ACAS American Capital, Ltd.

BETHESDA, Md., Aug. 1 /PRNewswire-FirstCall/ -- American Capital Strategies Ltd. (NASDAQ:ACAS) announced today its third quarter 2006 dividend and its results for the second quarter of 2006. 2006 Q3 DIVIDEND DECLARATION American Capital's Board of Directors has declared a third quarter 2006 regular dividend of $0.83 per share to record holders as of September 6, 2006, payable on October 2, 2006. This dividend is a 6% increase over the third quarter 2005 regular dividend of $0.78 per share. American Capital has paid a total of $1.2 billion in dividends and paid or declared dividends of $21.56 per share since its August 1997 IPO at $15.00 per share. Also, American Capital has reiterated its 2006 dividend guidance of $3.29 per share from ordinary taxable income earned in 2006. The estimated remaining 2006 dividend per share is $0.84 for the fourth quarter of 2006. SECOND QUARTER 2006 RESULTS In addition, American Capital announced today its results for the quarter ended June 30, 2006. Net operating income (NOI) for the quarter increased 49% to $109 million compared to $73 million for second quarter of 2005. On a basic per share basis, NOI increased 5% to $0.82 per share compared to $0.78 per share in the second quarter of 2005. On a diluted per share basis, NOI increased 7% to $0.81 per share compared to $0.76 per share for the second quarter of 2005. Net realized earnings (NOI plus net realized gains and losses) for the quarter increased 26% to $131 million compared to $104 million for second quarter of 2005. On a basic per share basis, net realized earnings decreased 11% to $0.98 per share compared to $1.10 per share for the second quarter of 2005. On a diluted per share basis, net realized earnings decreased 9% to $0.97 per share compared to $1.07 per share for the second quarter of 2005. For the quarter, the net increase in net assets resulting from operations (NOI plus net appreciation and depreciation and net gains and losses on investments) was $290 million, or $2.18 per basic share and $2.16 per diluted share, compared to $79 million, or $0.84 per basic share and $0.82 per diluted share, in the second quarter of 2005. Second quarter 2006 dividends were $0.82 per share, a 9% growth over second quarter 2005 dividends of $0.75 per share. American Capital's net asset value per share at June 30, 2006 was $27.63, a $3.26 or 13% growth over the December 31, 2005 net asset value per share of $24.37, and $5.20 or 23% over the June 30, 2005 net asset value per share of $22.43. "American Capital had a record breaking second quarter earning $2.18 per basic share, producing over the past year a 21% earnings return on equity and growing our book value 23% to $27.63 per share, continuing nine years of market leading performance since our IPO in 1997, performance that rivals the best public companies. With a current dividend yield of 9.4% and an annual dividend growth rate of 7% we are providing a 16.4% total return assuming no change to our dividend multiple," said Malon Wilkus, American Capital Chairman, President and CEO. "Having invested $4.7 billion in the past year we are the largest Business Development Company and one of the largest buyout and mezzanine funds in the world. The quality of our assets are excellent, allowing us to be one of a few investment grade buyout funds and one of two buyout funds that have raised equity at a premium to book, which we have done 24 times. We pioneered the securitization of our asset class, completing our eighth securitization in July and have 45% of our capital funded with investment grade debt. As we roll out our asset management strategy, which we expect will increase our return on equity, it is an excellent time to be an American Capital shareholder." In the second quarter of 2006, American Capital invested $1.6 billion of capital. Also in the second quarter of 2006, American Capital received $259 million of proceeds from exits of portfolio investments. "We continue to see strong investment opportunities," said Ira Wagner, Chief Operating Officer. "We invested $1.6 billion this quarter but we are being very selective as evidenced by our closing ratio, which has recently declined from our 2% historical average to about 1.5% for the last year. We can achieve those results because we have the best market coverage and largest deal flow of any middle market buyout and mezzanine investor and we have broad capabilities that enhance our competitiveness. We can invest up to $350 million, we do One-Stop Buyouts(TM) and financings, and we invest in a broad range of geographies and sectors, including Europe, energy, CMBS, CDO, special situations and technology. We currently have $26 billion of investment opportunities in our 10 offices worldwide, which are staffed by 417 employees, including 162 investment professionals, 53 CPAs or audit professionals performing accounting due diligence and a 26 member operations team. As a result, we believe our investment volume will be strong in the second half of the year." In the second quarter of 2006, American Capital recorded $17 million in portfolio net realized gains and $4 million in net realized gains attributable to interest rate derivatives. In the second quarter of 2006, net unrealized appreciation totaled $160 million, consisting of gross appreciation of $243 million from 34 portfolio companies, $83 million of gross depreciation from 25 portfolio companies, $12 million of net unrealized depreciation resulting from the recognition of net realized gains and $12 million of net appreciation on interest rate derivatives. The weighted average effective interest rate on American Capital's total investments in debt securities as of June 30, 2006 was 12.5%. At June 30, 2006, the weighted average loan grade of American Capital's loan portfolio was 3.1 on a scale of 1 to 4, with 4 being the highest quality, compared to 3.1 as of June 30, 2005. As of June 30, 2006, loans totaling $190 million, with a fair value of $55 million, were on non-accrual. Delinquent and non-accruing loans to 16 portfolio companies totaled $237 million, or 6% of total loans, at June 30, 2006, compared to $137 million, or 5% of total loans, at June 30, 2005. "Our credit quality is extremely good and we are experiencing great exits from our portfolio companies with $17 million in portfolio net realized gains this quarter," said Chief Financial Officer John Erickson. "We have generated $216 million in net realized gains from our 2001 - 2006 static pools and we expect significant additional net realized gains for the year given the number of companies we currently have for sale. This quarter alone produced net realized earnings of $0.98 per basic share, which is 120% of our $0.82 second quarter dividend. For the first half of the year, our net realized earnings were $2.12 per share, or 131% of our $1.62 of dividends. Not only do we have an excellent and growing dividend paid entirely from ordinary taxable income, our retention of capital gains provides additional returns to our shareholders, which should help us increase the growth rate of our dividend in 2007." In the second quarter of 2006, American Capital's portfolio company European Capital, the euro 750 million, or $941 million, fund managed by a wholly owned subsidiary of American Capital, made investments in four portfolio companies totaling euro 137 million or $172 million. Since inception in September of last year, it has invested in 21 portfolio companies totaling euro 504 million or $612 million. European Capital produced its first quarterly profit since inception in the second quarter and is expected to declare its first dividend in the fourth quarter of 2006. Since its August 1997 IPO through second quarter 2006, American Capital has earned an 18% compounded annual return, including interest, dividends, fees and net gains, on 131 exits and prepayments of senior debt, subordinated debt and equity investments, totaling $3.0 billion of invested capital. These exits and prepayments represent 28% of all amounts invested by American Capital since its August 1997 IPO. Proceeds from these exits and prepayments exceeded the associated prior quarter valuation of the investments by $56 million in aggregate, or 2%. Seventeen percent of these exits and prepayments were from portfolio companies that had at one time been either a loan grade 1 or 2 in American Capital's four point loan grading system, with 1 being the lowest loan grade. Since its IPO through the second quarter of 2006, $88 million of American Capital's PIK interest and dividends and accreted OID have been repaid, representing 26% of all PIK and OID recorded. "Our Operations Team has contributed tremendously to helping several troubled companies turn around and gain value that had been previously depreciated," said Gordon O'Brien, Senior Vice President in charge of the Operations Team. "We have not been successful in all cases, but already in six portfolio companies from the 1998 - 2001 static pools, the Operations Team worked diligently and drove turnarounds that resulted in $131 million of net appreciation, gains and losses from their low points. Our ability to hold investments through economic cycles gives us time to effect critical operational changes and in some cases drive industry consolidation, resulting in significant results for our shareholders. In fact, the IRRs on our older static pools have increased from their lows as a direct result of the improvement in these portfolio companies." THIRD PARTY VALUATION OF PORTFOLIO INVESTMENTS American Capital's Board of Directors is responsible for determining the fair value of American Capital's portfolio investments on a quarterly basis. In that regard, the board has retained Houlihan Lokey Howard & Zukin Financial Advisors Inc. ("Houlihan Lokey") to assist it by having Houlihan Lokey regularly review a designated percentage of our fair value determinations. Houlihan Lokey is a leading valuation firm in the U.S., engaged in approximately 1,000 valuation assignments per year for clients worldwide. Each quarter, Houlihan Lokey reviews American Capital's determination of the fair value of approximately 25% of its portfolio company investments that have been portfolio companies for at least one year and that have a fair value in excess of $10 million. In the second quarter of 2006, Houlihan Lokey reviewed valuations of 22 portfolio company investments having an aggregate $852 million in fair value as of the period end. Over the last four quarters, Houlihan Lokey has reviewed 97 portfolio companies totaling $3.4 billion in fair value as of their respective valuation dates. In addition, Houlihan Lokey representatives attend American Capital's quarterly valuation meetings and provide periodic reports and recommendations to the Audit and Compliance Committee of the Board of Directors. For those portfolio company investments that Houlihan Lokey has reviewed during the applicable period using the scope of review set forth by American Capital's Board of Directors, the Board has made a fair value determination that is within the aggregate range of fair value for such investments as determined by Houlihan Lokey. Financial highlights for the quarter are as follows: AMERICAN CAPITAL STRATEGIES, LTD. CONSOLIDATED BALANCE SHEETS As of June 30, 2006, December 31, 2005 and June 30, 2005 (in thousands, except per share data) Q2 Q4 Q2 2006 Versus Q4 2005 2006 2005 $ % (unaudited) Assets Investments at fair value (cost of $6,872,830, $5,134,398 and $4,040,689, respectively) Non-Control/Non-Affiliate investments $3,768,999 $2,135,795 $1,633,204 76% Affiliate investments 456,000 449,026 6,974 2% Control investments 2,765,584 2,516,282 249,302 10% Interest rate derivatives 49,768 18,132 31,636 174% Total investments at fair value 7,040,351 5,119,235 1,921,116 38% Cash and cash equivalents 172,350 97,134 75,216 77% Restricted cash 65,977 121,772 (55,795) -46% Interest receivable 39,442 32,668 6,774 21% Other 90,502 78,300 12,202 16% Total assets $7,408,622 $5,449,109 $1,959,513 36% Liabilities and Shareholders' Equity Debt $3,370,301 $2,466,860 $903,441 37% Interest rate derivatives 733 2,140 (1,407) -66% Accrued dividends payable 110,097 3,574 106,523 2980% Other 92,890 78,898 13,992 18% Total liabilities 3,574,021 2,551,472 1,022,549 40% Commitments and contingencies Shareholders' equity: Undesignated preferred stock, $0.01 par value, 5,000 shares authorized, 0 issued and outstanding - - - 0% Common stock, $0.01 par value, 200,000 shares authorized, 141,897, 119,123 and 98,220 issued and 138,808, 118,913 and 98,012 outstanding, respectively 1,388 1,189 199 17% Capital in excess of par value 3,641,112 2,942,814 698,298 24% Notes receivable from sale of common stock (6,655) (6,655) - 0% Undistributed (distributions in excess of) net realized earnings 32,519 (22,408) 54,927 245% Net unrealized appreciation (depreciation) of investments 166,237 (17,303) 183,540 1061% Total shareholders' equity 3,834,601 2,897,637 936,964 32% Total liabilities and shareholders' equity $7,408,622 $5,449,109 $1,959,513 36% AMERICAN CAPITAL STRATEGIES, LTD. CONSOLIDATED BALANCE SHEETS As of June 30, 2006, December 31, 2005 and June 30, 2005 (in thousands, except per share data) Q2 Q2 2006 Versus Q2 2005 2005 $ % (unaudited) Assets Investments at fair value (cost of $6,872,830, $5,134,398 and $4,040,689, respectively) Non-Control/Non-Affiliate investments $1,445,592 $2,323,407 161% Affiliate investments 485,405 (29,405) -6% Control investments 2,110,298 655,286 31% Interest rate derivatives 1,340 48,428 3614% Total investments at fair value 4,042,635 2,997,716 74% Cash and cash equivalents 103,554 68,796 66% Restricted cash 105,812 (39,835) -38% Interest receivable 27,870 11,572 42% Other 53,762 36,740 68% Total assets $4,333,633 $3,074,989 71% Liabilities and Shareholders' Equity Debt $1,997,751 $1,372,550 69% Interest rate derivatives 15,257 (14,524) -95% Accrued dividends payable 70,136 39,961 57% Other 52,103 40,787 78% Total liabilities 2,135,247 1,438,774 67% Commitments and contingencies Shareholders' equity: Undesignated preferred stock, $0.01 par value, 5,000 shares authorized, 0 issued and outstanding - - 0% Common stock, $0.01 par value, 200,000 shares authorized, 141,897, 119,123 and 98,220 issued and 138,808, 118,913 and 98,012 outstanding, respectively 980 408 42% Capital in excess of par value 2,243,841 1,397,271 62% Notes receivable from sale of common stock (6,679) 24 0% Undistributed (distributions in excess of) net realized earnings (26,445) 58,964 223% Net unrealized appreciation (depreciation) of investments (13,311) 179,548 1349% Total shareholders' equity 2,198,386 1,636,215 74% Total liabilities and shareholders' equity $4,333,633 $3,074,989 71% AMERICAN CAPITAL STRATEGIES, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS Three and Six Months Ended June 30, 2006 and 2005 (in thousands, except per share data) (unaudited) Three Months Ended Three Months Ended June 30, 2006 June 30, Versus 2005 2006 2005 $ % OPERATING INCOME: Interest and dividend income 156,539 97,910 58,629 60% Fee and other income 55,496 33,822 21,674 64% Total operating income 212,035 131,732 80,303 61% OPERATING EXPENSES: Interest 40,778 21,990 18,788 85% Salaries, benefits and stock-based compensation 38,800 22,701 16,099 71% General and administrative 16,510 8,808 7,702 87% Total operating expenses 96,088 53,499 42,589 80% OPERATING INCOME BEFORE INCOME TAXES 115,947 78,233 37,714 48% Provision for income taxes (6,708) (4,759) (1,949) 41% NET OPERATING INCOME 109,239 73,474 35,765 49% Net realized gain (loss) on investments Portfolio company investments 17,165 32,357 (15,192) -47% Interest rate derivative agreements 4,334 (2,161) 6,495 301% Total net realized gain 21,499 30,196 (8,697) -29% NET REALIZED EARNINGS 130,738 103,670 27,068 26% Net unrealized appreciation (depreciation) of investments Portfolio company investments 148,045 (7,872) 155,917 1981% Interest rate derivative agreements 11,561 (16,449) 28,010 170% Total net unrealized appreciation (depreciation) 159,606 (24,321) 183,927 756% INCREASE IN NET ASSETS RESULTING FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 290,344 79,349 210,995 266% Cumulative effect of accounting change, net of tax (1) - - - 0% NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $290,344 $79,349 $210,995 266% NET OPERATING INCOME PER COMMON SHARE: Basic $0.82 $0.78 $0.04 5% Diluted $0.81 $0.76 $0.05 7% NET REALIZED EARNINGS PER COMMON SHARE: Basic $0.98 $1.10 $(0.12) -11% Diluted $0.97 $1.07 $(0.10) -9% NET EARNINGS PER COMMON SHARE: Basic $2.18 $0.84 $1.34 160% Diluted $2.16 $0.82 $1.34 163% WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic 133,286 93,915 39,371 42% Diluted 134,189 96,731 37,458 39% DIVIDENDS DECLARED PER COMMON SHARE $0.82 $0.75 $0.07 9% AMERICAN CAPITAL STRATEGIES, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS Three and Six Months Ended June 30, 2006 and 2005 (in thousands, except per share data) (unaudited) Six Months Ended Six Months Ended June 30, 2006 June 30, Versus 2005 2006 2005 $ % OPERATING INCOME: Interest and dividend income 287,664 184,328 103,336 56% Fee and other income 97,549 48,259 49,290 102% Total operating income 385,213 232,587 152,626 66% OPERATING EXPENSES: Interest 76,760 39,336 37,424 95% Salaries, benefits and stock-based compensation 62,015 35,013 27,002 77% General and administrative 31,927 15,093 16,834 112% Total operating expenses 170,702 89,442 81,260 91% OPERATING INCOME BEFORE INCOME TAXES 214,511 143,145 71,366 50% Provision for income taxes (12,376) (5,784) (6,592) 114% NET OPERATING INCOME 202,135 137,361 64,774 47% Net realized gain (loss) on investments Portfolio company investments 60,067 40,478 19,589 48% Interest rate derivative agreements 5,630 (5,456) 11,086 203% Total net realized gain 65,697 35,022 30,675 88% NET REALIZED EARNINGS 267,832 172,383 95,449 55% Net unrealized appreciation (depreciation) of investments Portfolio company investments 151,047 16,845 134,202 797% Interest rate derivative agreements 32,493 1,801 30,692 1704% Total net unrealized appreciation (depreciation) 183,540 18,646 164,894 4 884% INCREASE IN NET ASSETS RESULTING FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 451,372 191,029 260,343 136% Cumulative effect of accounting change, net of tax (1) 1,026 - 1,026 0% NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $452,398 $191,029 $261,369 137% NET OPERATING INCOME PER COMMON SHARE: Basic $1.60 $1.50 $0.10 7% Diluted $1.58 $1.46 $0.12 8% NET REALIZED EARNINGS PER COMMON SHARE: Basic $2.12 $1.88 $0.24 13% Diluted $2.10 $1.83 $0.27 15% NET EARNINGS PER COMMON SHARE: Basic $3.57 $2.08 $1.49 72% Diluted $3.54 $2.03 $1.51 74% WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING: Basic 126,613 91,737 34,876 38% Diluted 127,675 94,078 33,597 36% DIVIDENDS DECLARED PER COMMON SHARE $1.62 $1.48 $0.14 9% (1) Effective January 1, 2006, American Capital adopted FASB Statement No. 123 (revised 2004), "Share-Based Payment," a revision to FASB Statement No. 123 ("SFAS 123R"). American Capital had adopted SFAS 123R using the "modified prospective" method. Effective January 1, 2003, American Capital adopted the fair-value-based method of accounting for stock-based compensation plans for all stock options granted in 2003 and forward as permitted under FASB Statement No. 148. All of American Capital's stock options granted prior to January 1, 2003, which were accounted for under APB No. 25 and not expensed in the consolidated statements of operations, were fully vested as of January 1, 2006 and therefore, no additional stock compensation costs for those stock option grants will be recorded as a result of the adoption of SFAS 123R. Under FASB Statement No. 123, American Capital elected to adjust compensation costs for forfeitures when the unvested awards were actually forfeited. Under SFAS 123R, American Capital is required to estimate forfeitures of unvested awards when recognizing compensation cost. Upon the adoption of SFAS 123R, American Capital recorded a cumulative effect of an accounting change for an adjustment to compensation costs recognized in prior periods to record forfeitures based on the amounts that would have been estimated during those periods. AMERICAN CAPITAL STRATEGIES, LTD. OTHER FINANCIAL INFORMATION Quarter Ended June 30, 2006, December 31, 2005 and June 30, 2005 (dollars in thousands) (unaudited) Q2 Q4 Q2 2006 Versus Q4 2005 2006 2005 $ % New Investments: Senior Debt $ 790,900 $ 382,800 $ 408,100 107% Subordinated Debt 260,100 193,400 66,700 34% Preferred Equity 279,800 169,900 109,900 65% Common Equity 49,900 64,500 (14,600) -23% Common Equity warrants 21,600 86,700 (65,100) -75% CMBS Investments 144,000 80,500 63,500 79% CDO/CLO Investments 25,000 - 25,000 100% Total $1,571,300 $ 977,800 $ 593,500 61% American Capital Sponsored Buyouts $ 902,100 $ 564,800 $ 337,300 60% Financing for Private Equity Buyouts 109,100 121,700 (12,600) -10% Direct Investments 6,100 - 6,100 100% CMBS Investments 144,000 80,500 63,500 79% CDO/CLO Investments 25,000 - 25,000 100% Add-on Financing for Acquisitions 240,800 20,300 220,500 1086% Add-on Financing for Recapitalizations 142,100 183,700 (41,600) -23% Add-on Financing for Working Capital in Distressed Situations 2,100 2,800 (700) -25% Add-on Financing for Working Capital - 4,000 (4,000) -100% Total $1,571,300 $ 977,800 $ 593,500 61% Exits and Repayments(1): Scheduled Principal Amortization $14,264 $16,990 $(2,726) -16% Senior Loan Sales 67,213 174,037 (106,824) -61% Principal Prepayments 131,448 258,536 (127,088) -49% Payment of Accrued Payment-in-kind Interest and Dividends and Original Issue Discount 5,848 13,971 (8,123) -58% Sale of Equity Investments 39,820 81,239 (41,419) -51% Total $ 258,593 $ 544,773 $(286,180) -53% Appreciation, Depreciation, Gains and Losses: Gross Realized Gains $32,097 $69,973 $(37,876) -54% Gross Realized Losses (14,932) (64,288) 49,356 -77% Portfolio Net Realized Gains 17,165 5,685 11,480 202% Net Realized Gains (Losses) From Interest Rate Derivatives 4,334 (825) 5,159 625% Net Realized Gains 21,499 4,860 16,639 342% Gross Unrealized Appreciation at 34, 20 and 22 Portfolio Companies 242,649 54,628 188,021 344% Gross Unrealized Depreciation at 25, 11 and 19 Portfolio Companies (82,632) (78,807) (3,825) 5% Current Portfolio Net Unrealized Appreciation (Depreciation) 160,017 (24,179) 184,196 762% Net Depreciation From the Recognition of Net Realized Gains (11,972) (2,987) (8,985) 301% Interest Rate Derivatives 11,561 11,568 (7) 0% Net Unrealized Appreciation (Depreciation) 159,606 (15,598) 175,204 1123% Net Gains, Losses, Appreciation and Depreciation $ 181,105 $(10,738) $ 191,843 1787% Other Financial Data: Net Asset Value per Share $27.63 $24.37 $3.26 13% Weighted Average Effective Interest Rate on Debt Investments 12.5% 12.8% Weighted Average Loan Grade 3.1 3.1 Loans on Non-Accrual at Face $ 189,563 $ 132,330 $57,233 43% Loans on Non-Accrual at Fair Value $54,694 $48,304 $6,390 13% Past Due Loans at Face $47,722 $53,675 $(5,953) -11% Past Due and Non-Accrual Loans as a Percentage of Total Loans 6% 5% Number of Portfolio Companies on Non-Accrual and Past Due 16 14 Debt to Equity Conversions at Face Value $27,691 $24,769 $2,922 12% LTM Net Operating Income Return on Average Equity at Cost 13.1% 13.6% LTM Net Realized Earnings Return on Average Equity at Cost 15.5% 15.2% LTM Net Earnings Return on Average Equity 21.5% 15.9% Current Quarter Net Operating Income Return on Average Equity at Cost Annualized 12.9% 13.3% Current Quarter Net Realized Earnings Return on Average Equity at Cost 15.4% 14.0% Current Quarter Net Earnings Return on Average Equity Annualized 33.4% 11.8% Market Capitalization $4,647,275 $4,305,840 $ 341,435 8% Total Enterprise Value $7,845,226 $6,675,566 $1,169,660 18% Q2 Q2 2006 Versus Q2 2005 2005 $ % New Investments: Senior Debt $ 485,300 $305,600 63% Subordinated Debt 209,500 50,600 24% Preferred Equity 134,000 145,800 109% Common Equity 48,500 1,400 3% Common Equity warrants 26,100 (4,500) -17% CMBS Investments - 144,000 100% CDO/CLO Investments - 25,000 100% Total $ 903,400 $667,900 74% American Capital Sponsored Buyouts $ 475,000 $427,100 90% Financing for Private Equity Buyouts 206,000 (96,900) -47% Direct Investments 25,100 (19,000) -76% CMBS Investments - 144,000 100% CDO/CLO Investments - 25,000 100% Add-on Financing for Acquisitions 102,500 138,300 135% Add-on Financing for Recapitalizations 71,000 71,100 100% Add-on Financing for Working Capital in Distressed Situations 13,500 (11,400) -84% Add-on Financing for Working Capital 10,300 (10,300) -100% Total $ 903,400 $667,900 74% Exits and Repayments(1): Scheduled Principal Amortization $14,064 $200 1% Senior Loan Sales 42,750 24,463 57% Principal Prepayments 146,898 (15,450) -11% Payment of Accrued Payment-in-kind Interest and Dividends and Original Issue Discount 4,367 1,481 34% Sale of Equity Investments 80,228 (40,408) -50% Total $ 288,307 $(29,714) -10% Appreciation, Depreciation, Gains and Losses: Gross Realized Gains $54,416 $(22,319) -41% Gross Realized Losses (22,059) 7,127 -32% Portfolio Net Realized Gains 32,357 (15,192) -47% Net Realized Gains (Losses) From Interest Rate Derivatives (2,161) 6,495 301% Net Realized Gains 30,196 (8,697) -29% Gross Unrealized Appreciation at 34, 20 and 22 Portfolio Companies 95,405 147,244 154% Gross Unrealized Depreciation at 25, 11 and 19 Portfolio Companies (77,345) (5,287) 7% Current Portfolio Net Unrealized Appreciation (Depreciation) 18,060 141,957 786% Net Depreciation From the Recognition of Net Realized Gains (25,932) 13,960 54% Interest Rate Derivatives (16,449) 28,010 170% Net Unrealized Appreciation (Depreciation) (24,321) 183,927 756% Net Gains, Losses, Appreciation and Depreciation $5,875 $175,230 2983% Other Financial Data: Net Asset Value per Share $22.43 $5.20 23% Weighted Average Effective Interest Rate on Debt Investments 12.9% Weighted Average Loan Grade 3.1 Loans on Non-Accrual at Face $ 115,397 $74,166 64% Loans on Non-Accrual at Fair Value $35,449 $19,245 54% Past Due Loans at Face $21,951 $25,771 117% Past Due and Non-Accrual Loans as a Percentage of Total Loans 5% Number of Portfolio Companies on Non-Accrual and Past Due 12 Debt to Equity Conversions at Face Value $12,464 $15,227 122% LTM Net Operating Income Return on Average Equity at Cost 13.7% LTM Net Realized Earnings Return on Average Equity at Cost 16.5% LTM Net Earnings Return on Average Equity 18.9% Current Quarter Net Operating Income Return on Average Equity at Cost Annualized 14.0% Current Quarter Net Realized Earnings Return on Average Equity at Cost 19.8% Current Quarter Net Earnings Return on Average Equity Annualized 15.2% Market Capitalization $3,539,213 $1,108,062 31% Total Enterprise Value $5,433,410 $2,411,816 44% (1) Excludes Repayments of European Capital Limited Bridge Loans. Portfolio Statistics (1) Static Pool ($ in millions, Pre- unaudited): 1999 1999 2000 2001 2002 2003 2004 Internal Rate of Return(2) 10.7% 7.4% 6.9% 22.6% 10.0% 25.1% 19.1% Original Investments and Commitments $375 $380 $395 $369 $943 $1,317 $1,991 Total Exits and Prepayments of Original Investments $141 $191 $226 $259 $443 $701 $555 Total Interest, Dividends and Fees Collected $137 $131 $94 $143 $241 $274 $281 Total Net Realized (Loss) Gain on Investments $(19) $(22) $(75) $49 $32 $120 $10 Current Cost of Investments $191 $175 $198 $94 $452 $631 $1,331 Current Fair Value of Investments $183 $121 $216 $78 $340 $704 $1,391 Net Unrealized Appreciation/ (Depreciation) $(8) $(54) $18 $(16) $(112) $73 $60 Non-Accruing Loans at Face $4 $30 $- $29 $88 $- $22 Equity Interest at Fair Value(9) $52 $9 $66 $39 $49 $312 $391 Debt to EBITDA(3)(4)(5) 7.0 8.6 4.4 4.4 7.4 4.6 4.6 Interest Coverage(3)(5) 1.7 1.8 3.5 1.6 1.7 2.3 2.1 Debt Service Coverage(3)(5) 1.5 1.5 2.3 1.2 1.3 1.8 1.6 Loan Grade(3)(10) 2.9 1.5 3.4 3.2 2.5 3.1 3.3 Average Age of Companies(5) 44 yrs 56 yrs 30 yrs 37 yrs 35 yrs 14 yrs 40 yrs Ownership Percentage(9) 88% 69% 26% 64% 57% 70% 43% Average Sales(5)(6) $121 $70 $120 $175 $89 $110 $86 Average EBITDA(5)(7) $7 $6 $40 $18 $10 $23 $18 Average EBITDA Margin 5.8% 8.6% 33.3% 10.3% 11.2% 20.9% 20.9% Total Sales(5)(6) $495 $405 $367 $1,758 $1,006 $1,803 $3,149 Total EBITDA(5)(7) $38 $33 $97 $161 $80 $307 $591 % of Senior Loans(5)(8) 52% 39% 55% 25% 62% 46% 56% % of Loans with Lien(5)(8) 69% 49% 81% 100% 95% 97% 85% Portfolio Statistics (1) 2001-2006 ($ in millions, unaudited): 2005 2006 Aggregate Aggregate Internal Rate of Return(2) 20.9% 103.0% 16.3% 20.4% Original Investments and Commitments $3,171 $1,730 $10,671 $9,521 Total Exits and Prepayments of Original Investments $494 $14 $3,024 $2,466 Total Interest, Dividends and Fees Collected $238 $78 $1,617 $1,255 Total Net Realized (Loss) Gain on Investments $5 $- $100 $216 Current Cost of Investments $2,257 $1,544 $6,873 $6,309 Current Fair Value of Investments $2,344 $1,614 $6,991 $6,471 Net Unrealized Appreciation/(Depreciation) $87 $70 $118 $162 Non-Accruing Loans at Face $17 $- $190 $156 Equity Interest at Fair Value(9) $1,098 $594 $2,610 $2,483 Debt to EBITDA(3)(4)(5) 4.5 4.9 4.9 4.8 Interest Coverage(3)(5) 2.3 1.9 2.1 2.1 Debt Service Coverage(3)(5) 1.9 1.5 1.7 1.7 Loan Grade(3)(10) 3.2 3.0 3.1 3.1 Average Age of Companies(5) 33 yrs 28 yrs 32 yrs 32 yrs Ownership Percentage(9) 58% 72% 59% 59% Average Sales(5)(6) $108 $132 $108 $108 Average EBITDA(5)(7) $24 $19 $20 $20 Average EBITDA Margin 22.2% 14.4% 18.5% 18.5% Total Sales(5)(6) $4,516 $1,271 $14,770 $13,503 Total EBITDA(5)(7) $735 $186 $2,228 $2,060 % of Senior Loans(5)(8) 40% 57% 50% 50% % of Loans with Lien(5)(8) 83% 88% 85% 87% (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. Investments in government securities and interest rate derivative agreements are excluded. (2) Assumes investments are exited at current fair value. (3) These amounts do not include investments in which the Company owns only equity. (4) For portfolio companies with a nominal EBITDA amount, the portfolio company's maximum debt leverage is limited to 15 times EBITDA. (5) Excludes investments in commercial mortgage backed securities, collateralized debt obligations and European Capital Limited. (6) Sales of the most recent twelve months, or when appropriate, the forecasted twelve months. (7) EBITDA of the most recent twelve months, or when appropriate, the forecasted twelve months. (8) As a percentage of our total debt investments. (9) Excludes investments in commercial mortgage backed securities and collateralized debt obligations. (10) Excludes investments in collateralized debt obligations and European Capital Limited. Additional Dividend Information American Capital must make certain distributions of its taxable income in order to maintain its tax status as a regulated investment company. Investors can refer to American Capital's most recent report on Form 10-K for more information about its tax status. American Capital intends to retain net long-term capital gains and treat them as deemed distributions for tax purposes. Therefore, the taxable income that is distributed as dividends would be expected to be treated as ordinary income for tax purposes. Taxable income differs from GAAP income because of both temporary and permanent differences in income and expense recognition. For example, changes in appreciation and depreciation of portfolio investments have no impact on American Capital's taxable income. American Capital reports the anticipated tax characteristics of each dividend when announced, while the actual tax characteristics of each year's dividends are reported annually to stockholders on Form 1099DIV. The 2006 declared dividend to-date, totaling $2.45 per share, is anticipated to be a distribution of ordinary income for tax purposes. DIVIDEND REINVESTMENT PLAN (DRIP) In appreciation of the loyal support of our shareholders, American Capital's Dividend Reinvestment Plan grants a 5% discount to the market price for reinvested dividends. Brokerages that have confirmed participation in the DRIP include: A.G. Edwards Citigroup-Smith Barney Fidelity Merrill Lynch Morgan Keegan RBC Dain Rauscher UBS Financial Wachovia Securities Wedbush Morgan A summary of American Capital's dividend history and forecast follows. For further dividend history, please visit our website at http://www.acas.com/. For more information regarding the DRIP, please visit our website or call our Investor Relations Department at (301) 951-6122. AMERICAN CAPITAL'S DIVIDEND HISTORY $21.56 DECLARED SINCE AUGUST 1997 IPO AT $15.00 PER SHARE % Change % Change of of Total Regular Dividend Regular Dividend Over Additional Over Prior Year/Quarter Dividend Prior Year Dividend Total Year Total 1997 to Q3 2006 Declared $21.56 2006 $3.29 8% Not Planned $3.29 7% Q4 Forecast $0.84 6% Q3 Declared $0.83 6% Q2 $0.82 9% Q1 $0.80 10% 2005 $3.05 7% $0.03 $3.08 6% Q4 $0.79 8% Q3 $0.78 8% Q2 $0.75 7% Q1 $0.73 4% 2004 $2.85 4% $0.06 $2.91 4% Q4 $0.73 6% Q3 $0.72 4% Q2 $0.70 3% Q1 $0.70 4% 2003 $2.73 7% $0.06 $2.79 9% Q4 $0.69 3% Q3 $0.69 5% Q2 $0.68 8% Q1 $0.67 14% 2002 $2.55 15% $0.02 $2.57 12% Q4 $0.67 18% Q3 $0.66 18% Q2 $0.63 15% Q1 $0.59 11% 2001 $2.21 13% $0.09 $2.30 6% Q4 $0.57 10% Q3 $0.56 14% Q2 $0.55 12% Q1 $0.53 18% 2000 $1.95 14% $0.22 $2.17 25% Q4 $0.52 18% Q3 $0.49 14% Q2 $0.49 14% Q1 $0.45 10% 1999 $1.71 39% $0.03 $1.74 30% Q4 $0.44 19% Q3 $0.43 34% Q2 $0.43 48% Q1 $0.41 64% 1998 $1.23 N/A $0.11 $1.34 Q4 $0.37 76% Q3 $0.32 N/A Q2 $0.29 N/A Q1 $0.25 N/A 1997 Q4 $0.21 $0.21 Total $21.56 Declared SHAREHOLDER CALL American Capital invites shareholders, prospective shareholders and analysts to attend the American Capital Shareholder Call on Wednesday, August 2, 2006 at 11:00 am ET. The dial in number will be (877) 209-9922. International callers should dial +1(612) 288-0329. Please advise the operator you are dialing in for the American Capital Shareholder Call. BEFORE THE CALL: SLIDE PRESENTATION AVAILABLE IN ADVANCE OF THE SHAREHOLDER CALL: The quarterly shareholder presentation includes a slide show to accompany the call that participants may download from the American Capital website at http://www.acas.com/ and print prior to the call. You may wish to take the time to review the slides in advance of the Shareholder Call. DURING THE CALL: STREAMING SLIDE PRESENTATION DURING THE SHAREHOLDER CALL: During the Shareholder Call you may access the webcast or listen to the Shareholder Call by phone and step through the slides at your own pace. AFTER THE CALL: The presentation will be made available on our website after the call. An archive of the quarterly shareholder calls can be found in the Investor Relations section of the website at http://www.acas.com/. AUDIO ONLY PRESENTATION AVAILABLE AFTER THE SHAREHOLDER CALL: There will be a phone recording available from 9:30 pm Wednesday, August 2 until 11:59 pm Wednesday, August 16. If you are interested in hearing the recording of the presentation, please dial (800) 475-6701. International callers may dial +1(320) 365-3844. The access code for both domestic and international callers is 835830. For further information or questions, please do not hesitate to call the Shareholder Relations Department at (301) 951-6122. ABOUT AMERICAN CAPITAL Since its August 1997 IPO through the second quarter of 2006, American Capital has invested $10.7 billion in 229 portfolio companies. As of July 31, 2006, American Capital shareholders have enjoyed a total return of 420% since the Company's IPO -- an annualized return of 20%, assuming reinvestment of dividends. American Capital has paid a total of $1.2 billion in dividends and paid or declared $21.56 dividends per share since its August 1997 IPO at $15 per share. Companies interested in learning more about American Capital's flexible financing should contact Mark Opel, Senior Vice President, Business Development, at (800) 248-9340, or visit our website at http://www.americancapital.com/. This press release contains forward-looking statements. The statements regarding expected results of American Capital Strategies are subject to various factors and uncertainties, including the uncertainties associated with the timing of transaction closings, changes in interest rates, availability of transactions, changes in regional, national or international economic conditions, or changes in the conditions of the industries in which American Capital has made investments. Persons considering an investment in American Capital should consider the investment objectives, risks and charges and expenses of the Company carefully before investing. Such information and other information about the Company is available in the Company's annual report on Form 10-K, quarterly report on Form 10-Q and in the prospectuses the Company issues from time to time in connection with its offering of securities. Such materials are filed with the Securities and Exchange Commission and copies are available on the SEC's website, http://www.sec.gov/. Prospective investors should read such materials carefully before investing. Performance data quoted above represents past performance of American Capital. Past performance does not guarantee future results and the investment return and principal value of an investment in American Capital will likely fluctuate. Consequently, an investor's shares, when sold, may be worth more or less than their original cost. Additionally, American Capital's current performance may be lower or higher than the performance data quoted above. DATASOURCE: American Capital Strategies Ltd. CONTACT: John Erickson, Chief Financial Officer, +1-301-951-6122, or Tom McHale, Senior Vice President, Finance, +1-301-951-6122, both of American Capital Strategies Ltd. Web site: http://www.americancapital.com/

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