 
4.4

 
0.1

Contour Semiconductor, Inc.
 
Semiconductors & Semiconductor Equipment
 
Convertible Senior Debt(6)(7)
 
3.0
%
 
5/12-10/12
 
 
 
1.0

 
0.9

 
1.0

 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
11,532,842

 
 
 
12.5

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.4

 
1.0

Core Financial Holdings, LLC(9)
 
Diversified Financial Services
 
Common Units(4)(7)
 
 
 
 
 
57,940,360

 
 
 
47.5

 
3.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

11


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
March 31, 2012
(unaudited)
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
Dyno Holding Corp.
 
Auto Components
 
Senior Debt(7)
 
11.6
%
 
11/15
 
 
 
40.5

 
40.3

 
40.5

 
 
 
Mezzanine Debt(7)
 
7.3
%
 
11/16
 
 
 
16.9

 
16.8

 
16.8

 
 
 
 
Mezzanine Debt(6)(7)
 
%
 
11/16
 
 
 
14.0

 
11.7

 
1.1

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
389,759

 
 
 
40.5

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
97,440

 
 
 
10.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
119.4

 
58.4

ECA Acquisition Holdings, Inc.
 
Health Care Equipment & Supplies
 
Mezzanine Debt(7)
 
16.5
%
 
12/14
 
 
 
14.6

 
14.5

 
14.6

 
 
Common Stock(4)(7)
 
 
 
 
 
583

 
 
 
11.1

 
10.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
25.6

 
25.0

eLynx Holdings, Inc.
 
IT Services
 
Senior Debt(7)
 
7.7
%
 
7/13
 
 
 
7.0

 
7.0

 
7.0

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
21,113

 
 
 
8.9

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
11,728

 
 
 
20.7

 
12.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
11,261

 
 
 
1.1

 

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
1,078,792

 
 
 
13.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
50.8

 
19.8

European Capital Limited(8)
 
Diversified Financial Services
 
Subordinated Debt(7)
 
7.8
%
 
12/13
 
 
 
88.4

 
88.4

 
88.4

Ordinary Shares(4)(7)
 
 
 
 
 
431,895,528

 
 
 
1,267.3

 
711.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,355.7

 
799.7

EXPL Pipeline Holdings LLC(9)
 
Oil, Gas & Consumable Fuels
 
Senior Debt(7)
 
8.0
%
 
1/17
 
 
 
46.0

 
45.7

 
46.0

 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
58,297

 
 
 
44.5

 
4.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
90.2

 
50.2

FL Acquisitions Holdings, Inc.
 
Computers & Peripherals
 
Senior Debt(7)
 
8.3
%
 
10/12-10/13
 
 
 
40.1

 
40.0

 
40.2

 
 
Mezzanine Debt(7)
 
18.7
%
 
4/14-10/14
 
 
 
39.2

 
39.1

 
39.2

 
 
 
 
Mezzanine Debt(6)(7)
 
22.5
%
 
10/14
 
 
 
22.8

 
8.0

 
2.3

 
 
 
 
Redeemable Preferred Stock(4)
 
 
 
 
 
583,000

 
 
 
0.6

 

 
 
 
 
Common Stock(4)
 
 
 
 
 
129,514

 
 
 
15.6

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
103.3

 
81.7

Formed Fiber Technologies, Inc.
 
Auto Components
 
Common Stock(4)(7)
 
 
 
 
 
31,250

 
 
 
8.1

 

Fosbel Global Services (LUXCO) S.C.A.(8)
 
Commercial Services & Supplies
 
Mezzanine Debt(6)(7)
 
18.7
%
 
12/13-12/14
 
 
 
67.8

 
37.9

 
14.7

 
 
 
Redeemable Preferred Stock(4)
 
 
 
 
 
18,449,456

 
 
 
18.5

 

 
 
 
 
Convertible Preferred Stock(4)
 
 
 
 
 
1,519,368

 
 
 
3.0

 

 
 
 
 
Common Stock(4)
 
 
 
 
 
108,526

 
 
 
0.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
59.6

 
14.7

FreeConference.com, Inc.
 
Diversified Telecommunication Services
 
Senior Debt(6)(7)
 
8.5
%
 
5/13
 
 
 
9.1

 
8.2

 
5.6

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
14,042,095

 
 
 
12.8

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
6,088,229

 
 
 
2.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
23.3

 
5.6

Future Food, Inc.
 
Food Products
 
Senior Debt(7)
 
5.2
%
 
3/14
 
 
 
1.6

 
1.6

 
1.6

 
 
 
 
Senior Debt(6)(7)
 
5.2
%
 
3/14
 
 
 
15.4

 
1.1

 
1.1

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
64,917

 
 
 
12.9

 

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
6,500

 
 
 
1.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
16.9

 
2.7

Group Montana, Inc.
 
Textiles, Apparel & Luxury Goods
 
Senior Debt(7)
 
4.2
%
 
1/17
 
 
 
5.0

 
5.0

 
5.0

 
 
 
 
Senior Debt(6)(7)
 
12.0
%
 
1/17
 
 
 
22.1

 
18.7

 
10.4

 
 
 
 
Mezzanine Debt(6)(7)
 
24.5
%
 
7/17
 
 
 
23.9

 
6.6

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
4,000

 
 
 
1.0

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
2.5
%
 
 
 
0.7

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.0

 
15.4

Halex Holdings, Inc.
 
Construction Materials
 
Senior Debt(6)(7)
 
12.0
%
 
12/14
 
 
 
13.0

 
9.8

 
4.5

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
6,482,972

 
 
 
6.6

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
16.4

 
4.5

Hard 8 Games, LLC
 
Hotels, Restaurants & Leisure
 
Membership Unit(4)(7)
 
 
 
 
 
1

 
 
 
1.5

 
1.5

Kingway Inca Clymer Holdings, Inc.
 
Building Products
 
Mezzanine Debt(6)(7)
 
12.3
%
 
4/12
 
 
 
3.4

 

 
1.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lifoam Holdings, Inc.
 
Leisure Equipment & Products
 
Mezzanine Debt(7)
 
14.0
%
 
3/18
 
 
 
15.0

 
15.0

 
15.0

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
985

 
 
 
30.3

 
30.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
45.3

 
45.9

LLSC Holdings Corporation
 
Personal Products
 
Senior Debt(7)
 
7.5
%
 
8/15
 
 
 
1.5

 
1.5

 
1.5

 
 
 
Mezzanine Debt(7)
 
12.0
%
 
8/16
 
 
 
5.5

 
5.5

 
5.5

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
7,496

 
 
 
8.1

 
9.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.1

 
16.5

LVI Holdings, LLC
 
Professional Services
 
Senior Debt(7)
 
7.2
%
 
6/12
 
 
 
2.7

 
2.7

 
2.7

 
 
 
 
Mezzanine Debt(6)(7)
 
18.0
%
 
2/13
 
 
 
13.9

 
8.9

 
4.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
11.6

 
7.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

12


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
March 31, 2012
(unaudited)
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
Medical Billings Holdings, Inc.
 
IT Services
 
Senior Debt(7)
 
6.3
%
 
9/12
 
 
 
1.5

 
1.5

 
1.5

 
 
 
Mezzanine Debt(7)
 
17.0
%
 
9/13
 
 
 
12.2

 
12.2

 
12.3

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
13,199,000

 
 
 
13.2

 
5.4

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
3,299,582

 
 
 
3.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
30.2

 
19.2

Mirion Technologies, Inc.
 
Electrical Equipment
 
Convertible Preferred Stock(7)
 
 
 
 
 
419,819

 
 
 
68.2

 
148.1

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
53,678

 
 
 
5.1

 
9.6

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
222,156

 
 
 
18.6

 
39.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
91.9

 
197.6

Montgomery Lane, LLC(9)
 
Diversified Financial Services
 
Common Membership Units(4)(7)
 
 
 
 
 
100

 
 
 
2.2

 
4.3

MW Acquisition Corporation
 
Health Care Providers & Services
 
Mezzanine Debt(7)
 
16.4
%
 
2/13-2/14
 
 
 
31.6

 
31.5

 
31.6

 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
2,485

 
 
 
1.4

 
1.4

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
38,326

 
 
 
13.7

 
8.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
46.6

 
41.9

NECCO Holdings, Inc.
 
Food Products
 
Senior Debt(6)(7)
 
6.5
%
 
8/13
 
 
 
12.3

 
11.5

 
9.6

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
860,189

 
 
 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
11.6

 
9.6

NECCO Realty Investments, LLC
 
Real Estate
 
Senior Debt(6)(7)
 
14.0
%
 
12/17
 
 
 
49.0

 
32.8

 
31.0

 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
7,450

 
 
 
4.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
37.7

 
31.0

Orchard Brands Corporation
 
Internet & Catalog Retail
 
Senior Debt(7)
 
14.0
%
 
4/16
 
 
 
15.3

 
15.3

 
14.1

 
 
 
Senior Debt(6)(7)
 
6.5
%
 
4/16
 
 
 
70.0

 
65.8

 
29.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
73,953

 
 
 
58.2

 

 
 
 
 
 
 
 

 
 
 
 
 
 

 
139.3

 
43.9

Paradigm Precision Holdings, LLC
 
Aerospace & Defense
 
Mezzanine Debt(7)
 
18.3
%
 
8/16-10/16
 
 
 
134.6

 
134.1

 
134.6

 
 
 
Mezzanine Debt(6)(7)
 
23.0
%
 
10/16
 
 
 
38.9

 
19.8

 
4.1

 
 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
478,488

 
 
 
17.5

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
171.4

 
138.7

PHC Sharp Holdings, Inc.
 
Commercial Services & Supplies
 
Senior Debt(7)
 
10.7
%
 
12/12
 
 
 
6.5

 
6.5

 
6.5

 
 
 
 
Mezzanine Debt(7)
 
17.0
%
 
12/14
 
 
 
10.5

 
10.4

 
10.5

 
 
 
 
Mezzanine Debt(6)(7)
 
19.0
%
 
12/14
 
 
 
14.8

 
7.3

 
0.7

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
367,881

 
 
 
4.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
28.4

 
17.7

PHI Acquisitions, Inc.
 
Internet & Catalog Retail
 
Mezzanine Debt(7)
 
15.3
%
 
3/16
 
 
 
29.0

 
28.8

 
29.0

 
 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
36,267

 
 
 
36.7

 
48.3

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
40,295

 
 
 
3.9

 
7.3

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
116,065

 
 
 
11.6

 
20.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
81.0

 
105.5

Plumbing Holding Corporation
 
Building Products
 
Common Stock(4)(7)
 
 
 
 
 
342,500

 
 
 
11.1

 

Small Smiles Holding Company, LLC(10)
 
Health Care Providers & Services
 
Senior Debt(6)(7)
 
6.8
%
 
2/15
 
 
 
8.5

 
6.2

 

 
 
 
Preferred Interest(4)(7)
 
 
 
 
 
 
 
 
 
37.8

 

 
 
 
 
Common Interest(4)(7)
 
 
 
 
 
22.1
%
 
 
 
13.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
57.8

 

SMG Holdings, Inc.
 
Hotels, Restaurants & Leisure
 
Senior Debt(7)
 
3.5
%
 
7/14
 
 
 
5.6

 
5.6

 
5.6

 
 
 
 
Mezzanine Debt(7)
 
12.6
%
 
6/15
 
 
 
138.8

 
138.2

 
138.8

 
 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
1,101,673

 
 
 
151.7

 
159.3

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
275,419

 
 
 
27.5

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
323.0

 
303.7

Specialty Brands of America, Inc.
 
Food Products
 
Mezzanine Debt(7)
 
14.0
%
 
5/14
 
 
 
36.5

 
36.3

 
36.5

 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
122,017

 
 
 
12.2

 
17.9

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
128,175

 
 
 
2.3

 
25.7

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
56,819

 
 
 
1.4

 
11.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
52.2

 
91.5

Spring Air International, LLC
 
Household Durables
 
Common Membership Units(4)
 
 
 
 
 
49
%
 
 
 
2.2

 

TestAmerica Environmental Services, LLC
 
Commercial Services & Supplies
 
Senior Debt(7)
 
6.5
%
 
12/12
 
 
 
22.3

 
20.8

 
22.1

 
 
 
Preferred Membership Units(7)
 
 
 
 
 
20,000

 
 
 
25.0

 
15.4

 
 
 
Common Units(4)(7)
 
 
 
 
 
490,000

 
 
 
2.0

 
24.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
47.8

 
61.7

UFG Real Estate Holdings, LLC
 
Real Estate
 
Common Membership(4)(7)
 
 
 
 
 
 
 
 
 

 
0.9

Unique Fabricating Incorporated
 
Auto Components
 
Senior Debt(7)
 
14.0
%
 
2/15
 
 
 
5.6

 
5.6

 
5.6

 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
301,556

 
 
 
7.9

 
11.2

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
6,862

 
 
 
0.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.7

 
16.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

13


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
March 31, 2012
(unaudited)
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
Unwired Holdings, Inc.
 
Household Durables
 
Senior Debt(7)
 
8.6
%
 
6/12
 
 
 
13.8

 
13.8

 
13.8

 
 
 
 
Mezzanine Debt(7)
 
14.5
%
 
6/12
 
 
 
24.3

 
14.0

 
29.0

 
 
 
 
Redeemable Preferred Stock(4)
 
 
 
 
 
1,890

 
 
 
1.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
29.7

 
42.8

Warner Power, LLC
 
Electrical Equipment
 
Mezzanine Debt(7)
 
14.6
%
 
12/12
 
 
 
6.0

 
6.0

 
6.0

 
 
 
 
Redeemable Preferred Membership Units(7)
 
 
 
 
 
3,796,269

 
 
 
7.7

 
8.3

 
 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
27,400

 
 
 
1.9

 
1.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.6

 
16.2

WIS Holding Company, Inc.
 
Commercial Services & Supplies
 
Mezzanine Debt(7)
 
14.5
%
 
1/14
 
 
 
88.9

 
88.6

 
89.0

 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
703,406

 
 
 
107.0

 
177.3

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
175,853

 
 
 
17.6

 
35.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
213.2

 
301.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDO / CLO INVESTMENTS
 
 
 
 
 
 
 
 
ACAS Wachovia Investments, L.P.(9)
 
Diversified Financial Services
 
Partnership Interest
 
 
 
 
 
90
%
 
 
 
14.7

 
6.9

Subtotal Control Investments (65% of total investments at fair value)
 
 
 
 
 
$
3,753.0

 
$
3,496.9

Total Investment Assets
 
 
 
 
 
$
6,321.8

 
$
5,378.6

Counterparty
 
Instrument
 
Interest
Rate (2)
 
Expiration
Date (2)
 
# of
Contracts
 
Notional
 
Cost
 
Fair
Value
DERIVATIVE AGREEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank, N.A
 
Balance Differential Swap - Pay Float/ Receive Fixed(7)
 
LIBOR/5.1%
 
8/19
 
1

 
$
27.4

 
$

 
$
10.1

Subtotal Derivative Assets
 
 
 
 
 
 
 
 
 
$

 
$
10.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BMO Financial Group
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.3%/LIBOR
 
2/13-8/17
 
5

 
$
236.7

 
$

 
$
(42.9
)
Wells Fargo Bank, N.A
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.0%/LIBOR
 
1/14-8/19
 
3

 
210.4

 

 
(22.6
)
Citibank, N.A.
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.3%/LIBOR
 
5/16-11/19
 
3

 
114.8

 

 
(15.3
)
UniCredit Group
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.7%/LIBOR
 
7/17
 
1

 
66.0

 

 
(15.1
)
Citibank, N.A.
 
Balance Differential Swap - Pay Fixed/ Receive Floating(7)
 
5.2%/LIBOR
 
11/19
 
1

 
62.2

 

 
(4.3
)
BNP Paribas
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.7%/LIBOR
 
7/17
 
1

 
22.3

 

 
(4.6
)
Subtotal Derivative Liabilities
 
 
 
 
 
 
 
 
 
$

 
$
(104.8
)
Total Derivative Agreements, Net
 
 
 
 
 
 
 
 
 
$

 
$
(94.7
)

Funds
 
Cost
 
Fair
Value
MONEY MARKET FUNDS(3)(7)
 
 
Invesco Stit Treasury Portfolio
 
$
12.5

 
$
12.5

Fidelity Money Market Pt CI I
 
12.5

 
12.5

Federated Tax-Free Obligation Fund
 
12.0

 
12.0

Morgan Stanley Liq Treas Srv
 
10.8

 
10.8

Fidelity Governmental Fund 57
 
10.3

 
10.3

Total Money Market Funds
 
$
58.1

 
$
58.1


(1)
Certain of the securities are issued by affiliate(s) of the listed portfolio company.
(2)
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by the nature of indebtedness by a single issuer. The maturity and expiration dates represent the earliest and the latest dates in which the security matures or the instrument expires.
(3)
Included in cash and cash equivalents on our consolidated balance sheet.
(4)
Some or all of the securities are non-income producing.
(5)
Publicly traded company or a consolidated subsidiary of a public company.
(6)
Loan is on non-accrual status and therefore considered non-income producing.
(7)
All or a portion of the investments or instruments are pledged as collateral under various secured financing arrangements.
(8)
Non-U.S. company or principal place of business outside the U.S. and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(9)
Excepted from the definition of investment company under Section 3(c) of the Investment Company Act and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(10)
Portfolio company has filed for reorganization under Chapter 11 of the United States Code.


14


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2011
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
NON-CONTROL / NON-AFFILIATE INVESTMENTS
 
 
 
 
 
 
 
 
Affordable Care Holding Corp.
 
Health Care Providers & Services
 
Mezzanine Debt(7)
 
15.0
%
 
6/16
 
 
 
$
70.8

 
$
70.3

 
$
70.8

 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
70,752

 
 
 
68.1

 
111.7

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
17,687,156

 
 
 
15.8

 
26.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
154.2

 
209.2

Algoma Holding Company
 
Building Products
 
Mezzanine Debt(7)
 
14.1
%
 
9/13
 
 
 
16.1

 
16.0

 
16.3

American Acquisition, LLC(9)
 
Capital Markets
 
Senior Debt(7)
 
14.3
%
 
12/12
 
 
 
13.7

 
13.6

 
13.5

AmWins Group, Inc.
 
Insurance
 
Senior Debt(7)
 
6.1
%
 
6/14
 
 
 
18.5

 
18.5

 
16.3

Avalon Laboratories Holding Corp.
 
Health Care Equipment & Supplies
 
Senior Debt(7)
 
11.0
%
 
1/14
 
 
 
16.0

 
15.9

 
16.0

Mezzanine Debt(7)
 
18.6
%
 
1/15
 
 
 
30.3

 
30.1

 
30.3

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
148,742

 
 
 
29.6

 
32.7

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
7,829

 
 
 
1.3

 
1.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
76.9

 
80.7

Avanti Park Place LLC
 
Real Estate
 
Senior Debt(7)
 
6.8
%
 
6/13
 
 
 
4.8

 
4.8

 
4.6

BBB Industries, LLC
 
Auto Components
 
Senior Debt(7)
 
9.3
%
 
6/14
 
 
 
21.2

 
21.2

 
20.7

Blue Wolf Capital Fund II, L.P.(9)
 
Capital Markets
 
Limited Partnership Interest(4)
 
 
 
 
 
 
 
 
 
4.8

 
4.3

CAMP Systems International, Inc.
 
Air Freight & Logistics
 
Senior Debt(7)
 
6.3
%
 
9/14
 
 
 
30.0

 
29.8

 
27.7

CIBT Investment Holdings, LLC
 
Commercial Services & Supplies
 
Common Stock(4)(7)
 
 
 
 
 
13,381

 
 
 
8.9

 
9.9

Cinelease Holdings, LLC
 
Electronic Equipment, Instruments & Components
 
Senior Debt(7)
 
11.0
%
 
4/13
 
 
 
51.6

 
51.5

 
52.2

 
 
 
Common Stock(4)
 
 
 
 
 
583

 
 
 
0.6

 
1.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
52.1

 
53.4

Contec, LLC
 
Household Durables
 
Mezzanine Debt(6)(7)
 
12.5
%
 
9/15
 
 
 
16.9

 
16.8

 

Delsey Holding(8)
 
Textiles, Apparel & Luxury Goods
 
Senior Debt(7)
 
7.6
%
 
2/14
 
 
 
20.5

 
20.5

 
13.9

DelStar, Inc.
 
Building Products
 
Redeemable Preferred Stock(7)
 
 
 
 
 
26,613

 
 
 
25.3

 
42.2

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
29,569

 
 
 
3.0

 
3.8

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
89,020

 
 
 
16.9

 
1.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
45.2

 
47.2

Easton Bell Sports, LLC
 
Leisure Equipment & Products
 
Redeemable Preferred Stock
 
 
 
 
 
1,171

 
 
 
1.7

 
1.7

 
 
 
 
Common Units(4)
 
 
 
 
 
3,830,068

 
 
 
0.7

 
1.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.4

 
2.8

FAMS Acquisition, Inc.
 
Diversified Financial Services
 
Mezzanine Debt(7)
 
14.0
%
 
11/13
 
 
 
17.7

 
17.6

 
17.7

 
 
 
 
Mezzanine Debt(6)(7)
 
15.5
%
 
11/14
 
 
 
19.1

 
11.8

 
9.2

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
919

 
 
 
0.9

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
861,364

 
 
 
20.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
51.2

 
26.9

Flexera Software, LLC
 
Software
 
Senior Debt(7)
 
11.0
%
 
10/18
 
 
 
15.0

 
14.0

 
14.0

FPI Holding Corporation
 
Food Products
 
Senior Debt(7)
 
8.6
%
 
12/12-5/13
 
 
 
18.6

 
18.6

 
18.6

 
 
 
 
Senior Debt(6)(7)
 
15.8
%
 
6/14-6/15
 
 
 
18.9

 
13.3

 
8.3

 
 
 
 
Mezzanine Debt(6)(7)
 
20.0
%
 
6/15
 
 
 
17.3

 
8.9

 

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
4,469

 
 
 
39.1

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
21,715

 
 
 
23.3

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
5,429

 
 
 
5.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
109.0

 
26.9

Groupe Unipex(8)
 
Personal Products
 
Mezzanine Debt
 
10.9
%
 
5/17
 
 
 
6.8

 
6.0

 
5.8

 
 
 
 
Common Stock Warrants(4)
 
 
 
 
 
840,001

 
 
 
0.9

 
0.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
6.9

 
6.6

HMSC Corporation
 
Insurance
 
Senior Debt(6)(7)
 
5.8
%
 
10/14
 
 
 
3.5

 
2.9

 
1.0

IS Holdings I, Inc.
 
Software
 
Common Stock(7)
 
 
 
 
 
1,165,930

 
 
 

 
9.3

JHCI Acquisition, Inc.
 
Air Freight & Logistics
 
Senior Debt(7)
 
5.8
%
 
12/14
 
 
 
19.0

 
19.1

 
15.6

KIK Custom Products, Inc.(8)
 
Household Products
 
Senior Debt(6)(7)
 
5.3
%
 
12/14
 
 
 
22.5

 
21.6

 
14.8

LCW Holdings, LLC
 
Real Estate
 
Senior Debt(7)
 
11.0
%
 
10/12
 
 
 
6.1

 
6.1

 
6.2

 
 
 
 
Warrant(4)
 
 
 
 
 
12.5
%
 
 
 
0.8

 
3.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
6.9

 
9.6

Mirion Technologies, Inc.
 
Electrical Equipment
 
Senior Debt(7)
 
5.6
%
 
10/14
 
 
 
124.0

 
123.5

 
124.5

 
 
 
 
Mezzanine Debt(7)
 
14.1
%
 
4/15
 
 
 
57.3

 
56.9

 
57.3

 
 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
435,724

 
 
 
68.6

 
141.1

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
24,503

 
 
 
2.8

 
4.1

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
222,156

 
 
 
18.6

 
37.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
270.4

 
364.5

Mitchell International, Inc.
 
IT Services
 
Senior Debt(7)
 
5.9
%
 
3/15
 
 
 
5.0

 
5.0

 
4.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

15


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2011
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
NBD Holdings Corp.
 
Diversified Financial Services
 
Convertible Preferred Stock(4)
 
 
 
 
 
84,174

 
 
 
8.7

 
3.4

 
 
 
 
Common Stock(4)
 
 
 
 
 
633,408

 
 
 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
8.8

 
3.4

Net1 Las Colinas Manager, LLC
 
Real Estate
 
Senior Debt(7)
 
7.7
%
 
10/15
 
 
 
3.2

 
3.3

 
2.9

Orion Foundry, Inc.(5)(8)
 
Internet Software & Services
 
Senior Debt(7)
 
7.8
%
 
12/15
 
 
 
13.6

 
13.3

 
6.5

 
 
 
 
Senior Debt(6)(7)
 
8.5
%
 
12/15
 
 
 
5.5

 
4.5

 
2.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
17.8

 
9.2

Pan Am International Flight Academy, Inc.
 
Professional Services
 
Mezzanine Debt(7)
 
16.5
%
 
7/14
 
 
 
43.2

 
43.1

 
43.2

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
14,938

 
 
 
14.9

 
20.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
58.0

 
63.5

PaR Systems, Inc.
 
Machinery
 
Senior Debt(7)
 
3.4
%
 
7/13
 
 
 
2.6

 
2.5

 
2.2

Parts Holding Coörperatief U.A(8)
 
Distributors
 
Membership Entitlements(4)(7)
 
 
 
 
 
173,060

 
 
 
6.4

 
0.4

Phillips & Temro Industries, Inc.
 
Auto Components
 
Common Stock Warrants(4)(7)
 
 
 
 
 
5,000,000

 
 
 

 
8.2

Qioptiq S.à r.l.(8)
 
Electronic Equipment, Instruments & Components
 
Mezzanine Debt(7)
 
10.0
%
 
3/18
 
 
 
34.4

 
34.3

 
32.7

Qualium I(8)
 
Capital Markets
 
Common Stock(4)(7)
 
 
 
 
 
241,879

 
 
 
2.0

 
1.9

RDR Holdings, Inc.
 
Household Durables
 
Mezzanine Debt(7)
 
13.6
%
 
10/14
 
 
 
30.7

 
30.6

 
30.7

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
133

 
 
 
13.3

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
1,541

 
 
 
192.3

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
15,414

 
 
 
32.7

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
268.9

 
30.7

Renaissance Learning, Inc.
 
Software
 
Senior Debt(7)
 
12.0
%
 
10/18
 
 
 
10.0

 
9.6

 
9.6

Roark - Money Mailer, LLC
 
Media
 
Common Membership Units(4)
 
 
 
 
 
3.5
%
 
 
 
0.9

 
1.0

Scanner Holdings Corporation
 
Computers & Peripherals
 
Mezzanine Debt(7)
 
14.0
%
 
6/14
 
 
 
17.8

 
17.7

 
17.8

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
77,640,000

 
 
 
7.7

 
15.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
78,242

 
 
 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
25.5

 
33.6

Soil Safe Holdings, LLC
 
Professional Services
 
Senior Debt(7)
 
9.8
%
 
8/13-8/14
 
 
 
37.3

 
37.1

 
37.4

 
 
 
 
Mezzanine Debt(7)
 
15.5
%
 
8/15-8/16
 
 
 
41.6

 
41.3

 
40.6

 
 
 
 
Mezzanine Debt(6)(7)
 
17.5
%
 
8/17
 
 
 
33.8

 
18.5

 
23.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
96.9

 
101.7

SPL Acquisition Corp.
 
Pharmaceuticals
 
Senior Debt(7)
 
11.0
%
 
6/14
 
 
 
47.0

 
46.8

 
47.1

 
 
 
 
Mezzanine Debt(7)
 
15.3
%
 
6/15-6/16
 
 
 
55.1

 
54.8

 
55.2

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
84,043

 
 
 
40.7

 
27.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
142.3

 
129.5

Survey Sampling International, LLC
 
Media
 
Mezzanine Debt(7)
 
15.0
%
 
7/18
 
 
 
40.6

 
40.2

 
40.2

Swank Audio Visuals, LLC
 
Commercial Services & Supplies
 
Senior Debt(7)
 
9.5
%
 
8/15
 
 
 
58.0

 
57.8

 
45.6

The Tensar Corporation
 
Construction & Engineering
 
Senior Debt(7)
 
13.0
%
 
5/13
 
 
 
83.1

 
82.7

 
83.2

 
 
 
 
Mezzanine Debt(7)
 
20.0
%
 
11/15
 
 
 
35.5

 
35.5

 
36.0

 
 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
8,263,171

 
 
 
10.8

 
22.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
129.0

 
141.9

ThreeSixty Sourcing, Inc.(8)
 
Commercial Services & Supplies
 
Common Stock Warrants(4)(7)
 
 
 
 
 
35

 
 
 
4.1

 

TransFirst Holdings, Inc.
 
Commercial Services & Supplies
 
Senior Debt(7)
 
6.3
%
 
6/15
 
 
 
54.0

 
53.7

 
44.2

Tyden Cayman Holdings Corp.(8)
 
Electronic Equipment, Instruments & Components
 
Common Stock(4)
 
 
 
 
 
3,218,667

 
 
 
3.8

 
4.1

WRH, Inc.
 
Life Sciences Tools & Services
 
Senior Debt(7)
 
4.3
%
 
9/13
 
 
 
3.9

 
3.9

 
3.9

 
 
 
Mezzanine Debt(7)
 
14.6
%
 
7/14-9/15
 
 
 
99.0

 
98.6

 
94.9

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
2,008,575

 
 
 
229.3

 
81.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
502,144

 
 
 
49.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
381.6

 
180.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS INVESTMENTS
 
 
 
 
 
 
 
 
Banc of America Commercial Mortgage Trust 2007-1(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(7)
 
5.9
%
 
2/17-2/18
 
 
 
12.4

 
4.0

 
0.3

CD 2007-CD4 Commercial Mortgage Trust(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.9
%
 
4/17
 
 
 
14.0

 
8.7

 
0.1

CD 2007-CD5 Mortgage Trust(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.3
%
 
12/17
 
 
 
14.8

 
9.3

 
1.4

Citigroup Commercial Mortgage Securities Trust 2007-C6(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(7)
 
5.9
%
 
7/17
 
 
 
67.5

 
33.9

 
11.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

16


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2011
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
COBALT CMBS Commercial Mortgage Trust 2007-C3(9)
 
Real Estate
 
Commercia1 Mortgage Pass-Through Certificates(4)(7)
 
5.2
%
 
10/17
 
 
 
11.1

 
7.9

 
0.2

Credit Suisse Commercial Mortgage Trust Series 2007-C4(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
8/17
 
 
 
20.8

 
11.3

 
2.2

GE Commercial Mortgage Corporation, Series 2007-C1(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.9
%
 
12/19
 
 
 
4.4

 
4.0

 

GS Mortgage Securities Trust 2006-GG10(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
7/17
 
 
 
7.0

 
4.1

 

J.P. Morgan Chase Commercial Mortgage Securities Trust 2007-LDP11(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
7/17
 
 
 
52.3

 
9.2

 
1.0

LB-UBS Commercial Mortgage Trust 2007-C6(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.4
%
 
8/17
 
 
 
36.6

 
21.4

 
1.5

LB-UBS Commercial Mortgage Trust 2008-C1(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.3
%
 
7/23-7/24
 
 
 
19.4

 
7.4

 
0.3

ML-CFC Commercial Mortgage Trust 2007-6(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.0
%
 
4/17
 
 
 
9.8

 
3.1

 
0.1

ML-CFC Commercial Mortgage Trust 2007-8(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.2
%
 
8/17
 
 
 
32.8

 
18.7

 
1.1

Wachovia Bank Commercial Mortgage Trust 2007-C31(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
7.0
%
 
5/17
 
 
 
20.0

 
10.8

 
1.0

Wachovia Bank Commercial Mortgage Trust, Series 2007-C32(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
5.8
%
 
10/17
 
 
 
66.0

 
42.4

 
2.1

Wachovia Bank Commercial Mortgage Trust, Series 2007-C34(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(7)
 
5.7
%
 
10/17-9/24
 
 
 
96.2

 
39.6

 
5.3

Wachovia Bank Commercial Trust 2006-C28(9)
 
Real Estate
 
Commercial Mortgage Pass-Through Certificates(4)(7)
 
6.2
%
 
11/16
 
 
 
5.0

 
2.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CLO INVESTMENTS
 
 
 
 
 
 
 
 
ACAS CLO 2007-1, Ltd.(8)(9)
 
 
 
Secured Notes(7)
 
 
 
 
 
 
 
8.5

 
8.4

 
5.7

 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
25.9

 
16.1

 
16.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
24.5

 
22.5

Ares IIIR/IVR CLO Ltd.(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
20.0

 
17.1

 
13.5

Ares VIII CLO, Ltd.(8)(9)
 
 
 
Preference Shares(7)
 
 
 
 
 
6,241

 
 
 
4.8

 
2.7

Avalon Capital Ltd. 3(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
13,796

 
 
 
5.0

 
6.5

Babson CLO Ltd. 2006-II(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
15.0

 
10.2

 
14.4

BALLYROCK CLO 2006-2 LTD.(8)(9)
 
 
 
Deferrable Notes(7)
 
 
 
 
 
 
 
2.0

 
1.6

 
1.5

Cent CDO 12 Limited(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
26.4

 
15.5

 
23.5

Centurion CDO 8 Limited(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
5.0

 
2.1

 
2.7

Champlain CLO(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
1,000,000

 
 
 
1.0

 
0.7

CoLTs 2005-1 Ltd.(8)(9)
 
 
 
Preference Shares(4)(7)
 
 
 
 
 
360

 
 
 
2.0

 
0.4

CoLTs 2005-2 Ltd.(8)(9)
 
 
 
Preference Shares(7)
 
 
 
 
 
34,170,000

 
 
 
22.4

 
8.7

CREST Exeter Street Solar 2004-2(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
3,089,177

 
 
 
3.8

 
2.2

Eaton Vance CDO X PLC(8)(9)
 
 
 
Secured Subordinated Income Notes(7)
 
 
 
 
 
 
 
15.0

 
12.6

 
9.8

Essex Park CDO Ltd.(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
5,750,000

 
 
 
2.4

 
2.6

Flagship CLO V(8)(9)
 
 
 
Deferrable Notes(7)
 
 
 
 
 
 
 
1.7

 
1.4

 
1.2

 
 
 
 
Subordinated Securities(7)
 
 
 
 
 
15,000

 
 
 
8.6

 
9.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.0

 
10.8

Galaxy III CLO, Ltd(8)(9)
 
 
 
Subordinated Notes(4)(7)
 
 
 
 
 
 
 
4.0

 
1.6

 
0.8

LightPoint CLO IV, LTD(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
6.7

 
7.5

 
5.1

LightPoint CLO VII, Ltd.(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
9.0

 
5.1

 
6.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

17


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2011
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
LightPoint CLO VIII, Ltd.(8)(9)
 
 
 
Deferrable Notes(7)
 
 
 
 
 
 
 
7.0

 
6.5

 
5.3

Mayport CLO Ltd.(8)(9)
 
 
 
Income Notes(7)
 
 
 
 
 
 
 
14.0

 
10.2

 
9.2

NYLIM Flatiron CLO 2006-1 LTD.(8)(9)
 
 
 
Subordinated Securities(7)
 
 
 
 
 
10,000

 
 
 
5.3

 
6.9

Octagon Investment Partners VII, Ltd.(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
5,000,000

 
 
 
1.6

 
2.5

Sapphire Valley CDO I, Ltd.(8)(9)
 
 
 
Subordinated Notes(7)
 
 
 
 
 
 
 
14.0

 
16.0

 
13.1

Vitesse CLO, Ltd.(8)(9)
 
 
 
Preferred Securities(7)
 
 
 
 
 
20,000,000

 
 
 
13.7

 
12.8

Subtotal Non-Control / Non-Affiliate Investments (41% of total investments at fair value)
 
 
 
$
2,781.2

 
$
2,113.3

 
 
 
 
 
 
 
 
 
AFFILIATE INVESTMENTS
 
 
 
 
 
 
 
 
American Capital Mortgage Investment Corp,(5)(9)
 
Real Estate
 
Common Stock(7)
 
 
 
 
 
2,000,100

 
 
 
$
40.0

 
$
34.6

Anchor Drilling Fluids USA, Inc.
 
Energy Equipment & Services
 
Senior Debt(7)
 
11.3
%
 
12/13
 
 
 
$
7.0

 
6.9

 
6.7

 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
859

 
 
 
1.6

 
1.0

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
3,061

 
 
 
5.0

 

 
 
 
 
 
 
 
 
 
 
 

 
 
 
13.5

 
7.7

Comfort Co., Inc.
 
Household Durables
 
Senior Debt(7)
 
11.5
%
 
3/15
 
 
 
9.7

 
9.7

 
9.2

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
110,684

 
 
 
11.8

 
5.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
21.5

 
14.4

Egenera, Inc.
 
Computers & Peripherals
 
Mezzanine Debt(6)
 
15.0
%
 
2/11
 
 
 
4.9

 
3.2

 
4.7

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
8,569,905

 
 
 
25.4

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
28.6

 
4.7

HALT Medical, Inc.
 
Health Care Equipment & Supplies
 
Senior Debt(7)
 
%
 
4/12
 
 
 
4.1

 
3.9

 
3.2

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
5,592,367

 
 
 
8.9

 
10.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
131,315

 
 
 
0.1

 
0.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
12.9

 
14.1

IEE Holding 1 S.A.(8)
 
Auto Components
 
Common Stock(4)
 
 
 
 
 
250,000

 
 
 
4.5

 
6.9

Neways Holdings, L.P.(8)
 
Personal Products
 
Senior Debt(6)(7)
 
17.3
%
 
2/12
 
 
 
29.1

 
18.4

 
15.8

Primrose Holding Corporation
 
Diversified Consumer Services
 
Common Stock(7)
 
 
 
 
 
4,213

 
 
 
1.6

 
2.8

Qualitor Component Holdings, LLC
 
Auto Components
 
Redeemable Preferred Units(4)
 
 
 
 
 
3,150,000

 
 
 
3.1

 

 
 
 
Common Units(4)
 
 
 
 
 
350,000

 
 
 
0.4

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.5

 

Radar Detection Holdings Corp.
 
Household Durables
 
Convertible Preferred Stock(4)
 
 
 
 
 
7,075

 
 
 
0.7

 
1.9

 
 
 
Common Stock(4)
 
 
 
 
 
40,688

 
 
 
0.6

 
0.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.3

 
2.5

WFS Holding, LLC
 
Software
 
Preferred Interest
 
 
 
 
 
20,403,772

 
 
 
2.3

 
3.0

Subtotal Affiliate Investments (2% of total investments at fair value)
 
 
 
$
148.1

 
$
106.5

 
 
 
 
 
 
 
 
 
CONTROL INVESTMENTS
 
 
 
 
 
 
 
 
ACAS Equity Holdings Corp.
 
Diversified Financial Services
 
Common Stock(4)(7)
 
 
 
 
 
589

 
 
 
$
14.5

 
$
2.7

ACAS Real Estate Holdings Corporation
 
Real Estate
 
Mezzanine Debt(6)(7)
 
15.0
%
 
5/16
 
 
 
$
5.5

 
3.7

 
0.6

 
 
 
Common Stock(7)
 
 
 
 
 
100
%
 
 
 
11.3

 
15.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.0

 
15.7

American Capital, LLC
 
Capital Markets
 
Senior Debt(7)
 
3.3
%
 
9/16
 
 
 
6.0

 
6.0

 
6.0

 
 
 
 
Common Membership Interest(7)
 
 
 
 
 
100
%
 
 
 
39.6

 
390.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
45.6

 
396.1

American Driveline Systems, Inc.
 
Diversified Consumer Services
 
Mezzanine Debt(7)
 
14.0
%
 
12/14-12/15
 
 
 
43.6

 
43.3

 
43.6

 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
403,357

 
 
 
40.4

 
56.1

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
128,681

 
 
 
10.8

 
0.8

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
204,663

 
 
 
17.3

 
1.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
111.8

 
101.7

Aptara, Inc.
 
IT Services
 
Senior Debt(7)
 
11.5
%
 
8/12
 
 
 
2.6

 
2.6

 
2.6

 
 
 
 
Mezzanine Debt(7)
 
17.1
%
 
8/12
 
 
 
64.0

 
63.9

 
67.1

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
15,107

 
 
 
30.8

 
34.2

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
2,549,410

 
 
 
8.8

 

 
 
 
 
Preferred Stock Warrants(4)(7)
 
 
 
 
 
230,681

 
 
 
1.0

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
107.1

 
103.9

Auto Network Member Corp.
 
Electronic Equipment, Instruments & Components
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
1,514

 
 
 
0.1

 
1.5

 
 
Common Stock(4)(7)
 
 
 
 
 
65

 
 
 
0.7

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
0.8

 
1.5

Capital.com, Inc.
 
Diversified Financial Services
 
Common Stock(4)(7)
 
 
 
 
 
8,500,100

 
 
 
0.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

18


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2011
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
CH Holding Corp.
 
Leisure Equipment & Products
 
Senior Debt(7)
 
7.3
%
 
5/13
 
 
 
18.4

 
18.4

 
18.4

 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
21,215

 
 
 
42.8

 
7.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
61.2

 
25.9

CIBT Travel Solutions, LLC
 
Commercial Services & Supplies
 
Redeemable Preferred Stock(7)
 
 
 
 
 
10,303

 
 
 
1.3

 
1.0

 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
858,410

 
 
 

 
11.7

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
188,889

 
 
 

 
2.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.3

 
14.7

CMX Inc.
 
Construction & Engineering
 
Senior Debt(6)(7)
 
3.5
%
 
2/12
 
 
 
4.6

 
4.6

 
0.3

Contour Semiconductor, Inc.
 
Semiconductors & Semiconductor Equipment
 
Convertible Senior Debt(7)
 
3.0
%
 
4/12-10/12
 
 
 
1.0

 
1.0

 
1.0

 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
11,532,842

 
 
 
12.4

 
1.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.4

 
2.4

Core Financial Holdings, LLC(9)
 
Diversified Financial Services
 
Common Units(4)(7)
 
 
 
 
 
57,940,360

 
 
 
47.5

 
4.1

Dyno Holding Corp.
 
Auto Components
 
Senior Debt(7)
 
11.6
%
 
11/15
 
 
 
40.5

 
40.3

 
40.5

 
 
 
Mezzanine Debt(6)(7)
 
3.9
%
 
11/16
 
 
 
30.6

 
25.6

 
15.0

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
389,759

 
 
 
40.5

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
97,440

 
 
 
10.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
116.5

 
55.5

ECA Acquisition Holdings, Inc.
 
Health Care Equipment & Supplies
 
Mezzanine Debt(7)
 
16.5
%
 
12/14
 
 
 
14.5

 
14.4

 
14.5

 
 
Common Stock(4)(7)
 
 
 
 
 
583

 
 
 
11.1

 
11.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
25.5

 
25.6

eLynx Holdings, Inc.
 
IT Services
 
Senior Debt(7)
 
7.8
%
 
7/13
 
 
 
7.5

 
7.5

 
7.5

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
21,113

 
 
 
8.9

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
11,728

 
 
 
20.7

 
6.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
11,261

 
 
 
1.1

 

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
1,078,792

 
 
 
13.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
51.3

 
14.3

European Capital Limited(8)
 
Diversified Financial Services
 
Subordinated Debt(7)
 
7.8
%
 
12/13
 
 
 
73.4

 
73.3

 
73.4

Ordinary Shares(4)(7)
 
 
 
 
 
431,895,528

 
 
 
1,267.3

 
547.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,340.6

 
620.7

European Touch, Ltd. II
 
Leisure Equipment & Products
 
Senior Debt(6)(7)
 
9.0
%
 
1/12-2/12
 
 
 
0.4

 
0.4

 
0.1

EXPL Pipeline Holdings LLC(9)
 
Oil, Gas & Consumable Fuels
 
Senior Debt(7)
 
8.0
%
 
1/17
 
 
 
45.2

 
44.9

 
45.2

 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
58,297

 
 
 
44.5

 
11.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
89.4

 
56.8

FL Acquisitions Holdings, Inc.
 
Computers & Peripherals
 
Senior Debt(7)
 
8.3
%
 
10/12-10/13
 
 
 
40.1

 
40.0

 
40.1

 
 
Mezzanine Debt(7)
 
18.7
%
 
4/14-10/14
 
 
 
38.1

 
38.0

 
38.1

 
 
 
 
Mezzanine Debt(6)(7)
 
22.5
%
 
10/14
 
 
 
21.6

 
8.2

 
2.5

 
 
 
 
Redeemable Preferred Stock(4)
 
 
 
 
 
583,000

 
 
 
0.6

 

 
 
 
 
Common Stock(4)
 
 
 
 
 
129,514

 
 
 
15.6

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
102.4

 
80.7

Formed Fiber Technologies, Inc.
 
Auto Components
 
Common Stock(4)(7)
 
 
 
 
 
31,250

 
 
 
8.1

 

Fosbel Global Services (LUXCO) S.C.A.(8)
 
Commercial Services & Supplies
 
Mezzanine Debt(6)(7)
 
18.7
%
 
12/13-12/14
 
 
 
64.7

 
37.9

 
14.7

 
 
 
Redeemable Preferred Stock(4)
 
 
 
 
 
18,449,456

 
 
 
18.5

 

 
 
 
 
Convertible Preferred Stock(4)
 
 
 
 
 
1,519,368

 
 
 
3.0

 

 
 
 
 
Common Stock(4)
 
 
 
 
 
108,526

 
 
 
0.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
59.6

 
14.7

FreeConference.com, Inc.
 
Diversified Telecommunication Services
 
Senior Debt(6)(7)
 
8.5
%
 
5/13
 
 
 
9.1

 
8.2

 
6.6

 
 
 
Mezzanine Debt(6)(7)
 
15.0
%
 
5/14
 
 
 
11.7

 
8.8

 

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
14,042,095

 
 
 
12.8

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
6,088,229

 
 
 
2.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
32.1

 
6.6

Future Food, Inc.
 
Food Products
 
Senior Debt(7)
 
5.3
%
 
3/12
 
 
 
1.6

 
1.6

 
1.6

 
 
 
 
Senior Debt(6)(7)
 
5.3
%
 
3/12
 
 
 
15.4

 
14.3

 
2.8

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
64,917

 
 
 
13.0

 

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
6,500

 
 
 
1.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
30.2

 
4.4

Group Montana, Inc.
 
Textiles, Apparel & Luxury Goods
 
Senior Debt(7)
 
10.1
%
 
1/12
 
 
 
20.1

 
20.1

 
20.1

 
 
 
 
Senior Debt(6)(7)
 
12.0
%
 
1/12
 
 
 
6.4

 
5.0

 
1.5

 
 
 
 
Mezzanine Debt(6)(7)
 
24.5
%
 
10/12
 
 
 
21.9

 
6.6

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
4,000

 
 
 
1.0

 

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
2.5
%
 
 
 
0.7

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
33.4

 
21.6

Halex Holdings, Inc.
 
Construction Materials
 
Senior Debt(6)(7)
 
12.0
%
 
12/14
 
 
 
12.6

 
9.8

 
4.4

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
26,070,518

 
 
 
33.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
42.9

 
4.4

Hard 8 Games, LLC
 
Hotels, Restaurants & Leisure
 
Membership Unit(4)(7)
 
 
 
 
 
1

 
 
 
1.5

 
1.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

19


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2011
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
Kingway Inca Clymer Holdings, Inc.
 
Building Products
 
Mezzanine Debt(6)(7)
 
12.3
%
 
4/12
 
 
 
3.3

 

 
1.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lifoam Holdings, Inc.
 
Leisure Equipment & Products
 
Senior Debt(7)
 
10.5
%
 
12/14
 
 
 
18.7

 
18.7

 
18.7

 
 
 
 
Mezzanine Debt(7)
 
8.0
%
 
12/14
 
 
 
46.8

 
46.7

 
46.8

 
 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
6,160

 
 
 
3.4

 

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
15,797

 
 
 
12.2

 
17.1

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
14,000

 
 
 
1.4

 

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
464,242

 
 
 
2.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
85.3

 
82.6

LLSC Holdings Corporation
 
Personal Products
 
Senior Debt(7)
 
7.5
%
 
8/15
 
 
 
1.7

 
1.7

 
1.7

 
 
 
Mezzanine Debt(7)
 
12.0
%
 
8/16
 
 
 
5.5

 
5.5

 
5.5

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
7,496

 
 
 
8.1

 
8.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.3

 
16.1

LVI Holdings, LLC
 
Professional Services
 
Senior Debt(7)
 
7.3
%
 
6/12
 
 
 
2.7

 
2.7

 
3.2

 
 
 
 
Mezzanine Debt(6)(7)
 
18.0
%
 
2/13
 
 
 
13.7

 
8.9

 
4.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
11.6

 
7.4

Medical Billings Holdings, Inc.
 
IT Services
 
Senior Debt(7)
 
6.3
%
 
9/12
 
 
 
1.0

 
1.0

 
1.0

 
 
 
Mezzanine Debt(7)
 
17.0
%
 
9/13
 
 
 
12.1

 
12.0

 
12.1

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
13,199,000

 
 
 
13.2

 
5.4

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
3,299,582

 
 
 
3.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
29.5

 
18.5

Montgomery Lane, LLC(9)
 
Diversified Financial Services
 
Common Membership Units(4)(7)
 
 
 
 
 
100

 
 
 
6.4

 
4.7

Montgomery Lane, LTD(8)(9)
 
Diversified Financial Services
 
Common Membership Units(4)
 
 
 
 
 
50,000

 
 
 
6.2

 

MW Acquisition Corporation
 
Health Care Providers & Services
 
Mezzanine Debt(7)
 
16.4
%
 
2/13-2/14
 
 
 
30.7

 
30.6

 
30.7

 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
2,485

 
 
 
1.4

 
1.4

 
 
 
 
Convertible Preferred Stock(4)(7)
 
 
 
 
 
38,326

 
 
 
13.6

 
8.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
45.6

 
41.0

NECCO Holdings, Inc.
 
Food Products
 
Senior Debt(6)(7)
 
6.5
%
 
8/13
 
 
 
17.4

 
17.0

 
15.9

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
860,189

 
 
 
0.1

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
17.1

 
15.9

NECCO Realty Investments, LLC
 
Real Estate
 
Senior Debt(6)(7)
 
14.0
%
 
12/17
 
 
 
47.7

 
32.8

 
31.0

 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
7,450

 
 
 
4.9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
37.7

 
31.0

Orchard Brands Corporation
 
Internet & Catalog Retail
 
Senior Debt(7)
 
14.0
%
 
4/16
 
 
 
14.8

 
14.7

 
13.6

 
 
 
Senior Debt(6)(7)
 
6.5
%
 
4/16
 
 
 
68.9

 
65.9

 
22.1

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
73,953

 
 
 
58.2

 

 
 
 
 
 
 
 

 
 
 
 
 
 

 
138.8

 
35.7

Paradigm Precision Holdings, LLC
 
Aerospace & Defense
 
Mezzanine Debt(7)
 
18.3
%
 
8/16
 
 
 
131.5

 
131.0

 
131.5

 
 
 
Mezzanine Debt(6)(7)
 
23.0
%
 
10/16
 
 
 
37.1

 
19.8

 
4.1

 
 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
478,488

 
 
 
17.5

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
168.3

 
135.6

PHC Sharp Holdings, Inc.
 
Commercial Services & Supplies
 
Senior Debt(7)
 
10.6
%
 
12/12
 
 
 
6.8

 
6.8

 
6.8

 
 
 
 
Mezzanine Debt(6)(7)
 
18.2
%
 
12/14
 
 
 
24.1

 
15.4

 
9.4

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
367,881

 
 
 
4.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
26.4

 
16.2

PHI Acquisitions, Inc.
 
Internet & Catalog Retail
 
Mezzanine Debt(7)
 
15.3
%
 
3/16
 
 
 
28.8

 
28.6

 
28.8

 
 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
36,267

 
 
 
35.7

 
47.3

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
40,295

 
 
 
3.9

 
4.6

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
116,065

 
 
 
11.6

 
13.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
79.8

 
94.0

Plumbing Holding Corporation
 
Building Products
 
Common Stock(4)(7)
 
 
 
 
 
342,500

 
 
 
11.1

 

Small Smiles Holding Company, LLC
 
Health Care Providers & Services
 
Senior Debt(6)(7)
 
6.5
%
 
2/15
 
 
 
8.5

 
6.2

 
2.7

 
 
 
Preferred Interest(4)(7)
 
 
 
 
 
 
 
 
 
37.8

 

 
 
 
 
Common Interest(4)(7)
 
 
 
 
 
22.1
%
 
 
 
13.8

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
57.8

 
2.7

SMG Holdings, Inc.
 
Hotels, Restaurants & Leisure
 
Senior Debt(7)
 
3.4
%
 
7/14
 
 
 
5.6

 
5.6

 
5.6

 
 
 
 
Mezzanine Debt(7)
 
12.6
%
 
6/15
 
 
 
137.0

 
136.4

 
137.0

 
 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
1,101,673

 
 
 
148.4

 
156.1

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
275,419

 
 
 
27.5

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
317.9

 
298.7

Specialty Brands of America, Inc.
 
Food Products
 
Mezzanine Debt(7)
 
14.0
%
 
5/14
 
 
 
36.3

 
36.1

 
36.3

 
 
 
Redeemable Preferred Stock(7)
 
 
 
 
 
122,017

 
 
 
11.9

 
17.5

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
128,175

 
 
 
2.3

 
25.7

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
56,819

 
 
 
1.4

 
11.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
51.7

 
90.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

20


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2011
(in millions, except share data)
Company (1)
 
Industry
 
Investments
 
Interest
Rate (2)
 
  Maturity
   Date(2)
 
# of
shares/
units
owned
 
Principal
 
Cost
 
Fair
Value
Spring Air International, LLC
 
Household Durables
 
Common Membership Units(4)
 
 
 
 
 
49
%
 
 
 
2.2

 

TestAmerica Environmental Services, LLC
 
Commercial Services & Supplies
 
Senior Debt(7)
 
6.5
%
 
12/12
 
 
 
22.4

 
20.4

 
21.7

 
 
 
Preferred Membership Units(7)
 
 
 
 
 
20,000

 
 
 
24.3

 
14.6

 
 
 
Common Units(4)(7)
 
 
 
 
 
490,000

 
 
 
2.0

 
24.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
46.7

 
60.5

UFG Real Estate Holdings, LLC
 
Real Estate
 
Common Membership(4)(7)
 
 
 
 
 
 
 
 
 

 
0.9

Unique Fabricating Incorporated
 
Auto Components
 
Senior Debt(7)
 
14.0
%
 
2/15
 
 
 
5.7

 
5.6

 
5.7

 
 
 
Redeemable Preferred Stock(4)(7)
 
 
 
 
 
301,556

 
 
 
7.9

 
9.0

 
 
 
 
Common Stock Warrants(4)(7)
 
 
 
 
 
6,862

 
 
 
0.2

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.7

 
14.7

Unwired Holdings, Inc.
 
Household Durables
 
Senior Debt(7)
 
8.5
%
 
6/12
 
 
 
13.5

 
13.5

 
13.5

 
 
 
 
Mezzanine Debt(7)
 
14.5
%
 
6/12
 
 
 
23.5

 
13.1

 
24.6

 
 
 
 
Redeemable Preferred Stock(4)
 
 
 
 
 
14,630

 
 
 
14.6

 

 
 
 
 
Common Stock(4)
 
 
 
 
 
126,001

 
 
 
1.3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
42.5

 
38.1

Warner Power, LLC
 
Electrical Equipment
 
Mezzanine Debt(7)
 
14.6
%
 
12/12
 
 
 
6.0

 
6.0

 
6.0

 
 
 
 
Redeemable Preferred Membership Units(7)
 
 
 
 
 
3,796,269

 
 
 
7.4

 
8.0

 
 
 
 
Common Membership Units(4)(7)
 
 
 
 
 
27,400

 
 
 
1.9

 
9.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
15.3

 
23.0

WIS Holding Company, Inc.
 
Commercial Services & Supplies
 
Mezzanine Debt(7)
 
14.5
%
 
1/14
 
 
 
88.5

 
88.1

 
88.5

 
 
 
Convertible Preferred Stock(7)
 
 
 
 
 
703,406

 
 
 
104.9

 
175.2

 
 
 
 
Common Stock(4)(7)
 
 
 
 
 
175,853

 
 
 
17.6

 
35.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
210.6

 
298.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CDO / CLO INVESTMENTS
 
 
 
 
 
 
 
 
ACAS Wachovia Investments, L.P.(9)
 
Diversified Financial Services
 
Partnership Interest
 
 
 
 
 
90
%
 
 
 
14.4

 
6.0

Subtotal Control Investments (57% of total investments at fair value)
 
 
 
 
 
$
3,809.5

 
$
2,910.4

Total Investment Assets
 
 
 
 
 
$
6,738.8

 
$
5,130.2

Counterparty
 
Instrument
 
Interest
Rate (2)
 
Expiration
Date (2)
 
# of
Contracts
 
Notional
 
Cost
 
Fair
Value
DERIVATIVE AGREEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
Wells Fargo Bank, N.A
 
Balance Differential Swap - Pay Float/ Receive Fixed(7)
 
LIBOR/5.1%
 
8/19
 
1

 
$
20.6

 
$

 
$
9.7

Subtotal Derivative Assets
 
 
 
 
 
 
 
 
 
$

 
$
9.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BMO Financial Group
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.3%/LIBOR
 
2/13-8/17
 
5

 
$
251.5

 
$

 
$
(36.0
)
Wells Fargo Bank, N.A
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
4.9%/LIBOR
 
1/14-8/19
 
3

 
216.7

 

 
(23.3
)
Citibank, N.A.
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.3%/LIBOR
 
5/16-11/19
 
3

 
116.5

 

 
(15.7
)
UniCredit Group
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.7%/LIBOR
 
7/17
 
1

 
66.0

 

 
(14.1
)
Citibank, N.A.
 
Balance Differential Swap - Pay Fixed/ Receive Floating(7)
 
5.2%/LIBOR
 
11/19
 
1

 
62.9

 

 
(4.7
)
BNP Paribas
 
Interest Rate Swap - Pay Fixed/ Receive Floating(7)
 
5.7%/LIBOR
 
7/17
 
1

 
22.3

 

 
(4.8
)
Subtotal Derivative Liabilities
 
 
 
 
 
 
 
 
 
$

 
$
(98.6
)
Total Derivative Agreements, Net
 
 
 
 
 
 
 
 
 
$

 
$
(88.9
)









21


AMERICAN CAPITAL, LTD.
CONSOLIDATED SCHEDULE OF INVESTMENTS—(Continued)
December 31, 2011
(in millions, except share data)
Funds
 
Cost
 
Fair
Value
MONEY MARKET FUNDS(3)(7)
 
 
Federated Tax-Free Obligation Fund
 
$
7.0

 
$
7.0

Morgan Stanley Liq Treas Srv
 
5.8

 
5.8

Federated Governmental Fund 57
 
5.3

 
5.3

Fidelity Money Market Pt CI I
 
5.0

 
5.0

Invesco Stit Treasury Portfolio
 
5.0

 
5.0

Total Money Market Funds
 
$
28.1

 
$
28.1


(1)
Certain of the securities are issued by affiliate(s) of the listed portfolio company.
(2)
Interest rates represent the weighted average annual stated interest rate on loans and debt securities, which are presented by the nature of indebtedness by a single issuer. The maturity and expiration dates represent the earliest and the latest dates in which the security matures or the instrument expires.
(3)
Included in cash and cash equivalents on our consolidated balance sheet.
(4)
Some or all of the securities are non-income producing.
(5)
Publicly traded company or a consolidated subsidiary of a public company.
(6)
Loan is on non-accrual status and therefore considered non-income producing.
(7)
All or a portion of the investments or instruments are pledged as collateral under various secured financing arrangements.
(8)
Non-U.S. company or principal place of business outside the U.S. and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.
(9)
Excepted from the definition of investment company under Section 3(c) of the Investment Company Act and as a result is not a qualifying asset under Section 55(a) of the Investment Company Act. Under the Investment Company Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets.



22


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in millions, except per share data)
 
Note 1.
Unaudited Interim Consolidated Financial Statements

Interim consolidated financial statements of American Capital, Ltd. (which is referred throughout this report as “American Capital”, the “Company”, “we”, “us” and “our”) are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with US GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (“SEC”).

Reclassifications

We have reclassified certain prior period amounts in our interim consolidated financial statements to conform to our current period presentation.

Note 2. Organization

We are a non-diversified closed end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). As a BDC, we primarily invest in senior and mezzanine debt and equity in the buyouts of private companies sponsored by us, the buyouts of private companies sponsored by other private equity firms and provide capital directly to early stage and mature private and small public companies. We refer to our investments in these companies as our private finance portfolio. Our primary business objectives are to increase our net earnings and net asset value (“NAV”) by making investments with attractive current yields and/or potential for equity appreciation and realized gains.

We are also an alternative asset manager with $101 billion of assets under management as of March 31, 2012, including $95 billion of third-party assets. Our alternative asset fund management is conducted through our wholly-owned portfolio company, American Capital, LLC. American Capital, LLC manages the following alternative asset funds: European Capital Limited (“European Capital”), American Capital Agency Corp. (“AGNC”), American Capital Mortgage Investment Corp. (“MTGE”), American Capital Equity I, LLC (“ACE I”), American Capital Equity II, LP (“ACE II”) and ACAS CLO 2007-1, Ltd. (“ACAS CLO-1”).

Through our tax year ended September 30, 2010, we qualified to be taxed as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). For our tax year ended September 30, 2011, we became subject to taxation as a corporation under Subchapter C of the Code. This change in tax status does not affect our status as a BDC under the 1940 Act or our compliance with the portfolio composition requirements of that statute.

Note 3.
Investments

Our investments consist of loans and securities issued by public and privately-held companies, including senior debt, mezzanine debt, equity warrants and preferred and common equity securities. We also have investments in both investment grade and non-investment grade structured financial product investments (“Structured Products”), which includes commercial mortgage backed securities (“CMBS”), collateralized loan obligation (“CLO”) securities and collateralized debt obligation (“CDO”) securities.

We fair value our investments in accordance with the 1940 Act and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) as determined in good faith by our Board of Directors. When available, we base the fair value of our investments on directly observable market prices or on market data derived for comparable assets. For restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date less a discount for the restriction. For all other investments, inputs used to measure fair value reflect management's best estimate of assumptions that would be used by market participants in pricing the investment in a hypothetical transaction. For these investments, we estimate the fair value of our senior debt, mezzanine debt, redeemable and convertible preferred equity, common equity and equity warrants using either an enterprise value waterfall methodology or a market yield valuation methodology that generally combines market, income and cost approaches and our Structured Products using a market yield valuation methodology that combines market and income approaches.


23


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings. Due to the uncertainty inherent in the valuation process, estimates of fair value may differ significantly from the values that would have been used had a ready market for our investments existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.
 
ASC 820 defines fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
 
The market in which we would sell our private finance investments is the mergers and acquisition (“M&A”) market. Under ASC 820, we have indentified the M&A market as our principal market for portfolio companies only if we have the ability to initiate a sale of the portfolio company as of the measurement date. We determine whether we have the ability to initiate a sale of a portfolio company based on our ability to control or gain control of the board of directors of the portfolio company as of the measurement date. In evaluating if we can control or gain control of a portfolio company as of the measurement date, we include our equity securities and those securities held by entities managed by our wholly-owned portfolio company, American Capital, LLC, on a fully diluted basis. For investments in portfolio companies for which we do not have the ability to control or gain control as of the measurement date and for which there is no active market, our principal market under ASC 820 is a hypothetical secondary market.
 
Accordingly, we use the M&A market as our principal market for portfolio companies that we control or can gain control as of the measurement date, and we use a hypothetical secondary market for portfolio companies that we do not control or cannot gain control as of the measurement date. However, to the extent that an active market exists, we will consider that as our principal market. Our valuation policy considers the fact that no ready market exists for substantially all of our investments and that fair value for our investments must typically be determined using unobservable inputs.
 
Enterprise Value Waterfall Methodology
 
For investments in portfolio companies that we have identified the M&A market as the principal market, we estimate the fair value based on the enterprise value waterfall (“Enterprise Value Waterfall”) valuation methodology. For minority equity securities in which the principal market is the hypothetical secondary market, we also estimate the fair value using the Enterprise Value Waterfall valuation methodology.
 
Under the Enterprise Value Waterfall valuation methodology, we estimate the enterprise value of a portfolio company and then waterfall the enterprise value over the portfolio company's securities in order of their preference relative to one another. The Enterprise Value Waterfall methodology assumes the loans and equity securities are sold to the same market participant in the M&A market which is consistent with how market participants would transact for these items in order to maximize their value. In applying the Enterprise Value Waterfall valuation methodology, we consider that in a change of control transaction, our loans are generally required to be repaid at par and that a buyer cannot assume the loan.

To estimate the enterprise value of the portfolio company, we prepare an analysis of traditional valuation methodologies including valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, estimating the liquidation or collateral value the portfolio company's assets, third-party valuations of the portfolio company, offers from third-parties to buy the portfolio company and considering the value of recent investments in the equity securities of the portfolio company. Significant inputs in these valuation methodologies to estimate enterprise value include the historical or projected operating results of the portfolio company, selection of comparable companies, discounts or premiums to the prices of comparable companies and discount rates applied to the forecasted cash flows. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require adjustments for non-recurring items or to normalize the operating results that may require significant judgment in its determination. In addition, projecting future financial results requires significant judgment regarding future growth assumptions. In evaluating the operating

24


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

results, we also analyze the impact of exposure to litigation, loss of customers or other contingencies. The selection of a population of comparable companies requires significant judgment including a qualitative and quantitative analysis of the comparability of the companies. In determining a discount or premium, if any, to prices of comparable companies, we use significant judgment for factors such as size, marketability, relative performance, and for portfolio companies in which we control, a control premium to the market price of comparable public companies. In determining a discount rate to apply to forecasted cash flows, we use significant judgment in the development of an appropriate discount rate including the evaluation of an appropriate risk premium. Further, a change in the future growth assumptions in projected future financial results could have a directionally opposite change in the assumptions used for determining an appropriate discount rate.
 
In valuing convertible debt, equity or other similar securities, we value our investment based on its priority in the waterfall and based on our pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value. We value non-convertible debt at the face amount of the debt to the extent that the estimated enterprise value of the portfolio company exceeds the outstanding debt of the portfolio company. If the estimated enterprise value is less than the outstanding debt of the portfolio company, we reduce the fair value of our debt investment beginning with the junior most debt such that the enterprise value less the fair value of the outstanding debt is zero.

Market Yield Valuation Methodology
 
For debt and redeemable preferred equity investments in portfolio companies for which we are required to identify a hypothetical secondary market as the principal market, we determine the fair value based on the assumptions that hypothetical market participants would use to value the investment in a current hypothetical sale using a market yield (“Market Yield”) valuation methodology based on an exchange valuation premise under ASC 820.
 
For debt and redeemable preferred equity investments of our private finance portfolio for which we do not control or cannot gain control as of the measurement date, we estimate the fair value based on such factors as third-party broker quotes and our own assumptions in the absence of market observable data, including estimated remaining life, current market yield and interest rate spreads of similar loans and securities as of the measurement date. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. We estimate the remaining life based on market data of the average life of similar loans. However, if we have information available to us that the loan is expected to be repaid in the near term, we would use an estimated remaining life based on the expected repayment date. The average life used to estimate the fair value of our loans may be shorter than the legal maturity of the loans since our loans have historically been prepaid prior to the maturity date. The current interest rate spreads used to estimate the fair value of our loans is based on our experience of current interest rate spreads on similar loans. We use significant judgment in determining the estimated remaining life as well as the current market yield and interest rate spreads. If there is a significant deterioration of the credit quality of a loan, we may consider other factors that a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.
 
We also value our investments in Structured Products using the Market Yield valuation methodology. We estimate fair value based on such factors as third-party broker quotes, sales of the same or similar securities, and our cash flow forecasts subject to assumptions a market participant would use regarding the investments' underlying collateral including, but not limited to, assumptions of default and recovery rates, reinvestment spreads and prepayment rates. Cash flow forecasts are discounted using a market participant's market yield assumptions that are derived from multiple sources including, but not limited to, third-party broker quotes, industry research reports and transactions of securities and indices with similar structure and risk characteristics. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer, depth and consistency at broker quotes and the correlation of changes in broker quotes with underlying performance and other market indices.
 
Investments in Alternative Asset Investment Funds
 
For an investment in an investment fund which does not have a readily determinable fair value, we measure the fair value of our investment predominately based on the NAV per share of the investment fund if the NAV of the investment fund is calculated in a manner consistent with the measurement principles of FASB ASC Topic 946, Financial Services-Investment Companies, as of our measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with ASC 820. However, in determining the fair value of our investment, we may make adjustments to the NAV per share in certain circumstances, based on our analysis of any restrictions on redemption of our shares of our investment as of the measurement date, comparisons of market price to NAV per share of comparable publicly traded funds and trades or sales of

25


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

comparable private and publicly traded funds, recent actual sales or redemptions of shares of the investment fund, expected future cash flows available to equity holders or other uncertainties surrounding our ability to realize the full NAV of the investment fund.
 
As of March 31, 2012, we had an investment in European Capital, a wholly-owned investment fund which invests in buyouts of private companies sponsored by European Capital, invests in the buyouts of private equity buyouts sponsored by other private equity firms and provides capital directly to private and mid-sized public companies primarily in Europe. It primarily invests in senior and mezzanine debt and equity. In determining the fair value of our investment in European Capital, we concluded that our investment should be less than the NAV of European Capital due to comparable public traded funds that were trading at a discount to NAV on the measurement date and the risks associated with our ability to realize the full fair value of European Capital's underlying assets for several reasons, including a public to private liquidity discount and the ability to demonstrate an implied market return on equity required by market participants for a measurable period of time, which indicate fair values at a discount to the NAV. The use of a discount to NAV of European Capital requires significant judgment and a change in the assumptions used to develop the discount could have a material impact on the determination of fair value. Further, the determination of European Capital's NAV requires significant judgment including the determination of the fair value of European Capital's investment portfolio.

The levels of fair value inputs used to measure our investments are characterized in accordance with the fair value hierarchy established by ASC 820. Where inputs for an asset or liability fall in more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s fair value measurement. We use judgment and consider factors specific to the investment in determining the significance of an input to a fair value measurement. Our policy is to recognize transfers in and out of levels as of the beginning of each reporting period. The three levels of the fair value hierarchy and investments that fall into each of the levels are described below:

Level 1: Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. We use Level 1 inputs for investments in publicly traded unrestricted securities. Such investments are valued at the closing price on the measurement date.

Level 2: Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. We use Level 2 inputs for investments in restricted securities of publicly traded companies. Such investments are valued at the closing price on the measurement date adjusted for the fair value of the restriction.

Level 3: Level 3 inputs are unobservable and cannot be corroborated by observable market data.
 

26


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

The following fair value hierarchy tables set forth our assets and liabilities that are measured at fair value on a recurring basis by level as of March 31, 2012 and December 31, 2011:
 
March 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Senior Debt
$

 
$

 
$
847

 
$
847

Mezzanine Debt

 

 
1,343

 
1,343

Preferred Equity

 

 
1,116

 
1,116

Common Equity

 
42

 
1,715

 
1,757

Equity Warrants

 

 
85

 
85

Structured Products

 

 
231

 
231

Derivative Agreements, Net

 

 
(95
)
 
(95
)
Total
$

 
$
42

 
$
5,242

 
$
5,284

 
 
 
 
 
 
 
 
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Senior Debt
$

 
$

 
$
1,054

 
$
1,054

Mezzanine Debt

 

 
1,464

 
1,464

Preferred Equity

 

 
1,110

 
1,110

Common Equity

 
35

 
1,172

 
1,207

Equity Warrants

 

 
77

 
77

Structured Products

 

 
218

 
218

Derivative Agreements, Net

 

 
(89
)
 
(89
)
Total
$

 
$
35

 
$
5,006

 
$
5,041



27


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

The following tables set forth the summary of changes in the fair value of investment assets and liabilities measured using Level 3 inputs for the three months ended March 31, 2012 and 2011:
 
Senior Debt
 
Mezzanine Debt
 
Preferred Equity
 
Common Equity
 
Equity Warrants
 
Structured Products
 
Derivative Agreements, Net
 
Total
Balances, January 1, 2012
$
1,054

 
$
1,464

 
$
1,110

 
$
1,172

 
$
77

 
$
218

 
$
(89
)
 
$
5,006

Net realized gain (loss)(1)
(13
)
 
(25
)
 
(71
)
 
(14
)
 
7

 
(9
)
 
(8
)
 
(133
)
Reversal of prior period net depreciation (appreciation) on realization(2)
12

 
21

 
70

 
12

 
(7
)
 
9

 
8

 
125

Net unrealized appreciation (depreciation)(2)(3)
5

 
(1
)
 
37

 
466

 
16

 
18

 
(14
)
 
527

Purchases(4)
16

 
49

 
25

 
53

 

 

 

 
143

Sales(5)

 

 
(33
)
 
(13
)
 
(8
)
 

 

 
(54
)
Settlements, net(6)
(227
)
 
(165
)
 
(22
)
 
39

 

 
(5
)
 
8

 
(372
)
Balances, March 31, 2012
$
847

 
$
1,343

 
$
1,116

 
$
1,715

 
$
85

 
$
231

 
$
(95
)
 
$
5,242


 
Senior Debt
 
Mezzanine Debt
 
Preferred Equity
 
Common Equity
 
Equity Warrants
 
Structured Products
 
Derivative Agreements, Net
 
Total
Balances, January 1, 2011
$
1,282

 
$
1,783

 
$
1,134

 
$
998

 
$
79

 
$
199

 
$
(102
)
 
$
5,373

   Realized gains (losses)(1)
1

 

 
6

 
(2
)
 

 

 
(13
)
 
(8
)
   Reversal of prior period net depreciation (appreciation) on realization(2)
2

 

 
(10
)
 

 
(1
)
 

 
11

 
2

   Unrealized appreciation(2)(3)
14

 
16

 
5

 
271

 
5

 
39

 
2

 
352

   Purchases(4)
33

 
52

 
32

 
3

 

 

 

 
120

   Sales(5)
(8
)
 

 
(78
)
 
(17
)
 

 

 

 
(103
)
   Settlements(6)
(136
)
 
(80
)
 
38

 

 

 
(8
)
 
12

 
(174
)
Balances, March 31, 2011
$
1,188

 
$
1,771

 
$
1,127

 
$
1,253

 
$
83

 
$
230

 
$
(90
)
 
$
5,562


(1)
Included in net realized loss on investments in the consolidated statements of operations. Excludes gain (loss) on realized foreign currency transactions on American Capital assets and liabilities that are denominated in a foreign currency. Also, excludes realized gain (loss) from other assets and liabilities not measured at fair value.
(2)
Included in net unrealized appreciation of investments in the consolidated statements of operations.
(3)
Excludes unrealized appreciation (depreciation) related to foreign currency translation for American Capital assets and liabilities not measured at fair value that are denominated in a foreign currency.
(4)
Includes increases in the cost basis of investments resulting from new and add-on portfolio investments, the accrual or allowance of payment-in-kind (“PIK”) interest or cumulative dividends and the amortization of discounts, premiums and closing fees.
(5)
Includes the sale of equity investments, collection of cumulative dividends, loan syndications and loan sales.
(6)
Includes principal repayments on debt investments, collection of PIK interest, collection of accreted loan discounts, the exchange of one or more existing securities for one or more new securities and net interest rate derivative periodic interest and termination payments.
(7)
Includes increases in the cost basis of investments resulting from new portfolio investments, PIK interest or cumulative dividends, the amortization of discounts, premiums and closing fees and the exchange of one or more existing securities for one or more new securities as well as decreases in the cost basis of investments resulting from principal repayments or sales and the exchange of one or more existing securities for one or more new securities.




28


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

Significant Unobservable Inputs

The following table summarizes the significant unobservable inputs in the fair value measurements of our level 3 investments by category of investment and valuation technique as of March 31, 2012:
 
 
 
 
 
 
 
Range
 
Fair Value
 
Valuation Techniques
 
Unobservable Inputs
 
Minimum
Maximum
 
 
 
 
Senior Debt
$
847

 
Enterprise discounted cash flow
 
Discount rate
 
10%
76%
 
 
 
 
 
Terminal value growth rate
 
—%
5%
 
 
 
Public comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(50)%
15%
 
 
 
 
 
Control premium
 
8%
24%
 
 
 
Sales of comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(30)%
5%
 
 
 
Market yield
 
Market yield
 
7%
45%
 
 
 
 
 
Estimated remaining life
 
0 yrs
4 yrs
Mezzanine Debt
$
1,343

 
Enterprise discounted cash flow
 
Discount rate
 
10%
40%
 
 
 
 
 
Terminal value growth rate
 
3%
5%
 
 
 
Public comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(55)%
15%
 
 
 
 
 
Control premium
 
—%
24%
 
 
 
Sales of comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(45)%
20%
 
 
 
Market yield
 
Market yield
 
12%
20%
 
 
 
 
 
Estimated remaining life
 
2 yrs
4 yrs
Preferred Equity
$
1,116

 
Enterprise discounted cash flow
 
Discount rate
 
10%
68%
 
 
 
 
 
Terminal value growth rate
 
—%
8%
 
 
 
Public comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(55)%
15%
 
 
 
 
 
Control premium
 
8%
24%
 
 
 
Sales of comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(40)%
20%
 
 
 
Market yield
 
Market yield
 
18%
20%
 
 
 
 
 
Estimated remaining life
 
4 yrs
4 yrs
Common Equity
$
1,715

 
Enterprise discounted cash flow
 
Discount rate
 
10%
76%
 
 
 
 
 
Terminal value growth rate
 
—%
8%
 
 
 
Public comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(60)%
20%
 
 
 
 
 
Control premium
 
—%
24%
 
 
 
Sales of comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(45)%
20%
Equity Warrants
$
85

 
Enterprise discounted cash flow
 
Discount rate
 
10%
76%
 
 
 
 
 
Terminal value growth rate
 
—%
5%
 
 
 
Public comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(45)%
(10)%
 
 
 
 
 
Control premium
 
9%
24%
 
 
 
Sales of comparable companies
 
Premium or (discount) to multiples of comparable companies
 
(15)%
20%
Structured Products
$
231

 
Discounted cash flow
 
Discount rate
 
10%
41%
 
 
 
 
 
Constant prepayment rate
 
30%
30%
 
 
 
 
 
Constant default rate
 
2%
4%
 
 
 
Sales of comparable securities
 
Premium or (discount) to comparable transactions
 
(10)%
10%
Derivative Agreements, Net
$
(95
)
 
Discounted cash flow
 
Credit valuation adjustment
 
1%
6%

As of March 31, 2012 and December 31, 2011, loans on non-accrual status had a cost basis of $356 million and $419 million, respectively, and a fair value of $178 million and $219 million, respectively. As of March 31, 2012 and December 31, 2011, accruing loans with a cost basis of $3 million were greater than 90 days past due.



 

29


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

The following tables show the composition summaries of our investment portfolio at cost and fair value as a percentage of total investments as of March 31, 2012 and December 31, 2011:
 
March 31, 2012
 
December 31, 2011
Cost
 
 
 
Senior debt
15.3
%
 
17.7
%
Mezzanine debt
22.4
%
 
23.0
%
Preferred equity
22.7
%
 
22.9
%
Common equity
31.3
%
 
28.3
%
Equity warrants
1.4
%
 
1.3
%
Structured Products
6.9
%
 
6.8
%
Total
100.0
%
 
100.0
%
 
 
 
 
Fair Value
 
 
 
Senior debt
15.7
%
 
20.6
%
Mezzanine debt
25.0
%
 
28.5
%
Preferred equity
20.7
%
 
21.6
%
Common equity
32.7
%
 
23.5
%
Equity warrants
1.6
%
 
1.5
%
Structured Products
4.3
%
 
4.3
%
Total
100.0
%
 
100.0
%
 

30


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

We use the Global Industry Classification Standards for classifying the industry groupings of our portfolio companies. The following tables show the portfolio composition by industry grouping at cost and at fair value as a percentage of total investments as of March 31, 2012 and December 31, 2011. Our investments in European Capital and CLO and CDO securities are excluded from the table below. Our investments in CMBS are classified in the Real Estate and Real Estate Investment Trusts category.
 
March 31, 2012
 
December 31, 2011
Cost
 
 
 
Commercial Services and Supplies
10.0
%
 
9.1
%
Life Sciences Tools and Services
8.1
%
 
7.4
%
Household Durables
6.8
%
 
6.8
%
Hotels, Restaurants and Leisure
6.8
%
 
6.2
%
Real Estate and Real Estate Investment Trusts
6.7
%
 
6.7
%
Health Care Providers and Services
5.7
%
 
5.1
%
Internet and Catalog Retail
4.6
%
 
4.2
%
Professional Services
3.9
%
 
3.3
%
Aerospace and Defense
3.6
%
 
3.3
%
Auto Components
3.6
%
 
3.2
%
Food Products
3.4
%
 
4.0
%
Computers and Peripherals
3.3
%
 
3.0
%
Pharmaceuticals
3.0
%
 
2.7
%
Construction and Engineering
2.9
%
 
2.6
%
Health Care Equipment and Supplies
2.6
%
 
2.2
%
Capital Markets
2.4
%
 
1.3
%
Diversified Financial Services
2.3
%
 
2.3
%
Leisure Equipment and Products
2.3
%
 
2.9
%
Electrical Equipment
2.3
%
 
5.5
%
Diversified Consumer Services
2.2
%
 
2.2
%
Oil, Gas and Consumable Fuels
1.9
%
 
1.7
%
IT Services
1.8
%
 
3.7
%
Other
9.8
%
 
10.6
%
Total
100.0
%
 
100.0
%

 

31


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

 
March 31, 2012
 
December 31, 2011
Fair Value
 
 
 
Capital Markets
17.2
%
 
9.6
%
Commercial Services and Supplies
11.8
%
 
11.7
%
Hotels, Restaurants and Leisure
7.0
%
 
7.0
%
Health Care Providers and Services
5.9
%
 
5.8
%
Electrical Equipment
4.9
%
 
9.0
%
Life Sciences Tools and Services
4.7
%
 
4.2
%
Professional Services
3.9
%
 
4.0
%
Internet and Catalog Retail
3.4
%
 
3.0
%
Construction and Engineering
3.3
%
 
3.3
%
Aerospace and Defense
3.2
%
 
3.1
%
Health Care Equipment and Supplies
3.1
%
 
2.8
%
Pharmaceuticals
3.0
%
 
3.0
%
Food Products
2.9
%
 
3.2
%
Real Estate and Real Estate Investment Trusts
2.7
%
 
2.9
%
Computers and Peripherals
2.7
%
 
2.8
%
Diversified Consumer Services
2.4
%
 
2.4
%
Auto Components
2.4
%
 
2.4
%
Household Durables
2.2
%
 
2.0
%
Leisure Equipment and Products
1.7
%
 
2.6
%
Building Products
1.6
%
 
1.5
%
Other
10.0
%
 
13.7
%
Total
100.0
%
 
100.0
%


32


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

The following tables show the portfolio composition by geographic location at cost and at fair value as a percentage of total investments, excluding Structured Products, as of March 31, 2012 and December 31, 2011. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
 
March 31, 2012
 
December 31, 2011
Cost
 
 
 
International
26.2
%
 
24.3
%
Mid-Atlantic
19.8
%
 
18.2
%
Southwest
19.6
%
 
22.7
%
Northeast
10.5
%
 
10.5
%
Southeast
9.5
%
 
10.5
%
South-Central
9.4
%
 
9.0
%
North-Central
4.5
%
 
4.2
%
Northwest
0.5
%
 
0.6
%
Total
100.0
%
 
100.0
%
 
 
 
 
Fair Value
 
 
 
Mid-Atlantic
30.6
%
 
25.1
%
Southwest
20.8
%
 
25.9
%
International
17.7
%
 
14.8
%
Southeast
11.3
%
 
13.7
%
Northeast
10.7
%
 
10.8
%
North-Central
4.7
%
 
5.0
%
South-Central
3.9
%
 
4.2
%
Northwest
0.3
%
 
0.5
%
Total
100.0
%
 
100.0
%

Note 4.
Borrowings

Our debt obligations consisted of the following as of March 31, 2012 and December 31, 2011:
 
March 31, 2012
 
December 31, 2011
Fixed rate private secured notes due December 2013
$
30

 
$
30

Floating rate private secured loans due December 2013
16

 
17

Fixed rate non-amortizing secured notes due December 2013
524

 
524

Floating rate non-amortizing secured notes due December 2013
4

 
4

Unsecured public notes due August 2012
11

 
11

ACAS Business Loan Trust 2004-1 asset securitization
12

 
21

ACAS Business Loan Trust 2005-1 asset securitization
183

 
227

ACAS Business Loan Trust 2006-1 asset securitization
150

 
180

ACAS Business Loan Trust 2007-1 asset securitization
121

 
140

ACAS Business Loan Trust 2007-2 asset securitization
81

 
97

Total
$
1,132

 
$
1,251


The daily weighted average debt balance for the three months ended March 31, 2012 and 2011 was $1,183 million and $2,001 million, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended March 31, 2012 and 2011 was 5.5% and 5.7%, respectively. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, for the three months ended March 31, 2012 and 2011 was 4.6% and 3.9%, respectively. The weighted average interest rate on all of our borrowings, excluding deferred financing costs, as of March 31, 2012 was 4.7%.
 

33


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

As of March 31, 2012 and December 31, 2011, the aggregate fair value of the above borrowings was $1,116 million and $1,210 million, respectively. The fair values of our debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions, and are measured using Level 1 inputs for our publicly traded debt and Level 2 inputs for the remainder of our borrowings. It assumes that the liability is transferred to a market participant at the measurement date and that the nonperformance risk relating to that liability is the same before and after the transfer. Nonperformance risk refers to the risk that the obligation will not be fulfilled and affects the value at which the liability is transferred. The fair value of our debt obligations is valued at the closing market quotes as of the measurement date for our public notes or estimated based upon market interest rates for our own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any, based on a quantitative and/or qualitative evaluation of our credit risk.

Secured Debt Agreements
 
As of March 31, 2012, we had secured loans (“Floating Rate Private Secured Loans”) outstanding under an amended and restated credit agreement and secured notes outstanding under an indenture (collectively with the amended and restated credit agreement, the “Secured Debt Agreements”), consisting of fixed rate private secured notes (“Fixed Rate Private Secured Notes”), call-protected fixed rate secured notes (“Fixed Rate Non-Amortizing Secured Notes”) and call-protected floating rate secured notes (“Floating Rate Non-Amortizing Secured Notes,” and collectively with the Floating Rate Private Secured Loans, Fixed Rate Private Secured Notes and Fixed Rate Non-Amortizing Secured Notes, the “Secured Debt”).

Maturity Date and Optional Redemption—The Secured Debt has a final maturity date of December 31, 2013, unless earlier repaid. Prior to August 1, 2012, the Fixed Rate Non-Amortizing Secured Notes and Floating Rate Non-Amortizing Secured Notes may be redeemed at our option in whole or in part from time to time so long as there are no Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes outstanding only at a price equal to (i) 100% of the principal amount being redeemed, plus accrued and unpaid interest to the date of redemption, but without payment of any premium, with Realized Proceeds (as defined in the Secured Debt Agreements) or (ii) the accrued and unpaid interest on the principal amount being redeemed plus the greater of (a) 100% of the principal amount being redeemed, and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the principal amount being redeemed discounted to the redemption date on a semi-annual basis at the Adjusted Treasury Rate (as defined in the Secured Debt Agreements), plus 30 basis points. In addition, the Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes may be repaid prior to maturity at our option in whole or in part from time to time at a price equal to 100% of the principal amount repaid, plus accrued and unpaid interest to the payment date.
 
Scheduled Amortization and Mandatory Redemption—As of March 31, 2012, there were no further required scheduled amortization payments on the Floating Rate Private Secured Loans and the Fixed Rate Private Secured Notes. The Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes are subject to mandatory prepayments in certain instances as follows: (i) 100% of the net proceeds of certain debt incurred, (ii) 50% of the net cash flow proceeds of any capital stock issued after June 28, 2012, (iii) 25% of any Realized Proceeds, and (iv) 25% of Excess Cash Flow (as defined in the Secured Debt Agreements). However, as of March 31, 2012, we were entitled to retain the first $149 million that would otherwise be payable from any proceeds from debt issued, capital stock issued, Realized Proceeds or Excess Cash Flow for new portfolio investments or other general corporate purposes. The Fixed Rate Non-Amortizing Secured Notes and Floating Rate Non-Amortizing Secured Notes are not subject to amortization or mandatory redemptions.
 
Interest—The Floating Rate Private Secured Loans and Floating Rate Non-Amortizing Secured Notes bear interest at a rate per annum equal to one, two, three or six-month LIBOR, subject to a LIBOR floor of 2% per annum, plus 5.50%.
 
In addition, the interest rates for each type of Secured Debt will increase by 0.50% per annum if we do not pay the remaining outstanding balance on the Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes by June 30, 2013. The increase will remain in effect for each succeeding day until the remaining balance of the Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes have been paid.
 

34


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

The following table sets forth the interest rates on the Secured Debt as of March 31, 2012:
Fixed rate private secured notes due December 2013
7.96%
Floating rate private secured loans due December 2013
7.50%
Fixed rate non-amortizing secured notes due December 2013
7.96%
Floating rate non-amortizing secured notes due December 2013
7.50%

Fees—We are required to pay a fee in an amount equal to 1% of the aggregate principal amount of the Secured Debt outstanding on December 31, 2012, payable on such date.
 
Security and Ranking—The Secured Debt is a senior obligation of ours and is secured by a first priority lien (subject to certain permitted liens) on substantially all of our non-securitized assets.
 
Covenants—The financial covenants under the Secured Debt Agreements include the maintenance of a minimum ratio of adjusted operating cash flow to interest expense and a minimum ratio of pledged assets to secured debt, tested on a quarterly basis. We are also subject to additional covenants. As of March 31, 2012, we were in compliance with all of the covenants under the Secured Debt Agreements.

Asset Securitizations

Under the terms of each of our asset securitizations, if any loan collateral in each trust becomes a defaulted loan (as defined in each indenture for the respective asset securitization), all interest and principal collections that would be applied to the subordinated notes retained by us are used to sequentially pay down the principal of the notes that are generally held by third-party institutional investors in an amount equal to the principal amount of the defaulted loan collateral. As of March 31, 2012, there was defaulted loan collateral in each of the asset securitization trusts and therefore all interest and principal collections that would have been applied to the subordinated notes retained by us will continue to be applied sequentially to pay down the principal of the notes generally held by third-party institutional investors in an amount equal to the principal amount of the defaulted loan collateral. As of March 31, 2012, our asset securitizations, which had an outstanding balance of $547 million, were secured by portfolio investments and assets with a fair value of approximately $1.3 billion. On April 25, 2012, the third-party notes issued by ACAS Business Loan Trust 2004-1 were paid off in full.

As of March 31, 2012, we were in compliance with all of the covenants under our asset securitizations.
 
Note 5.
Derivative Agreements

We enter into interest rate swap agreements to manage interest rate risk and also to fulfill our obligations under the terms of our asset securitizations. We may also enter into foreign exchange swap agreements to manage foreign currency risk. We do not hold or issue interest rate or foreign exchange swap agreements for speculative purposes. We fair value our derivatives in accordance with the 1940 Act and ASC 820 as determined in good faith by our Board of Directors. All derivative financial instruments are recorded at fair value with changes in value reflected in net unrealized appreciation or depreciation during the reporting period. The fair value of our interest rate swap agreements is based on an income approach using a discounted cash flow methodology. Significant inputs to the discounted future cash flow methodology include forward interest rate yield curves in effect as of the end of the measurement period and an evaluation of both our and our counterparty’s credit risk that consider collateral requirements, credit enhancements and the impact of netting arrangements. As of March 31, 2012, we were not in default under any of our interest rate swap agreements.

We have entered into interest rate swap agreements where we generally pay a fixed rate and receive a floating rate based on LIBOR. The fair value of our interest rate derivative agreements are identified as separate items on our consolidated balance sheets and are described in the accompanying consolidated schedules of investments.
 
We record the accrual of periodic interest settlements of interest rate swap agreements in net unrealized appreciation or depreciation of derivative agreements and subsequently record the cash payments as a net realized gain or loss on derivative agreements on the interest settlement date and are classified under investing activities in our consolidated statements of cash flows. Cash payments received or paid for the termination of an interest rate swap agreement are recorded as a realized gain or loss upon termination in our consolidated statements of operations and are classified under investing activities in our consolidated statements of cash flows.


35


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

During the three months ended March 31, 2012, we recorded $6 million of net unrealized depreciation from interest rate swap agreements in the financial statement line item derivative agreements in our consolidated statements of operations. During the three months ended March 31, 2011, we recorded $13 million of net unrealized appreciation from interest rate swap agreements in the financial statement line item derivative agreements in our consolidated statements of operations.

During the three months ended March 31, 2012 and 2011, we recorded a net realized loss of $8 million and $12 million, respectively, in the financial statement line item derivative agreements in our consolidated statements of operations for periodic interest settlements of interest rate swap agreements. During the three months ended March 31, 2011, cash termination payments totaling $1 million, were made to settle terminated interest rate swap agreements, which are recorded as a net realized loss in the financial statement line item derivative agreements in our consolidated statements of operations.
  
Credit Risk-Related Contingent Features

Our interest rate swap agreements under which American Capital is a party are secured by a first priority lien (subject to certain permitted liens) on substantially all of our non-securitized assets pari passu with the Secured Debt. Our other interest rate swap agreements were entered into by one of our subsidiary securitization trusts and a counterparty and are secured by a first priority lien (subject to certain permitted liens) on such trust's securitized assets pari passu with our securitized debt issued by the trust.

Certain of our interest rate swap agreements contain an event of default that allows the counterparty to terminate agreements outstanding under the agreement following the occurrence of a cross default on certain of our other indebtedness in amounts equal to or greater than $5 million to $15 million, as applicable. Derivatives under these agreements in a liability position had a US GAAP fair value liability of $59 million and $50 million as of March 31, 2012 and December 31, 2011, respectively. While none of our counterparties had the right to elect to terminate their agreements with us early as a result of this provision as of March 31, 2012 and December 31, 2011, the termination liability would have been $60 million and $61 million as of such dates, respectively. The difference between the US GAAP fair value liability and the termination liability represents an adjustment for nonperformance risk of us and our counterparties.

Certain of our interest rate swap agreements also contain an event of default that allows the counterparty to terminate agreements outstanding under the agreement if certain of our other indebtedness in amounts equal to or greater than $5 million or $15 million, as applicable, is accelerated. Derivatives under these agreements in a liability position had a US GAAP fair value liability of $14 million and $15 million as of March 31, 2012 and December 31, 2011, respectively. While none of our counterparties had the right to elect to terminate their agreements with us early as a result of this provision as of March 31, 2012 and December 31, 2011, the termination liability would have been $16 million and $18 million as of such dates, respectively. The difference between the US GAAP fair value liability and the termination liability represents an adjustment for nonperformance risk of us and our counterparties.

Certain of our interest rate swap agreements also contain an additional termination event that allows either party or, in one case, our counterparty, to elect on a designated date prior to the scheduled maturity date of the agreement to terminate all transactions outstanding under the agreement early on such date. If the optional early termination right is exercised, the early termination dates under the agreement would occur during the second or third quarters of 2012. Derivatives under these agreements in a liability position had a US GAAP fair value liability of $66 million and $58 million as of March 31, 2012 and December 31, 2011, respectively. While none of our counterparties had the right to elect to terminate their agreements early with us as a result of this provision as of March 31, 2012 and December 31, 2011, the termination liability would have been $68 million and $70 million as of such dates, respectively. The difference between the US GAAP fair value liability and the termination liability represents an adjustment for nonperformance risk of us and our counterparties.
 
We have agreed to guarantee the payment of (i) any swap breakage costs related to the interest rate swap agreements entered into by our asset securitization trusts prior to the occurrence of an event of default under the respective asset securitizations, and (ii) any such swap breakage costs in excess of $500,000 after the occurrence of an event of default under such asset securitizations. Derivatives under these agreements in a liability position had a US GAAP fair value liability of $32 million and $34 million as of March 31, 2012 and December 31, 2011, respectively. If such interest rate swap agreements could have been terminated early in accordance with their terms as of March 31, 2012 and December 31, 2011, the aggregate termination liability would have been $34 million and $38 million, respectively. The difference between the US GAAP fair value liability and the termination liability represents an adjustment for nonperformance risk of us and our counterparties.

36


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)


Note 6.
Net Operating Income and Net Earnings Per Common Share
 
The following table sets forth the computation of basic and diluted net operating income and net earnings per common share for the three months ended March 31, 2012 and 2011:
 
 
Three Months Ended March 31,
 
 
2012
 
2011
Numerator for basic and diluted net operating income per common share
 
$
49

 
$
83

Numerator for basic and diluted net earnings per common share
 
$
580

 
$
434

Denominator for basic weighted average common shares
 
330.9

 
346.1

Employee stock options and awards
 
8.7

 
12.3

Denominator for diluted weighted average common shares
 
339.6

 
358.4

Basic net operating income per common share
 
$
0.15

 
$
0.24

Diluted net operating income per common share
 
$
0.14

 
$
0.23

Basic net earnings per common share
 
$
1.75

 
$
1.25

Diluted net earnings per common share
 
$
1.71

 
$
1.21


In accordance with the provisions of FASB ASC Topic 260, Earnings per Share, basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating EPS on a diluted basis.

In computing diluted EPS, only potential common shares that are dilutive, those that reduce earnings per share or increase loss per share, are included. The effect of stock options, unvested employee stock awards and contingently issuable shares are not included if the result would be anti-dilutive.

Stock options and unvested shares under our deferred compensation plan of 32.4 million and 11.6 million for the three months ended March 31, 2012 and 2011, respectively, were not included in the computation of diluted EPS either because the respective exercise or grant prices are greater than the average market value of the underlying stock or their inclusion would have been anti-dilutive, as determined using the treasury stock method.

Note 7.
Commitments and Contingencies

As of March 31, 2012, we had commitments under loan and financing agreements to fund up to $110 million to 18 portfolio companies, with $12 million and $14 million of the commitments related to undrawn revolving credit facilities for European Capital and American Capital, LLC, respectively. These commitments are primarily composed of working capital credit facilities, acquisition credit facilities and subscription agreements. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and availability under borrowing base thresholds. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio.

Note 8.
Shareholders' Equity
 
Our common stock activity for the three months ended March 31, 2012 and 2011 was as follows:
 
Three Months Ended March 31,
 
2012
 
2011
Common stock outstanding at beginning of period
329.1

 
342.4

Issuance of common stock under stock option plans
1.6

 
1.0

Repurchase of common stock
(5.5
)
 

Distribution of common stock held in deferred compensation trust
0.4

 
0.5

Common stock outstanding at end of period
325.6

 
343.9



37


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

Stock Repurchase and Dividend Program
      
During the third quarter of 2011, our Board of Directors adopted a program that may provide for additional repurchases of shares or dividend payments. On April 26, 2012, our Board of Directors extended the stock repurchase and dividend program through December 31, 2013. Under the program, we will consider quarterly setting an amount to be utilized for stock repurchases or dividends. Generally, the amount may be utilized for repurchases if the price of our common stock represents a discount to the NAV of our shares, and the amount may be utilized for the payment of cash dividends if the price of our common stock represents a premium to the NAV of our shares. In determining the quarterly amount for repurchases or dividends, the our Board of Directors will be guided by our cumulative net cash provided by operating activities in the prior quarter and since the beginning of 2012, cumulative repurchases or dividends, cash on hand, debt service considerations, investment plans, forecasts of financial liquidity and economic conditions, operational issues and the then current trading price of our stock. The repurchase and dividends program may be suspended, terminated or modified at any time for any reason. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases. During the first quarter of 2012, we made open market purchases of 5.5 million shares, or $48 million, of our common stock at an average price of $8.79 per share.

Note 9.
Income Taxes

As a taxable corporation under Subchapter C of the Code, we are subject to federal and applicable state corporate income taxes on our taxable ordinary income and capital gains. However, we estimate that for income tax purposes, we had both a net operating loss and net long-term capital loss for the tax year ended September 30, 2011 and for the six months ended March 31, 2012. Under Subchapter C of the Code, we are able to carry forward any net operating losses to succeeding tax years, which we would not be able to do if we were subject to taxation as a RIC under Subchapter M. In addition, while we are subject to taxation under Subchapter C of the Code, we will not be required to fulfill the annual distribution, investment diversification or gross income composition requirements applicable to RICs.

As a corporation taxed under Subchapter C of the Code, we are able to file a consolidated federal income tax return with corporate subsidiaries, including portfolio companies, in which we hold 80% or more of the outstanding equity interest measured by both vote and fair value. Effective for our tax year ended September 30, 2011, we intend to elect to file a consolidated federal income tax return with eligible portfolio companies. As a result, we have entered into a tax sharing agreement under which members of the consolidated tax group are compensated for losses and other tax benefits by members that are able to use those losses and tax benefits on their pro forma stand-alone federal income tax return.


38


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

The following table sets forth the significant components of our deferred tax assets and liabilities as of March 31, 2012 and December 31, 2011:
 
March 31, 2012
 
December 31, 2011
Deferred tax assets
 
 
 
Net operating loss carryforwards
$
116

 
$
86

Net unrealized depreciation of ordinary investments
158

 
203

Basis differences in ordinary investments
72

 
89

Stock-based compensation
51

 
51

Other
8

 
7

Total ordinary deferred tax assets
405

 
436

Net capital loss carryforwards
155

 
180

Net unrealized depreciation of capital investments
234

 
457

Basis differences in capital investments
235

 
204

Total capital deferred tax assets
624

 
841

Total deferred tax assets
1,029

 
1,277

Less valuation allowance
(624
)
 
(841
)
Total deferred tax assets less valuation allowance
405

 
436

 
 
 
 
Deferred tax liabilities
 
 
 
Other
(9
)
 
(8
)
Total deferred tax liabilities
(9
)
 
(8
)
Total net deferred tax assets
$
396

 
$
428


The table above classifies certain deferred tax assets and liabilities based on management's current estimate of the expected tax character of recognition of the reversal of the timing difference that gives rise to the deferred tax assets and liabilities as either ordinary or capital income. The ultimate tax character of the deferred tax assets and liabilities may change from the above classification based on the ultimate form of the recognition of the timing difference.

As of March 31, 2012, we believe that it is more likely than not that we will have future ordinary income to realize our ordinary deferred tax assets and therefore did not record a valuation allowance against these deferred tax assets. As of March 31, 2012, we do not believe we meet the more likely than not criteria regarding the ability to utilize our capital deferred tax assets and therefore maintain a full valuation allowance of $624 million against these capital deferred tax assets. In making the determination to establish a full valuation allowance, we have weighed both the positive and negative evidence. Due to our cumulative net unrealized depreciation on our capital assets as of March 31, 2012, we do not believe that we can reliably forecast future net capital gains or appreciation to realize our capital deferred tax assets.

Assessing the recoverability of a deferred tax asset requires management to make estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from investments and operations, the character of expected income or loss as either capital or ordinary, and the application of existing tax laws in each jurisdiction. To the extent that future cash flows or the amount or character of taxable income differ significantly from these estimates, our ability to realize the deferred tax assets could be impacted. Additionally, if we regain our status as a RIC, most or all of any net deferred tax asset would likely be written off.

As of March 31, 2012, we estimate that we have $305 million of federal net operating loss carryforwards and various state net operating loss carryforwards for which we have recorded a gross deferred tax asset of $116 million. For federal income tax purposes, the net operating loss carryforwards expire in various years from 2029 through 2032. The timing and manner in which we will utilize any net operating loss carryforwards in any year, or in total, may be limited in the future under the provisions of the Code and applicable state laws.

As of March 31, 2012, we estimate that we have $401 million of net capital loss carryforwards for federal income tax purposes and various state net capital loss carryforwards for which we have recorded a gross deferred tax asset of $155 million. Under rules governing the carryover of capital losses from a RIC to a C corporation, $113 million of these capital losses initially

39


AMERICAN CAPITAL, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(in millions, except per share data)

had a carryforward of eight years, which will be reduced by one year for each year during the carryforward period (not to exceed three years) that we do not qualify as a RIC. If we remain a C corporation, $113 million will expire in 2015 and $288 million will expire in 2016. We will only be able to utilize these net capital loss carryforwards to the extent we generate future net capital gains within the carryforward periods.

A reconciliation of the tax provision computed at the US federal statutory income tax rate and our effective tax rate for the three months ended March 31, 2012 and 2011 were as follows:
 
Three Months Ended March 31,
 
2012
 
2011
Tax on income computed at federal statutory tax rate
$
214

 
$

State taxes, net of federal tax benefit
24

 

Valuation allowance
(217
)
 

Other
10

 

Total tax provision
$
31

 
$


Note 10.
Subsequent Event

On May 2, 2012, we received written approval from the Internal Revenue Service to change our tax accounting method related to the recognition of accrued but unpaid dividends on our investments in PIK preferred equity securities. The approval results in a cumulative adjustment related to investments held as of October 1, 2010 and also governs our tax treatment from that date forward. The impact of the subsequent event will be recorded in the quarter ending June 30, 2012. The method change should generate an immediate deferred tax benefit, net of reserves, of approximately $110 million to $115 million, due to an increase to the federal net operating loss carryforward of approximately $280 million to $294 million.



40



ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (in millions, except per share data)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of American Capital’s financial statements with a narrative from the perspective of management. Our MD&A is presented in four sections:

Executive Overview

Results of Operations

Financial Condition, Liquidity and Capital Resources

Forward-Looking Statements

EXECUTIVE OVERVIEW

We are a publicly traded private equity firm and global asset manager. We invest in private equity, private debt, private real estate securities and other investments, technology investments, special situation investments and alternative asset funds managed by us. These investments constitute, in part, what are considered alternative assets. We provide investors the opportunity to participate in the private equity and alternative asset management industry through an investment in our publicly traded stock.
 
We primarily invest in senior and mezzanine debt and equity in buyouts of private companies sponsored by us (“One Stop Buyouts®”) or sponsored by other private equity funds (“Private Equity Buyouts”) and provide capital directly to early stage and mature private and small public companies. We refer to our investments in these companies as our private finance portfolio. Our primary business objectives are to increase our net earnings and net asset value (“NAV”) by making investments with attractive current yields and/or potential for equity appreciation and realized gains.
 
We are also an alternative asset manager with $101 billion of assets under management as of March 31, 2012, including $95 billion of third-party assets. Our alternative asset fund management is conducted through our wholly-owned portfolio company, American Capital, LLC. American Capital, LLC manages the following alternative asset funds: European Capital Limited (“European Capital”), American Capital Agency Corp. (“AGNC”), American Capital Mortgage Investment Corp. (“MTGE”), American Capital Equity I, LLC (“ACE I”), American Capital Equity II, LP (“ACE II”) and ACAS CLO 2007-1, Ltd. (“ACAS CLO-1”) .

American Capital Investment Portfolio

We primarily invest in middle market companies, which we generally consider to be companies with revenue between $10 million and $750 million. Currently, we will invest up to $500 million in a single middle market company in North America. We also have investments in structured finance investments (“Structured Products”), including commercial mortgage backed securities (“CMBS”), collateralized loan obligation (“CLO”) securities and collateralized debt obligation (“CDO”) securities and invest in alternative asset funds managed by us.
 

41


Portfolio Composition
 
As of March 31, 2012, we had investments in 144 portfolio companies totaling $5.4 billion at fair value, with an average investment size of $37 million, or 0.6% of total assets. As of March 31, 2012, our ten largest investments at fair value were $3.2 billion, or 49% of total assets, and are as follows (in millions):
Company 
 
Product Line
 
Industry
 
Fair Value
 
Cost Basis
European Capital Limited
 
European Capital
 
Diversified Financial Services
 
$
800

 
$
1,356

American Capital, LLC
 
Asset Management
 
Capital Markets
 
736

 
99

SMG Holdings, Inc.
 
One Stop Buyouts®
 
Hotels, Restaurants & Leisure
 
304

 
323

WIS Holding Company, Inc.
 
One Stop Buyouts®
 
Commercial Services & Supplies
 
302

 
213

Affordable Care Holding Corp.
 
One Stop Buyouts®
 
Health Care Providers & Services
 
217

 
156

WRH, Inc.
 
One Stop Buyouts®
 
Life Sciences Tools & Services
 
206

 
385

Mirion Technologies, Inc.
 
One Stop Buyouts®
 
Electrical Equipment
 
198

 
92

The Tensar Corporation
 
Private Equity Buyouts
 
Construction & Engineering
 
145

 
132

Paradigm Precision Holdings, LLC
 
One Stop Buyouts®
 
Aerospace & Defense
 
139

 
171

SPL Acquisition Corp.
 
One Stop Buyouts®
 
Pharmaceuticals
 
130

 
143

Total
 
 
 
 
 
$
3,177

 
$
3,070

 
 
 
 
 
 
 
 
 

Our investments are composed of the following six product lines: (i) One Stop Buyouts®, (ii) Private Equity Buyouts, (iii) Direct and Other Investments, (iv) European Capital, (v) Asset Management and (vi) Structured Products.

The composition of our investment portfolio as of March 31, 2012, at fair value, as a percentage of total investments based on these different product lines, is shown below:


42


Our new investments totaled $83 million and $152 million during the three months ended March 31, 2012 and 2011, respectively. The amounts of our new investments include both funded commitments and unfunded commitments as of the investment date. The type and aggregate dollar amount of new investments were as follows (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Direct and other investments
$

 
$
14

Add-on financing for acquisitions
56

 

Add-on financing for working capital in distressed situations
15

 
16

Add-on financing for growth and working capital
12

 
97

Add-on financing for recapitalizations, not including distressed investments

 
25

       Total
$
83

 
$
152

We received cash proceeds from realizations and repayments of portfolio investments as follows (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Principal prepayments
$
288

 
$
149

Sale of equity investments
47

 
63

Payment of accrued PIK notes and dividend and accreted original issue discounts
51

 
43

Loan syndications and sales

 
6

Scheduled principal amortization
10

 
8

Total
$
396

 
$
269


Private Finance Investments
 
A majority of our investments have been to assist in the funding of change of control buyouts of privately held middle market companies, which we expect to continue in the future. A change of control transaction could be the result of a corporate divestiture, a sale of a family-owned or closely-held business, a going private transaction, the sale by a private equity fund of a portfolio company or an ownership transition. Our financing of a change of control transaction could either be for a One Stop Buyout® or for a Private Equity Buyout. In One Stop Buyouts®, we lend senior and mezzanine debt and make majority equity investments. As an investor in Private Equity Buyouts, we lend senior and mezzanine debt and make minority equity co-investments.
 
Our private finance portfolio investments consist of loans and equity securities primarily to privately-held middle market companies. Our private finance loans consist of first lien secured revolving credit facilities, first lien secured loans, second lien secured loans and secured and unsecured mezzanine loans. Our loans typically mature in five to ten years and require monthly or quarterly interest payments at fixed rates or variable rates generally based on LIBOR, plus a margin. Certain of our loans permit the interest to be paid-in-kind by adding it to the outstanding loan balance and paid at maturity. We price our debt and equity investments based on our analysis of each transaction. As of March 31, 2012, the weighted average effective interest rate on our private finance debt investments was 11.1%, which includes the impact of non-accruing loans. As of March 31, 2012, our fully-diluted weighted average ownership interest in our private finance portfolio companies, excluding our investment in European Capital, was 69%, with a total equity investment at fair value of approximately $2.2 billion.
 
There is generally no publicly available information about these companies and a primary or secondary market for the trading of these privately issued loans and equity securities generally does not exist. These investments have been historically exited through normal repayment, a change in control transaction or recapitalization of the portfolio company. However, we may also sell our loans or equity securities.
 
Our ability to fund the entire capital structure is a competitive advantage in completing many middle market transactions. We sponsor One Stop Buyouts® in which we provide most, if not all, of the senior and mezzanine debt and equity financing in the transaction. We may initially fund all of the senior debt at closing and syndicate it to third-party lenders post closing. We have a loan syndications group that arranges to have all or part of the senior loans syndicated to third-party lenders.
 
As a business development company (“BDC”), we are required by law to make significant managerial assistance available to most of our portfolio companies. Such assistance typically involves providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to its management and board of directors, including

43


participating on the company's board of directors. We have an operations team with significant turnaround and bankruptcy experience that assists our investment professionals in providing intensive operational and managerial assistance to our portfolio companies. As of March 31, 2012, we had board seats at 60 out of 102 of our private finance companies and had board observation rights on 8 of our remaining private finance portfolio companies. Providing assistance to our portfolio companies serves as an opportunity for us to maximize their value.

American Capital, LLC Investment
 
Our alternative asset management business is conducted through our wholly-owned portfolio company, American Capital, LLC. In general, subsidiaries of American Capital, LLC enter into management agreements with each of its managed alternative asset funds. As of March 31, 2012, our investment in American Capital, LLC was $99 million at cost and $736 million at fair value, or 14% of our total investments at fair value. The discussion of the operations of American Capital, LLC includes its consolidated subsidiaries. As of March 31, 2012, its third-party assets under management totaled $95 billion, including $88 billion of assets under management in American Capital Agency Corp. (NASDAQ: AGNC) and $4 billion of assets under management in American Capital Mortgage Investment Corp. (NASDAQ: MTGE), which are publicly traded residential mortgage real estate investment trusts (“REITs”).
 
American Capital, LLC had over 70 employees as of March 31, 2012, including seven investment teams with over 20 investment professionals located in Bethesda (Maryland), London and Paris. We have entered into service agreements with American Capital, LLC to provide it with additional asset management service support. Through these agreements, we provide investment advisory and oversight services to American Capital, LLC, as well as access to our employees, infrastructure, business relationships, management expertise and capital raising capabilities. We charge American Capital, LLC a fee for the use of these services. American Capital, LLC generally earns base management fees based on the shareholders' equity or the net cost basis of the assets of the alternative asset funds under management and may earn incentive income, or a carried interest, based on the performance of the funds. In addition, we may invest directly into these alternative asset funds and earn investment income from our investments in those funds.
 
The following table sets forth certain information with respect to American Capital, LLC's funds under management as of March 31, 2012:
 
 
European Capital
 
AGNC
 
MTGE
 
ACE I
 
ACE II
 
ACAS CLO-1
Fund type
 
Private Equity Fund
 
Publicly Traded REIT - NASDAQ (AGNC)
 
Publicly Traded REIT - NASDAQ (MTGE)
 
Private Equity Fund
 
Private Equity Fund
 
CLO
Established
 
2005
 
2008
 
2011
 
2006
 
2007
 
2006
Assets under management
 
$1.6 Billion
 
$88.4 Billion
 
$4.3 Billion
 
$0.6 Billion
 
$0.3 Billion
 
$0.4 Billion
Investment types
 
Senior & Mezzanine Debt,
Equity, Structured Products
 
Agency Securities
 
Mortgage Investments
 
Equity
 
Equity
 
Senior Debt
Capital type
 
Permanent
 
Permanent
 
Permanent
 
Finite Life
 
Finite Life
 
Finite Life

European Capital Investment
 
We own all of European Capital, an investment fund incorporated in Guernsey that invests in One Stop Buyouts®, Private Equity Buyouts and provides capital directly to early stage and mature private and small public companies primarily in Europe. It primarily invests in senior and mezzanine debt and equity.
 
As of March 31, 2012, European Capital had investments in 51 portfolio companies totaling $1.3 billion at fair value, with an average investment size of $25 million, or 1.6% of its total assets. As of March 31, 2012, European Capital's five largest investments at fair value were $476 million, or 30% of its total assets.


44


The composition of European Capital's investment portfolio as of March 31, 2012, at fair value, as a percentage of its total investments based on its different product lines, is shown below:
As of March 31, 2012, European Capital's NAV at fair value was $868 million. As of March 31, 2012, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $1,267 million and $711 million, respectively, and a debt investment with a fair value and cost basis of $88 million. As of March 31, 2012, we valued our equity investment in European Capital below its NAV as a result of applying several discounts to its NAV in computing the fair value.

Summary of Critical Accounting Policies

The preparation of our financial condition and results of operations requires us to make judgments and estimates that may have a significant impact upon our financial results. We believe that of our significant accounting policies, the following require estimates and assumptions that require complex, subjective judgments by management, which can materially impact reported results: valuation of investments; income taxes; interest and dividend income recognition; and stock-based compensation. All of our critical accounting policies are fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2011.

See Note 3 to our interim consolidated financial statements in this Form 10-Q for further information regarding the classification of our investment portfolio by levels of fair value inputs used to measure our investments as of March 31, 2012.

RESULTS OF OPERATIONS

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto.

Our consolidated financial performance, as reflected in our consolidated statements of operations, is composed of the following three primary elements:

The first element is “Net operating income” (“NOI”), which is primarily the interest, dividends, prepayment fees, finance and transaction fees and portfolio company management fees earned from investing in debt and equity securities and the fees we earn from fund asset management, less our operating expenses and tax provision.
The second element is “Net realized gain (loss) on investments,” which reflects the difference between the proceeds from an exit of an investment and the cost at which the investment was carried on our consolidated balance sheets and periodic interest settlements and termination receipts or payments on derivatives, foreign currency transaction gains or losses and taxes on realized gains or losses.

45


The third element is “Net unrealized appreciation (depreciation) of investments,” which is the net change in the estimated fair value of our portfolio investments and of our interest rate derivatives at the end of the period compared with their estimated fair values at the beginning of the period or their stated costs, as appropriate, and taxes on unrealized gains or losses. In addition, our net unrealized depreciation of investments includes the foreign currency translation from converting the cost basis of our assets and liabilities denominated in a foreign currency to the US dollar.

The consolidated operating results were as follows (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Operating income
$
149

 
$
159

Operating expenses
68

 
76

NOI before income taxes
81

 
83

Tax provision
(32
)
 

NOI
49

 
83

Net realized loss
(107
)
 
(3
)
Net realized (loss) earnings
(58
)
 
80

Net unrealized appreciation
638

 
354

Net earnings
$
580

 
$
434


Operating Income

We derive the majority of our operating income by investing in senior and mezzanine debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realized gains. We also derive operating income from investing in Structured Products and in our wholly-owned asset manager, American Capital, LLC. Operating income consisted of the following (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Interest income on debt investments
$
84

 
$
93

Interest income on Structured Products investments
15

 
13

Dividend income on private finance portfolio investments
22

 
36

Dividend income from American Capital, LLC
15

 
4

Interest and dividend income
136

 
146

Portfolio company advisory and administrative fees
3

 
4

Advisory and administrative services - American Capital, LLC
6

 
4

Other fees
4

 
5

Fee income
13

 
13

          Total operating income
$
149

 
$
159



46


Interest and Dividend Income

The following table summarizes selected data for our debt, Structured Products and equity investments outstanding, at cost (dollars in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Debt investments(1)
$
2,613

 
$
3,518

Effective interest rate on debt investments(1)
12.9
%
 
10.6
%
Average non-accrual debt investments at cost(2)
$
387

 
$
682

Structured Products investments(1)
$
450

 
$
596

Effective interest rate on Structured Products investments(1)
13.1
%
 
8.8
%
Debt and Structured Products investments(1)
$
3,063

 
$
4,114

Effective interest rate on debt and Structured Products investments(1)
13.0
%
 
10.3
%
Average monthly one-month LIBOR
0.3
%
 
0.3
%
Equity investments - private finance portfolio(1)(3)
$
2,206

 
$
2,162

Effective dividend yield on equity investments - private finance portfolio(1)(3)
4.0
%
 
6.8
%
Debt, Structured Products and equity investments(1)(3)
$
6,536

 
$
7,544

Effective yield on debt, Structured Products and equity investments(1)(3)
7.4
%
 
7.6
%
 ——————————
(1)
Monthly weighted average.
(2)
Quarterly average.
(3)
Excludes our equity investment in American Capital, LLC.

Debt Investments

Interest income on debt investments decreased by $9 million, or 10%, for the three months ended March 31, 2012, over the comparable period in 2011, primarily due to a decrease in our monthly weighted average debt investments outstanding. Our weighted average debt investments outstanding decreased by $0.9 billion for the three months ended March 31, 2012 over the comparable period in 2011 primarily as a result of the repayment or sale of debt investments or write-off of non-performing debt investments.

When a debt investment is placed on non-accrual, we may record reserves on uncollected payment-in-kind (“PIK”) interest income recorded in prior periods as a reduction of interest income in the current period. Conversely, when a debt investment is removed from non-accrual, we record interest income in the current period on prior period uncollected PIK interest income that was reserved in prior periods. For the three months ended March 31, 2012, we recorded additional interest income on uncollected PIK interest income recorded in prior periods of $12 million as a result of debt investments being removed from non-accrual. For the three months ended March 31, 2011, we recorded net reserves on uncollected PIK interest income recorded in prior periods of $1 million as a result of debt investments being placed on non-accrual.

Structured Products

Interest income on Structured Products investments increased by $2 million, or 15%, for the three months ended March 31, 2012, over the comparable period in 2011, primarily due to an increase in interest income recognized on our CLO investments due to increases in projected cash flows. Our weighted average Structured Products investments outstanding decreased for the three months ended March 31, 2012 over the comparable period in 2011, primarily as a result of the write-off of non-performing CMBS investments.

Equity Investments - Private Finance Portfolio

Dividend income on private finance portfolio investments decreased by $14 million, or 39%, for the three months ended March 31, 2012, over the comparable period in 2011, primarily due to the recognition of prior period dividend income for private finance preferred stock investments removed from non-accrual during the three months ended March 31, 2011. As a result, the monthly weighted average effective dividend yield on equity investments was 4.0% for the three months ended March 31, 2012, a 280 basis point decrease over the comparable period in 2011.

When a preferred equity investment is placed on non-accrual, we may record net reserves on uncollected accrued dividend income recorded in prior periods as a reduction of dividend income in the current period. Conversely, when a preferred equity investment is removed from non-accrual, we record dividend income in the current period for prior period uncollected accrued

47


dividend income which was reserved in prior periods. For the three months ended March 31, 2012 and 2011, we recorded dividend income for the reversal of reserves of accrued dividend income attributable to prior periods from private finance preferred stock investments of $4 million and $16 million, respectively, which had an approximate 70 basis point and 290 basis point impact, respectively, on the effective dividend yield on equity investments.

Equity Investments - American Capital, LLC

Dividend income from American Capital, LLC was $15 million and $4 million for the three months ended March 31, 2012 and 2011, respectively. In addition, for the three months ended March 31, 2012 and 2011, we received an additional $2 million of dividends from American Capital, LLC which was recorded as a reduction to cost basis. The increase in dividends received during the three months ended March 31, 2012 was primarily due to an increase in net income of American Capital, LLC, which was primarily generated from management fees earned for the management of AGNC and MTGE, both of which experienced significant growth in their equity capital during the quarter as a result of follow-on equity offerings.

Fee Income

Portfolio Company Advisory and Administrative Fees

As a BDC, we are required by law to make significant managerial assistance available to most of our portfolio companies. This generally includes providing guidance and counsel concerning the management, operations and business objectives and policies of the portfolio company to the portfolio company's management and board of directors, including participating on the company's board of directors. Our portfolio company advisory and administrative fees for the three months ended March 31, 2012 and 2011 were $3 million and $4 million, respectively.

Advisory and Administrative Services - American Capital, LLC

We have entered into service agreements with American Capital, LLC to provide additional asset management service support so that American Capital, LLC can fulfill its responsibilities under its fund management agreements. The fees generated from these service agreements for the three months ended March 31, 2012 and 2011 were $6 million and $4 million, respectively.

Other Fees

Other fees are primarily composed of transaction fees for structuring, financing and executing middle market portfolio transactions, which may not be recurring in nature. These fees amounted to $4 million and $5 million for the three months ended March 31, 2012 and 2011, respectively.

Operating Expenses

Operating expenses decreased $8 million, or 11%, for the three months ended March 31, 2012 over the comparable period in 2011. Operating expenses consisted of the following (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Interest
$
16

 
$
29

Salaries, benefits and stock-based compensation
37

 
36

General and administrative
15

 
11

Total operating expenses
$
68

 
$
76

 
Interest

Interest expense for the three months ended March 31, 2012 decreased $13 million, or 45%, over the comparable period in 2011. The decrease in interest expense was primarily attributable to a decrease in the weighted average borrowings outstanding for the three months ended March 31, 2012 over the comparable period in 2011 as well as a $6 million decrease in the amortization of deferred financing costs primarily as a result of unscheduled payments on our outstanding secured borrowings during 2011.


48


The components of interest expense, cash paid for interest expense, average interest rates and average outstanding balances for our borrowings are as follows (dollars in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Asset Securitizations:
 
 
 
Cash interest expense
$
1

 
$
3

Amortization of deferred financing costs
1

 
1

Total interest expense
$
2

 
$
4

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
1.7
%
 
1.2
%
Weighted average interest rate, excluding amortization of deferred financing costs
1.2
%
 
0.8
%
Weighted average balance outstanding
$
598

 
$
1,119

 
 
 
 
Public and Private Secured and Unsecured Borrowings:
 
 
 
Cash interest expense
$
12

 
$
17

Amortization of deferred financing costs
2

 
8

Total interest expense
$
14

 
$
25

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
9.5
%
 
11.4
%
Weighted average interest rate, excluding amortization of deferred financing costs
8.0
%
 
7.8
%
Weighted average balance outstanding
$
585

 
$
882

 
 
 
 
Total Borrowings:
 
 
 
Cash interest expense
$
13

 
$
20

Amortization of deferred financing costs
3

 
9

Total interest expense
$
16

 
$
29

 
 
 
 
Weighted average interest rate, including amortization of deferred financing costs
5.5
%
 
5.7
%
Weighted average interest rate, excluding amortization of deferred financing costs
4.6
%
 
3.9
%
Weighted average balance outstanding
$
1,183

 
$
2,001


Salaries, Benefits and Stock-based Compensation

Salaries, benefits and stock-based compensation consisted of the following (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Base salaries
$
14

 
$
13

Incentive compensation
8

 
10

Benefits
4

 
3

Stock-based compensation
11

 
10

Total salaries, benefits and stock-based compensation
$
37

 
$
36


As of March 31, 2012, we had 247 total employees compared to 244 total employees as of March 31, 2011.


49


Tax Provision

During our tax year ended September 30, 2011, due to a shift in the composition and value of our assets, we did not meet the quarterly investment diversification requirements to continue to be taxed as a regulated investment company. Therefore, we are now subject to taxation as a corporation under Subchapter C of the Internal Revenue Code of 1986, as amended, beginning with our tax year ended September 30, 2011. During the three months ended March 31, 2012, our deferred tax provision consisted of the following:
 
Three Months Ended March 31,
 
2012
 
2011
Tax provision - net operating income
$
(32
)
 
$

Tax benefit - net realized loss
22

 

Tax provision - net unrealized appreciation
(21
)
 

Total tax provision
$
(31
)
 
$


Net Realized Gain (Loss)

Our net realized gain (loss) consisted of the following individual portfolio company realized gains (losses) greater than $15 million (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Other, net
$
15

 
$
14

Total gross realized portfolio gain
15

 
14

 
 
 
 
FPI Holding Corporation
(29
)
 

Halex Holdings Inc.
(27
)
 

Contec, LLC
(17
)
 

Other, net
(64
)
 
(4
)
Total gross realized portfolio loss
(137
)
 
(4
)
Total net realized portfolio (loss) gain
(122
)
 
10

Tax benefit
22

 

Interest rate derivative periodic interest payments, net
(8
)
 
(12
)
Interest rate derivative termination payments

 
(1
)
Foreign currency transactions
1

 

Total net realized loss
$
(107
)
 
$
(3
)
 



50


Net Unrealized Appreciation (Depreciation)

The following table itemizes the change in net unrealized appreciation (depreciation) (in millions):
 
Three Months Ended March 31,
 
2012
 
2011
Gross unrealized appreciation of private finance portfolio investments
$
134

 
$
162

Gross unrealized depreciation of private finance portfolio investments
(56
)
 
(87
)
Net unrealized appreciation of private finance portfolio investments
78

 
75

Net unrealized appreciation of European Capital investment
148

 
133

Net unrealized depreciation of European Capital foreign currency translation
(21
)
 
(43
)
Net unrealized appreciation of American Capital, LLC
287

 
60

Net unrealized appreciation of Structured Products investments
18

 
39

Reversal of prior period net unrealized depreciation (appreciation) upon realization
117

 
(8
)
Net unrealized appreciation of portfolio investments
627

 
256

Foreign currency translation - European Capital
37

 
82

Foreign currency translation - other
1

 
3

Derivative agreements
(6
)
 
13

Net unrealized appreciation of investments
659

 
354

Tax provision
(21
)
 

Net unrealized appreciation
$
638

 
$
354


See our “Investment Valuation Policy” in Note 3 in this Quarterly Report on Form 10-Q for a description of our valuation methodologies.
 
Private Finance Portfolio

Our private finance portfolio investments consist of loans and equity securities primarily to privately-held middle market companies with a cost basis of $4,427 million and fair value of $3,612 million as of March 31, 2012. There is generally no publicly available information about these companies and an active primary or secondary market for the trading of these privately issued loans and securities generally does not exist. Our investments have been historically exited through normal repayment or a change in control transaction such as a sale or recapitalization of the portfolio company.

For the three months ended March 31, 2012 and 2011, the $78 million and $75 million, respectively, of net unrealized appreciation on our private finance portfolio investments was driven primarily by improved portfolio company performance, multiple expansion of comparable companies and narrowing investment spreads.

European Capital

As of March 31, 2012, our investment in European Capital consisted of an equity investment with a cost basis and fair value of $1,267 million and $711 million, respectively, and a debt investment with a cost basis and fair value of $88 million. For the three months ended March 31, 2012, we recognized net unrealized appreciation of $127 million on our investment in European Capital comprised of $148 million unrealized appreciation on our investment and $21 million of unrealized depreciation from foreign currency translation of the cumulative unrealized depreciation of our investment in European Capital. For the three months ended March 31, 2011, we recognized unrealized appreciation of $90 million on our investment in European Capital comprised of $133 million unrealized appreciation on our investment and $43 million of unrealized depreciation from foreign currency translation of the cumulative unrealized depreciation of our investment in European Capital.

For foreign currency denominated investments recorded at fair value, such as European Capital, the net unrealized appreciation or deprecation from foreign currency translation on the accompanying consolidated statements of operations represents the economic impact of translating the cost basis of the investment from a foreign currency, such as the Euro, to the US dollar. However, the economic impact of translating the cumulative unrealized appreciation or depreciation from a foreign currency to the US dollar is not recorded as net unrealized depreciation or appreciation from foreign currency translation but rather is included as net unrealized appreciation or depreciation of portfolio company investments on the accompanying consolidated statements of operations. For the three months ended March 31, 2012 and 2011, we recorded unrealized appreciation of $37 million and $82 million for foreign currency translation, respectively, on the cost basis in our investment in European Capital (included in our total unrealized appreciation of $38 million and $85 million for foreign currency translation for the three months ended March 31, 2012 and 2011, respectively). European Capital, a wholly-owned portfolio company of American Capital, is an investment fund which

51


invests in One Stop Buyouts®, Private Equity Buyouts and provides capital directly to early stage and mature private and small public companies primarily in Europe. It primarily invests in senior and mezzanine debt and equity. European Capital's underlying portfolio investments are recorded at fair value determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). In determining the fair value of our investment in European Capital, we concluded that our investment should be less than the NAV of European Capital due to comparable public traded funds which were trading at a discount to NAV on the measurement date and the risks associated with our ability to realize the full fair value of European Capital's underlying assets for several reasons, including a public to private liquidity discount and the ability to demonstrate an implied market return on equity required by market participants for a measurable period of time, which indicate fair values at a discount to the NAV. During the three months ended March 31, 2012 and 2011, the unrealized appreciation on our investment of $148 million and $133 million, respectively, excluding unrealized depreciation on foreign currency translation, was due primarily to an increase in the NAV of European Capital and a decrease to the discount applied to NAV.

The following is a summary of European Capital's NAV at fair value and our equity investment's implied discount to European Capital's NAV at fair value (€ and $ in millions) as of March 31, 2012 and December 31, 2011:
 
March 31, 2012
 
December 31, 2011
Debt investments at fair value
719

 
712

Equity investments at fair value
258

 
262

Other assets and liabilities, net
142

 
92

Secured debt at cost
(290
)
 
(271
)
Unsecured debt at cost
(110
)
 
(111
)
Unsecured debt from American Capital at cost
(66
)
 
(57
)
NAV (Euros)
653

 
627

Exchange rate
1.33

 
1.30

NAV (US dollars)
$
868

 
$
815

Fair value of American Capital equity investment
$
711

 
$
547

Implied discount to NAV
18.1
%
 
32.9
%

American Capital, LLC

American Capital, LLC manages the following funds through various subsidiaries: European Capital, AGNC, MTGE, ACE I, ACE II and ACAS CLO-1. American Capital, LLC had a cost basis of $99 million and fair value of $736 million as of March 31, 2012. During the three months ended March 31, 2012 and 2011, we recognized $287 million and $60 million of unrealized appreciation, respectively, on our investment in American Capital, LLC. The unrealized appreciation on our investment in American Capital, LLC for the three months ended March 31, 2012 and 2011 was primarily due to increases in the historical and projected management fees for managing AGNC and MTGE due to significant growth in their equity capital of each company. During the three months ended March 31, 2012, AGNC and MTGE have raised $2.2 billion and $258 million of common equity capital, respectively.

Structured Products Investments

American Capital has investments in Structured Products (which includes investment and non-investment grade tranches of CMBS, CLO and CDO securities) with a cost basis of $440 million and fair value of $231 million as of March 31, 2012. During the three months ended March 31, 2012 and 2011, we recorded $18 million and $39 million, respectively, of net unrealized appreciation on our Structured Products investments. Our investments in CLO and CDO portfolios of commercial loans experienced $18 million and $31 million of net unrealized appreciation during the three months ended March 31, 2012 and 2011, respectively, due primarily to a narrowing of investment spreads, higher broker quotes and improved projected cash flows. Our CMBS portfolio experienced $8 million of net unrealized appreciation during the three months ended March 31, 2011.

Derivative Agreements

During the three months ended March 31, 2012 and 2011, we recorded $6 million of net unrealized depreciation and $13 million of net unrealized appreciation, respectively, from derivative agreements, primarily interest rate swaps. The fair value of the net liability for our derivative agreements as of March 31, 2012 was $95 million, which included a $5 million net reduction related to the incorporation of an adjustment for nonperformance risk of us and our counterparties. The fair value of the net liability for our derivative agreements as of March 31, 2011 was $90 million, which included a $10 million net reduction due to the incorporation of an adjustment for nonperformance risk of us and our counterparties.


52


For interest rate swap agreements, we estimate the fair value based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the end of the measurement period, adjusted for nonperformance risk, if any, including an evaluation of our credit risk and our counterparty's credit risk. A negative fair value would represent an amount we would have to pay a third-party and a positive fair value would represent an amount we would receive from a third-party to assume our obligation under an interest rate swap agreement. The derivative agreements generally appreciate or depreciate primarily based on relative market interest rates and their remaining term to maturity as well as changes in our and our counterparty's credit risk.
 
Return on Shareholders’ Equity

The following table summarizes our returns on shareholders’ equity for the last twelve months (“LTM”) and quarters ended March 31, 2012 and 2011:
 
Period Ended March 31,
 
2012
 
2011
LTM NOI return on average equity at cost
6.9
 %
 
4.0
 %
LTM net realized earnings (loss) return on average equity at cost
 %
 
(3.6
)%
LTM net earnings return on average equity at fair value
25.1
 %
 
37.3
 %
Current quarter annualized NOI return on average equity at cost
3.3
 %
 
5.5
 %
Current quarter annualized net realized (loss) earnings return on average equity at cost
(3.9
)%
 
5.3
 %
Current quarter annualized net earnings return on average equity at fair value
47.9
 %
 
44.6
 %

Financial Condition, Liquidity and Capital Resources

Our primary sources of liquidity are our cash and cash equivalents and our investment portfolio. As of March 31, 2012, we had $313 million of cash and cash equivalents and $205 million of restricted cash and cash equivalents. Our restricted cash and cash equivalents consists primarily of collections of interest and principal payments on assets that are securitized. In accordance with the terms of the related securitized debt agreements, based on current characteristics of the securitized loan portfolios, the restricted funds are generally used each quarter to pay interest and principal on the securitized debt and are not distributed to us or available for our general operations. During the three months ended March 31, 2012 and 2011, we principally funded our operations from (i) cash receipts from interest, dividend and fee income from our investment portfolio and (ii) cash proceeds from the realization of portfolio investments through the repayments of loan investments and the sale of loan and equity investments.

As of March 31, 2012, our required principal amortization requirements for the next twelve months are limited to our $11 million of unsecured public notes due August 2012 and any principal amortization of our secured notes within our asset securitizations as a result of principal and interest payments on our securitized debt investments. We believe that we will continue to generate sufficient cash flow through the receipt of interest, dividend and fee payments from our investment portfolio, as well as cash proceeds from the realization of select portfolio investments, to allow us to continue to service our debt, pay our operating costs and expenses, fund capital to our current portfolio companies and originate new investments. However, there is no certainty that we will generate sufficient liquidity to meet our liquidity needs.

Operating and Investing Cash Flow

For the three months ended March 31, 2012 and 2011, cash provided by operations was $46 million and $42 million, respectively. Our cash flow from operations for the three months ended March 31, 2012 and 2011, was primarily from the collection of interest, dividends and fees on our investment portfolio less operating expenses.

For the three months ended March 31, 2012 and 2011, net cash provided by investing activities was $348 million and $213 million, respectively. Our cash flow from investing activities includes cash proceeds from the realization of portfolio investments totaling $396 million and $269 million for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, we had portfolio investments totaling $5.4 billion at fair value, including $2.2 billion in debt investments, $3.0 billion in equity investments and $0.2 billion in Structured Products investments. However, our investments are generally illiquid and no active primary or secondary market for the trading of these investments exists and our estimates of fair value may differ significantly from the values that may be ultimately realized. We are generally repaid or exit our investments upon a change of control event of the portfolio company, such as a sale or recapitalization of the portfolio company.

For the three months ended March 31, 2012, approximately $63 million of interest income collected was generated from securitized assets, which is included in our cash flow from operations on our consolidated statements of cash flows. However, because of defaulted loan collateral within our asset securitizations, all interest collections within the securitizations are currently required to be used to pay interest and principal on the outstanding notes in our securitizations with such principal payments included in our cash flow from financing activities on our consolidated statements of cash flows.

53



Debt Capital

Our debt obligations consisted of the following as of March 31, 2012 and December 31, 2011 (in millions):
 
March 31, 2012
 
December 31, 2011
Fixed rate private secured notes due December 2013
$
30

 
$
30

Floating rate private secured loans due December 2013
16

 
17

Fixed rate non-amortizing secured notes due December 2013
524

 
524

Floating rate non-amortizing secured notes due December 2013
4

 
4

Unsecured public notes due August 2012
11

 
11

ACAS Business Loan Trust 2004-1 asset securitization
12

 
21

ACAS Business Loan Trust 2005-1 asset securitization
183

 
227

ACAS Business Loan Trust 2006-1 asset securitization
150

 
180

ACAS Business Loan Trust 2007-1 asset securitization
121

 
140

ACAS Business Loan Trust 2007-2 asset securitization
81

 
97

Total
$
1,132

 
$
1,251


The daily weighted average debt balance for the three months ended March 31, 2012 and 2011 was $1,183 million and $2,001 million, respectively. The weighted average interest rate on all of our borrowings, including amortization of deferred financing costs, for the three months ended March 31, 2012 and 2011 was 5.5% and 5.7%, respectively. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, for the three months ended March 31, 2012 and 2011 was 4.6% and 3.9%, respectively. The weighted average interest rate on all of our borrowings, excluding amortization of deferred financing costs, as of March 31, 2012 was 4.7%.

As a BDC, we are permitted to issue Senior Securities in any amounts as long as immediately after such issuance our asset coverage is at least 200%, or equal to or greater than our asset coverage prior to such issuance, after taking into account the payment of debt with proceeds from such issuance. Asset coverage is defined as the ratio of the value of the total assets, less all liabilities and indebtedness not represented by Senior Securities, bears to the aggregate amount of Senior Securities representing indebtedness. However, if our asset coverage is below 200%, we may also borrow amounts up to 5% of our total assets for temporary purposes even if that would cause our asset coverage ratio to further decline. As of March 31, 2012, our asset coverage was 552%.

Secured Debt Agreements
 
As of March 31, 2012, we had secured loans (“Floating Rate Private Secured Loans”) outstanding under an amended and restated credit agreement and secured notes outstanding under an indenture (collectively with the amended and restated credit agreement, the “Secured Debt Agreements”), consisting of fixed rate private secured notes (“Fixed Rate Private Secured Notes”), call-protected fixed rate secured notes (“Fixed Rate Non-Amortizing Secured Notes”) and call-protected floating rate secured notes (“Floating Rate Non-Amortizing Secured Notes,” and collectively with the Floating Rate Private Secured Loans, Fixed Rate Private Secured Notes and Fixed Rate Non-Amortizing Secured Notes, the “Secured Debt”).

Maturity Date and Optional Redemption—The Secured Debt has a final maturity date of December 31, 2013, unless earlier repaid. Prior to August 1, 2012, the Fixed Rate Non-Amortizing Secured Notes and Floating Rate Non-Amortizing Secured Notes may be redeemed at our option in whole or in part from time to time so long as there are no Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes outstanding only at a price equal to (i) 100% of the principal amount being redeemed, plus accrued and unpaid interest to the date of redemption, but without payment of any premium, with Realized Proceeds (as defined in the Secured Debt Agreements) or (ii) the accrued and unpaid interest on the principal amount being redeemed plus the greater of (a) 100% of the principal amount being redeemed, and (b) the sum of the present values of the remaining scheduled payments of principal and interest on the principal amount being redeemed discounted to the redemption date on a semi-annual basis at the Adjusted Treasury Rate (as defined in the Secured Debt Agreements), plus 30 basis points. In addition, the Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes may be repaid prior to maturity at our option in whole or in part from time to time at a price equal to 100% of the principal amount repaid, plus accrued and unpaid interest to the payment date.
 
Scheduled Amortization and Mandatory Redemption—As of March 31, 2012, there were no further required scheduled amortization payments on the Floating Rate Private Secured Loans and the Fixed Rate Private Secured Notes. The Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes are subject to mandatory prepayments in certain instances as follows: (i) 100% of the net proceeds of certain debt incurred, (ii) 50% of the net cash flow proceeds of any capital stock issued after June 28, 2012, (iii) 25% of any Realized Proceeds, and (iv) 25% of Excess Cash Flow (as defined in the Secured Debt Agreements). However, as of March 31, 2012, we were entitled to retain the first $149 million that would otherwise be payable from any proceeds

54


from debt issued, capital stock issued, Realized Proceeds or Excess Cash Flow for new portfolio investments or other general corporate purposes. The Fixed Rate Non-Amortizing Secured Notes and Floating Rate Non-Amortizing Secured Notes are not subject to amortization or mandatory redemptions.
 
Interest—The Floating Rate Private Secured Loans and Floating Rate Non-Amortizing Secured Notes bear interest at a rate per annum equal to one, two, three or six-month LIBOR, subject to a LIBOR floor of 2% per annum, plus 5.50%.
 
In addition, the interest rates for each type of Secured Debt will increase by 0.50% per annum if we do not pay the remaining outstanding balance on the Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes by June 30, 2013. The increase will remain in effect for each succeeding day until the remaining balance of the Floating Rate Private Secured Loans and Fixed Rate Private Secured Notes have been paid.
 
The following table sets forth the interest rates on the Secured Debt as of March 31, 2012:
Fixed rate private secured notes due December 2013
7.96%
Floating rate private secured loans due December 2013
7.50%
Fixed rate non-amortizing secured notes due December 2013
7.96%
Floating rate non-amortizing secured notes due December 2013
7.50%

Fees—We are required to pay a fee in an amount equal to 1% of the aggregate principal amount of the Secured Debt outstanding on December 31, 2012, payable on such date.
 
Security and Ranking—The Secured Debt is a senior obligation of ours and is secured by a first priority lien (subject to certain permitted liens) on substantially all of our non-securitized assets. The cost basis and fair value of the investment collateral securing the Secured Debt consisted of the following as of March 31, 2012 (in millions): 
 
Cost Basis
 
Fair Value
Senior debt
$
537

 
$
457

Mezzanine debt
675

 
619

Preferred equity
1,398

 
1,104

Common equity
1,917

 
1,729

Equity warrants
84

 
82

Structured Products
426

 
224

Total investment collateral
5,037

 
4,215

Total investment non-collateral(1)
1,285

 
1,164

Total investments
$
6,322

 
$
5,379


(1)
Includes investments in our asset securitizations for which the notes issued by the asset securitizations have a security interest. We hold the subordinated notes in the asset securitizations. The Secured Debt has a first priority lien on our retained subordinated notes in the asset securitizations.

Covenants—The financial covenants under the Secured Debt Agreements include the maintenance of a minimum ratio of adjusted operating cash flow to interest expense and a minimum ratio of pledged assets to secured debt, tested on a quarterly basis. We are also subject to additional covenants. As of March 31, 2012, we were in compliance with all of the covenants under the Secured Debt Agreements.

Asset Securitizations

Under the terms of each of our asset securitizations, if any loan collateral in each trust becomes a defaulted loan (as defined in each indenture for the respective asset securitization), all interest and principal collections that would be applied to the subordinated notes retained by us are used to sequentially pay down the principal of the notes that are generally held by third-party institutional investors in an amount equal to the principal amount of the defaulted loan collateral. As of March 31, 2012, there was defaulted loan collateral in each of the asset securitization trusts and therefore all interest and principal collections that would have been applied to the subordinated notes retained by us will continue to be applied sequentially to pay down the principal of the notes generally held by third-party institutional investors in an amount equal to the principal amount of the defaulted loan collateral. As of March 31, 2012, our asset securitizations, which had an outstanding balance of $547 million, were secured by portfolio investments and assets with a fair value of approximately $1.3 billion. On April 25, 2012, the third-party notes issued by ACAS Business Loan Trust 2004-1 were paid off in full.


55


Derivative Agreements

We enter into interest rate swap agreements to manage interest rate risk and also to fulfill our obligations under the terms of our asset securitizations. We may also enter into foreign exchange swap agreements to manage foreign currency risk. We do not hold or issue interest rate or foreign exchange swap agreements for speculative purposes. We fair value our derivatives in accordance with the Investment Company Act of 1940, as amended (“1940 Act”) and ASC 820 as determined in good faith by our Board of Directors. All derivative financial instruments are recorded at fair value with changes in value reflected in net unrealized appreciation or depreciation of investments during the reporting period.

We have entered into interest rate swap agreements where we generally pay a fixed rate and receive a floating rate based on LIBOR. The fair value of our interest rate swap agreements are identified as separate items on our consolidated balance sheets and are described in the accompanying consolidated schedules of investments.

As of March 31, 2012, we had interest rate swap agreements that had a net fair value liability of $95 million. Certain of our interest rate swap agreements allow the counterparty to terminate the transactions in the event of default under certain conditions. As of March 31, 2012, none of the counterparties had the right to terminate the agreements.

Certain of our interest rate swap agreements also contain an additional termination event that allows either party or, in one case, our counterparty, to elect on a designated date prior to the scheduled maturity date of the agreement to terminate all transactions outstanding under the agreement early on such date. If the optional early termination right is exercised, the early termination dates under the agreement would occur during the second or third quarters of 2012. Derivatives under these agreements in a liability position had a US GAAP fair value liability of $66 million and $58 million as of March 31, 2012 and December 31, 2011, respectively. While none of our counterparties had the right to elect to terminate their agreements early with us as a result of this provision as of March 31, 2012 and December 31, 2011, the termination liability would have been $68 million and $70 million as of such dates, respectively. The difference between the US GAAP fair value liability and the termination liability represents an adjustment for nonperformance risk of us and our counterparties.

Equity Capital

As a BDC, we are generally not able to issue or sell our common stock at a price below our NAV per share, exclusive of any distributing commission or discount, except (i) with the prior approval of a majority of our shareholders, (ii) in connection with a rights offering to our existing shareholders, or (iii) under such other circumstances as the Securities and Exchange Commission (“SEC”) may permit. As of March 31, 2012, our NAV was $15.71 per share and our closing market price was $8.68 per share.

During the third quarter of 2011, our Board of Directors adopted a program that may provide for additional repurchases of shares or dividend payments. On April 26, 2012, our Board of Directors extended the stock repurchase and dividend program through December 31, 2013. Under the program, we will consider quarterly setting an amount to be utilized for stock repurchases or dividends. Generally, the amount may be utilized for repurchases if the price of our common stock represents a discount to the NAV of our shares, and the amount may be utilized for the payment of cash dividends if the price of our common stock represents a premium to the NAV of our shares. In determining the quarterly amount for repurchases or dividends, the our Board of Directors will be guided by our cumulative net cash provided by operating activities in the prior quarter and since the beginning of 2012, cumulative repurchases or dividends, cash on hand, debt service considerations, investment plans, forecasts of financial liquidity and economic conditions, operational issues and the then current trading price of our stock. The repurchase and dividends program may be suspended, terminated or modified at any time for any reason. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases. During the first quarter of 2012, we made open market purchases of 5.5 million shares, or $48 million, of our common stock at an average price of $8.79 per share.


56


Commitments
 
As of March 31, 2012, we had commitments under loan and financing agreements to fund up to $110 million to 18 portfolio companies, with $12 million and $14 million of the commitments related to undrawn revolving credit facilities for European Capital and American Capital, LLC, respectively. These commitments are primarily composed of working capital credit facilities, acquisition credit facilities and subscription agreements. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and availability under borrowing base thresholds. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio.
 
Non-Performing Loans Analysis

We stop accruing interest on our debt investments when it is determined that interest is no longer collectible. Our valuation analysis serves as a critical piece of data in this determination. A significant change in the portfolio company valuation assigned by us could have an effect on the amount of our loans on non-accrual status. As of March 31, 2012, loans on non-accrual status for 25 portfolio companies had a cost basis and fair value of $356 million and $178 million, respectively.

As of March 31, 2012 and December 31, 2011, current loans, past due accruing loans and loans on non-accrual status were as follows (dollars in millions): 
 
March 31, 2012
 
December 31, 2011
Current
$
2,001

 
$
2,304

0 - 30 days past due
5

 
16

31 - 60 days past due
14

 
3

61 - 90 days past due

 

Greater than 90 days past due
3

 
3

Total past due accruing loans at cost
22

 
22

Non-accruing loans at cost
356

 
419

Total loans at cost
$
2,379

 
$
2,745

Non-accruing loans at fair value
$
178

 
$
219

Total loans at fair value
$
2,190

 
$
2,518

Non-accruing loans at cost as a percent of total loans at cost
15.0
%
 
15.3
%
Non-accruing loans at fair value as a percent of total loans at fair value
8.1
%
 
8.7
%
Non-accruing loans at fair value as a percent of non-accruing loans at cost
50.0
%
 
52.3
%

We believe that principal and interest collection is probable for our past due accruing loans. Non-accruing loans at cost decreased $63 million from December 31, 2011 to March 31, 2012 primarily due to approximately $57 million of loan restructurings, exits and write-offs and $22 million of loans removed from non-accrual status due to improved portfolio company performance, partially offset by approximately $14 million of loans placed on non-accrual status due to weaker portfolio company performance.

During the first quarter of 2012, we recapitalized two portfolio companies by exchanging our loans for common equity securities that had a cost basis of $20 million and a fair value of $17 million.

During the first quarter of 2011, we recapitalized two portfolio companies by exchanging our loans for preferred or common equity securities that had a cost basis of $49 million and a fair value of $37 million.



57


Portfolio Company Statistics

We track our portfolio investments on a static pool basis. A static pool consists of the investments made during a given year. The static pool classification is based on the year the initial investment was made. Subsequent add-on investments are included in the static pool year of the original investment. The Pre-2001 static pool consists of the investments made from the time of our IPO through the year ended December 31, 2000. The following table contains a summary of portfolio statistics as of and for the period ended March 31, 2012:
 
Static Pool (1)
Portfolio Statistics
($ in millions, unaudited)
Aggregate
Pre-
2001
2001
2002
2003
2004
2005
2006
2007
2008
2011
Pre-2001 - 2012 Static Pools Aggregate
IRR at Fair Value of All Investments(2)
8.3
%
18.1
%
8.2
%
20.3
%
13.5
%
12.7
%
10.3
%
(5.3%)

6.5
%
19.9
%
8.3
%
IRR of Exited Investments(3)
9.1
%
18.6
%
9.7
%
20.0
%
17.1
%
22.0
%
10.4
%
(9.6%)

3.5
%
N/A

10.7
%
IRR at Fair Value of Equity Investments Only(2)(4)(5)
6.7
%
46.4
%
11.1
%
27.7
%
26.5
%
11.2
%
14.6
%
(9.5%)

18.6
%
20.7
%
10.7
%
IRR of Exited Equity Investments Only(3)(4)(5)
10.9
%
46.4
%
21.4
%
36.7
%
49.0
%
51.0
%
18.1
%
9.5
%
35.5
%
N/A

28.3
%
IRR at Fair Value of All One Stop Buyout® Investments(2)
2.3
%
17.1
%
10.8
%
18.8
%
16.0
%
28.7
%
12.6
%
1.4
%
15.1
%
%
13.5
%
IRR at Fair Value of Current One Stop Buyout® Investments(2)
14.1
%
N/A

(0.1%)

17.3
%
6.8
%
23.9
%
11.4
%
(1.4%)

15.1
%
%
10.8
%
IRR of Exited One Stop Buyout® Investments(3)
1.3
%
17.1
%
14.7
%
16.3
%
27.5
%
30.6
%
14.9
%
15.5
%
14.2
%
N/A

16.2
%
Committed Investments(7)
$
1,065

$
376

$
966

$
1,436

$
2,267

$
4,811

$
5,239

$
7,481

$
1,039

$
137

$
24,817

Total Exits and Prepayments of Committed Investments(7)
$
995

$
367

$
836

$
1,266

$
1,971

$
2,597

$
3,877

$
4,717

$
496

$

$
17,122

Total Interest, Dividends and Fees Collected
$
407

$
148

$
347

$
455

$
695

$
1,187

$
1,228

$
1,175

$
335

$
7

$
5,984

Total Net Realized (Loss) Gain on Investments
$
(137
)
$
(23
)
$
(118
)
$
143

$
16

$
375

$
(170
)
$
(1,097
)
$
(116
)
$

$
(1,127
)
Current Cost of Investments
$
78

$
4

$
120

$
157

$
276

$
1,921

$
1,075

$
2,211

$
372

$
108

$
6,322

Current Fair Value of Investments
$
44

$

$
86

$
296

$
195

$
1,981

$
1,048

$
1,305

$
313

$
111

$
5,379

Current Fair Value of Investments as a % of Total Investments at Fair Value
0.8
%
%
1.6
%
5.5
%
3.6
%
36.8
%
19.5
%
24.3
%
5.8
%
2.1
%
100.0
%
Net Unrealized (Depreciation) Appreciation
$
(34
)
$
(4
)
$
(34
)
$
139

$
(81
)
$
60

$
(27
)
$
(906
)
$
(59
)
$
3

$
(943
)
Non-Accruing Loans at Cost
$

$

$
18

$

$
31

$
58

$
43

$
174

$
32

$

$
356

Non-Accruing Loans at Fair Value
$
1

$

$
7

$

$
11

$
30

$
7

$
96

$
26

$

$
178

Equity Interest at Fair Value(4)
$
18

$

$

$
259

$
110

$
1,623

$
484

$
326

$
93

$
45

$
2,958

Debt to Adjusted EBITDA(8)(9)(10)(11)(14)
4.3

NM

10.3

2.8

5.2

1.9

4.4

6.1

5.8

5.7

4.4

Interest Coverage(10)(11)(14)
4.2

NM

1.5

4.3

2.4

2.1

2.7

2.1

2.3

2.1

2.3

Debt Service Coverage(10)(11)(14)
3.8

NM

1.5

3.8

2.1

0.6

2.4

1.8

1.9

2.0

1.7

Average Age of Companies(11)(14)
46

0

29

39

53

15

39

31

20

25

29

Diluted Ownership Percentage(4)(15)
62
%
%
43
%
55
%
71
%
87
%
47
%
51
%
33
%
9
%
63
%
Average Revenue(11)(12)(14)
$
47

$

$
43

$
211

$
65

$
158

$
170

$
179

$
91

$
159

$
158

Average Adjusted EBITDA(8)(11)(14)
$
6

$

$
10

$
44

$
16

$
67

$
41

$
38

$
21

$
42

$
44

Total Revenue(11)(12)
$
95

$
238

$
73

$
1,458

$
349

$
1,245

$
3,391

$
4,882

$
1,543

$
478

$
13,752

Total Adjusted EBITDA(8)(11)
$
13

$
6

$
10

$
202

$
55

$
287

$
448

$
846

$
250

$
142

$
2,259

% of Senior Loans(10)(11)(13)
72
%
%
52
%
%
33
%
31
%
26
%
50
%
31
%
38
%
39
%
% of Loans with Lien(10)(11)(13)
100
%
%
100
%
100
%
100
%
84
%
99
%
87
%
69
%
38
%
73
%
 
 
 
 
 
 
 
 
 
 
 
 
Majority Owned Portfolio Companies (“MOPC”)(6)
Pre-2001 - 2012 Static Pools Aggregate
 
 
 
 
 
 
 
 
 
Total Revenue(12)
$
3,116
 
 
 
 
 
 
 
 
 
 
Total Gross Profit(12)
$
1,561
 
 
 
 
 
 
 
 
 
 
Total Adjusted EBITDA(8)
$
703
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Capital Expenditures(12)
$
95
 
 
 
 
 
 
 
 
 
 
Total Current ACAS Investment in MOPC at Fair Value
$
3,429
 
 
 
 
 
 
 
 
 
 
Diluted Ownership Percentage of ACAS in MOPC(15)
69
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Cash
$
197
 
 
 
 
 
 
 
 
 
 
Total Assets
$
4,571
 
 
 
 
 
 
 
 
 
 
Total Debt
$
3,347
 
 
 
 
 
 
 
 
 
 
Total Third-party Debt at Cost
$
1,486
 
 
 
 
 
 
 
 
 
 
Total Shareholders' Equity(16)
$
2,984
 
 
 
 
 
 
 
 
 
 
——————— 
1)
Static pool classification is based on the year the initial investment was made. Subsequent add-on investments are included in the static pool year of the original investment. There were no investments made in 2009, 2010 and 2012 static pool years.
2)
Assumes investments are exited at current fair value.
3)
Includes fully exited investments of existing portfolio companies.
4)
Excludes investments in Structured Products.
5)
Excludes equity investments that are the result of conversions of debt and warrants received with the issuance of debt.
6)
MOPC investments represent portfolio company investments in which American Capital, or its affiliates, have a fully diluted ownership percentage of 50% or more or have over 50% board representation at the portfolio company. Excludes our investment in European Capital.
7)
Represents committed investment amount at the time of origination.
8)
Adjusted EBITDA may reflect certain adjustments to the reported EBITDA of a portfolio company for non-recurring, unusual or infrequent items or other pro-forma items or events to normalize current earnings which a buyer may consider in a change in control transactions. These adjustments may be material and are highly subjective in nature. Portfolio company reported EBITDA is for the most recently available twelve months, or when appropriate, the forecasted twelve months or current annualized run-rate.
9)
For portfolio companies with a nominal Adjusted EBITDA amount, the portfolio company's maximum debt leverage is limited to 15 times Adjusted EBITDA.
10)
Excludes investments in which we own only equity.
11)
Excludes investments in Structured Products and managed funds.
12)
For the most recent twelve months, or when appropriate, the forecasted twelve months.
13)
As a percentage of our total debt investments.
14)
Weighted average based on fair value.
15)
Weighted average based on fair value of equity investments.
16)
Calculated as the estimated enterprise value of the MOPC's less the cost basis of any outstanding debt of the MOPC's.

.



58




FORWARD-LOOKING STATEMENTS
 
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: (i) changes in the economic conditions in which we operate negatively impacting our financial resources; (ii) certain of our competitors have greater financial resources than us, reducing the number of suitable investment opportunities offered to us or reducing the yield necessary to consummate the investment; (iii) there is uncertainty regarding the value of our privately-held securities that require our good faith estimate of fair value, and a change in estimate could affect our NAV; (iv) our investments in securities of privately-held companies may be illiquid, which could affect our ability to realize the investment; (v) our portfolio companies could default on their loans or provide no returns on our investments, which could affect our operating results; (vi) we use external financing to fund our business, which may not always be available; (vii) our ability to retain key management personnel; (viii) an economic downturn or recession could impair our portfolio companies and therefore harm our operating results; (ix) our borrowing arrangements impose certain restrictions; (x) changes in interest rates may affect our cost of capital and net operating income; (xi) we cannot incur additional indebtedness unless immediately after a debt issuance we maintain an asset coverage of at least 200%, or equal to or greater than our asset coverage prior to such issuance, which may affect returns to our shareholder; (xii) our common stock price may be volatile; and (xiii) general business and economic conditions and other risk factors described in our reports filed from time to time with the SEC. We caution 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.

ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Stock Repurchase and Dividend Program
 
In September 2011, our Board of Directors adopted a program that may provide for stock repurchases or dividend payments. On April 26, 2012, our Board of Directors extended the stock repurchase and dividend program through December 31, 2013. The following table provides information for the quarter ended March 31, 2012, regarding shares of our common stock that we repurchased in the open market and were subsequently retired (in millions, except per share amounts):
 
Total Number of Shares Purchased(1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)
 
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
February 16, 2012 through February 29, 2012
2.9

 
$
8.81

 
2.9

 
N/A
March 1, 2012 through March 9, 2012
2.6

 
$
8.76

 
2.6

 
N/A
First Quarter 2012
5.5

 
$
8.79

 
5.5

 
N/A

(1)
All shares were purchased by us pursuant to the stock repurchase and dividend program described in footnote 2 below.
(2)
During the third quarter of 2011, we announced a program that may provide for additional repurchases of shares or dividend payments. On April 26, 2012, our Board of Directors extended the stock repurchase and dividend program through December 31, 2013. Under the program, we will consider quarterly setting an amount to be utilized for stock repurchases or dividends.

ITEM 3.
Quantitative and Qualitative Disclosure About Market Risk

We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio.
 
Interest Rate Risk
 
Interest rate sensitivity refers to the change in net operating income and net earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net operating income and net earnings are affected by the difference between the interest rate at which we invest and the interest rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net operating income and net earnings.
 
As of March 31, 2012, approximately 51% of the principal balance of the debt investments in our portfolio were at fixed rates, approximately 17% were at variable rates with interest rate floors, primarily one-month LIBOR, 11% were at variable rates with no interest rate floors and 21% were on non-accrual status. Additionally, approximately 48% of our borrowings bear interest at variable rates with no interest rate floors, 2% bear interest at variable rates with a 2% interest rate floor and 50% of our borrowings bear interest at fixed rates.
 

59


We maintain an interest rate risk management strategy under which we use derivative financial instruments to primarily manage the adverse impact of interest rates changes on our cash flows by locking in the spread between our asset yield and the cost of our borrowings, and to fulfill our obligation under the terms of our asset securitizations. While our interest rate risk management strategy may mitigate our exposure to adverse fluctuations in interest rates, certain derivative transactions that we may enter into in the future, such as interest rate swap agreements, may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio investments.
 
Our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB ASC Topic 815, Derivatives and Hedging. We record the accrual of the periodic interest settlements of interest rate derivatives in net unrealized appreciation or depreciation of investments and subsequently record the cash payments as a realized gain or loss on investments on the interest settlement date.

Based on our March 31, 2012 consolidated balance sheets, the following table shows the annual impact on net operating income and net earnings of base rate changes in the applicable interest rate indexes, primarily one-month LIBOR, (considering interest rate floors for variable rate instruments and excluding changes in the fair value of our investments and derivative instruments and loans on non-accrual status) assuming no changes in our investment, hedging and borrowing structure (in millions). The one-month LIBOR rate was 0.2% as of March 31, 2012.

Basis Point Change
 
Interest
Income
 
Interest
Expense
 
Net
Operating Income
 
Net Realized Gain (Loss) on Derivative Agreements(1)
 
Net Earnings
Up 400 basis points
 
$
22

 
$
22

 
$

 
$
15

 
$
15

Up 300 basis points
 
$
14

 
$
17

 
$
(3
)
 
$
13

 
$
10

Up 200 basis points
 
$
8

 
$
11

 
$
(3
)
 
$
8

 
$
5

Up 100 basis points
 
$
3

 
$
5

 
$
(2
)
 
$
4

 
$
2

Down 100 basis points
 
$
(1
)
 
$
(1
)
 
$

 
$
(2
)
 
$
(2
)
Down 200 basis points
 
$
(1
)
 
$
(1
)
 
$

 
$
(2
)
 
$
(2
)
Down 300 basis points
 
$
(1
)
 
$
(1
)
 
$

 
$
(2
)
 
$
(2
)
Down 400 basis points
 
$
(1
)
 
$
(1
)
 
$

 
$
(2
)
 
$
(2
)
(1)
Represents interest rate derivative periodic interest payments.

Foreign Currency Risks
 
We have a limited number of investments in portfolio companies, including European Capital, for which the investment is denominated in a foreign currency, primarily the Euro. We also have other assets and liabilities denominated in foreign currencies. Fluctuations in exchange rates therefore impact our financial condition and results of operations, as reported in U.S. dollars. During the three months ended March 31, 2012, the foreign currency translation adjustment recorded in our consolidated statements of operations was net unrealized depreciation of $38 million, primarily as a result of the Euro depreciating against the U.S. dollar.

As of March 31, 2012, our exposure to foreign currency exchange risk was estimated using a sensitivity analysis, which illustrates a hypothetical change in the foreign currency exchange rate as of March 31, 2012. As stated above, the Euro is the functional currency for the majority of our investments denominated in a foreign currency, and as such, the sensitivity analysis excludes any changes in other foreign currencies. Actual changes in foreign currency exchange rates may differ from this hypothetical change. Based on a hypothetical increase or decrease of 5% in the Euro to US dollar exchange rate, assuming no hedging, the fair value of our investments would have increased or decreased by approximately $36 million.

Portfolio Valuation
 
Our investments are carried at fair value in accordance with the 1940 Act and ASC 820. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. As of March 31, 2012, the fair value of 99% of our investments were estimated using Level 3 inputs determined in good faith by our Board of Directors because the investments were not publicly traded on an active market.

60



Item 4.
Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of “disclosure controls and procedures” as promulgated under the SEC Act of 1934, as amended. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
American Capital, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2012.
 
Changes in Internal Controls over Financial Reporting
 
There have been no significant changes in our internal controls over financial reporting or in other factors that could have significantly affected the internal controls over financial reporting during the first quarter of 2012.
 


61


PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

We and certain of our executive officers are defendants in a purported class action lawsuit in the United States District Court for the District of Maryland styled as Klugmann v. American Capital, Ltd., et al. The lawsuit was filed on behalf of the purchasers of our common stock between October 31, 2007 and November 7, 2008, and alleges violations of Sections 10(b) and 20A of the Exchange Act and Rule 10b-5 promulgated thereunder, violations of Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and in the case of the individual defendants, the control person provisions of the Exchange Act. The factual assertions in the complaint consist primarily of the allegation that the defendants made incorrect statements related to our dividend guidance for 2008. The complaint seeks unspecified damages, costs and expenses.

On February 22, 2012, the court granted preliminary approval of a settlement submitted by the parties. The terms of the settlement include payment by our insurers in exchange for a full release of the claims and provides that there is no admission as to the validity of the claims. The settlement is subject to certain contingencies including final court approval following notice and hearing and the right of defendants to terminate the settlement if a certain number of shareholders opt out of the class after notice. The final approval hearing is scheduled for June 7, 2012.

Item 1A.
Risk Factors
 
The risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 have not materially changed.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

62




Item 6.
Exhibits
 
3.1.
American Capital, Ltd. (f/k/a American Capital Strategies, Ltd.) Third Amended and Restated Certificate of Incorporation, as amended, filed herewith.
 
 
*3.2.
American Capital, Ltd. (f/k/a American Capital Strategies, Ltd.) Second Amended and Restated Bylaws, as amended, incorporated herein by reference to Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2008 (File No. 814-00149), filed August 11, 2008.
 
 
4.1.
Instruments defining the rights of holders of securities: See Article IV of our Third Amended and Restated Certificate of Incorporation, as amended, filed herewith as Exhibit 3.1.
 
 
*4.2.
Instruments defining the rights of holders of securities: See Section I of our Second Amended and Restated Bylaws, as amended, incorporated herein by reference to Exhibit 3.2 to Form 10-Q for the quarter ended June 30, 2008 (File No. 814-00149), filed August 11, 2008.
 
 
*4.3.
Indenture by and between American Capital, Ltd. (f/k/a American Capital Strategies, Ltd.) and Wilmington Trust Company, as successor trustee, dated as of April 26, 2007, incorporated herein by reference to Exhibit 2.d.3 of the Registration Statement on Form N-2 (File No. 333-142398), filed April 26, 2007.
 
 
*4.4.
First Supplemental Indenture by and between American Capital, Ltd. (f/k/a American Capital Strategies, Ltd.) and Wilmington Trust Company, as successor trustee, dated as of July 17, 2007, incorporated herein by reference to Exhibit 4.4 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.5.
Second Supplemental Indenture by and between American Capital, Ltd. and Wilmington Trust Company, as successor trustee, dated as of June 28, 2010, incorporated herein by reference to Exhibit 4.6 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.6.
Indenture by and between American Capital, Ltd. and Wilmington Trust, National Association, as successor trustee, dated as of June 28, 2010, incorporated herein by reference to Exhibit 4.7 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.7.
Senior Secured Non-Amortizing Call-Protected Adjustable Fixed Rate Dollar Unrestricted Global Note, No. B-1, CUSIP No. 02503YAF0, payable to Cede & Co., in the original principal amount of $500,000,000, incorporated herein by reference to Exhibit 4.8 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.8.
Senior Secured Non-Amortizing Call-Protected Adjustable Fixed Rate Dollar Unrestricted Global Note, No. B-2, CUSIP No. 02503YAF0, payable to Cede & Co., in the original principal amount of $24,098,000, incorporated herein by reference to Exhibit 4.9 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.9.
Senior Secured Non-Amortizing Call-Protected Floating Rate Dollar Unrestricted Global Note, No. C-1, CUSIP No. 02503YAE3, payable to Cede & Co., in the original principal amount of $4,300,000, incorporated herein by reference to Exhibit 4.10 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.10.
Senior Secured Amortizing Adjustable Fixed Rate Dollar Rule 144A Global Note, No. D-1, CUSIP No. 02503YAC7, payable to Cede & Co., in the original principal amount of $500,000,000, incorporated herein by reference to Exhibit 4.11 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.11.
Senior Secured Amortizing Adjustable Fixed Rate Dollar Rule 144A Global Note, No. D-2, CUSIP No. 02503YAC7, payable to Cede & Co., in the original principal amount of $2,431,467, incorporated herein by reference to Exhibit 4.12 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.12.
Series 6.85% Senior Notes Due 2012, No. 1, CUSIP No. 024937AA2, payable to Cede & Co., in the original principal amount of $500,000,000, incorporated herein by reference to Exhibit 4.13 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.13.
Series 6.85% Senior Notes Due 2012, No. 2, CUSIP No. 024937AA2, payable to Cede & Co., in the original principal amount of $50,000,000, incorporated herein by reference to Exhibit 4.14 to Form 10-Q for the quarter ended June 30, 2010 (File No. 814-00149), filed August 6, 2010.
 
 
*4.14.
Form of Senior Secured Amortizing Adjustable Fixed Rate Dollar Note Due 2013, No. A-1, CUSIP No. 02503YAA1, in the original principal amount of $0.00, incorporated herein by reference to Exhibit 4.14 to Form 10-K for the year ended December 31, 2011 (File No.814-00149), filed February 27, 2012.
 
 

63


31.1.
Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2.
Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.
Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
*
Fully or partly previously filed



64


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
AMERICAN CAPITAL, LTD.
 
 
 
 
By:
/s/    RICHARD E. KONZMANN        
 
 
Richard E. Konzmann
Senior Vice President, Accounting

Date: May 7, 2012


65