American Capital 10-K/A 2001 FY Annual report (amended)

As filed with the Securities and Exchange Commission on April 4, 2002

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2001
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number 814-00149

AMERICAN CAPITAL STRATEGIES, LTD.

Delaware	52-1451377
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

2 Bethesda Metro Center

14^th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 951-6122

(Registrant’s telephone number, including area code)

Securities to be registered pursuant to Section 12(b) of the Act:     Not Applicable

Securities registered pursuant to section 12(g) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value per share	NASDAQ Stock Market

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter earlier period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý.  No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

On March 20, 2002, the aggregate market value of the Registrant’s common stock held by nonaffiliates of the Registrant was approximately $1,179,241,000 based upon a closing price of the Registrant’s common stock of $30.80 per share as reported on the NASDAQ Stock Market on that date. (For this computation, the registrant has excluded the market value of all shares of its Common Stock reported as beneficially owned by executive officers and directors of the registrant and certain other stockholders; such an exclusion shall not be deemed to constitute an admission that any such person is an “affiliate” of the registrant.) On March 20, 2002, there were 38,287,057 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE. The Company’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 8, 2002 is incorporated by reference into certain sections of Part III herein.

Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report.

EXPLANATORY PARAGRAPH

This amendment to Form 10-K has been filed to correct certain typographical errors and certain other errors in Note 14, "Selected Quarterly Data (Unaudited)" to the financial statements.

Item 8.      Financial Statements and Supplementary Data

Report of Independent Auditors

Board of Directors

American Capital Strategies, Ltd.

We have audited the accompanying consolidated balance sheets of American Capital Strategies, Ltd., including the consolidated schedules of investments, as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001, and the consolidated financial highlights for each of the four years in the period then ended, and the three-months ended December 31, 1997. These financial statements and the financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the consolidated financial position of American Capital Strategies, Ltd. at December 31, 2001 and 2000, and the consolidated results of its operations, and its cash flows for each of the three years in the period ended December 31, 2001, and its consolidated financial highlights for each of the four years in the period then ended, and the three-months ended December 31, 1997 in conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, effective for its 2001 annual financial statements, the Company adopted the provisions of the revised AICPA Audit and Accounting Guide, Audits of Investment Companies, requiring amortization and accretion of premiums and discounts on debt securities using the effective interest method.

/s/ Ernst & Young LLP

McLean, Virginia

February 5, 2002

21

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except share data)

	December 31, 2001			December 31, 2000
Assets
Cash and cash equivalents	$	18,890		$	11,569
Investments at fair value (cost of $882,731 and $557,944, respectively)	858,266			585,746
Interest receivable	12,957			4,934
Other	14,071			11,750
Total assets	$	904,184		$	613,999
Liabilities and Shareholders’ Equity
Revolving credit facility	$	147,646		$	68,002
Notes payable	103,495			87,200
Accrued dividends payable	3,420			6,163
Other	9,358			7,467
Total liabilities	263,919			168,832
Commitments and Contingencies
Shareholders’ equity:
Undesignated preferred stock, $0.01 par value, 5,000 shares authorized, 0 issued and outstanding	—			—
Common stock, $.01 par value, 70,000 shares authorized, and 38,017 and 28,003 issued and outstanding, respectively	380			280
Capital in excess of par value	699,291			448,587
Notes receivable from sale of common stock	(27,143		)	(27,389		)
Distributions in excess of net realized earnings	(3,823		)	(95		)
Net unrealized (depreciation) appreciation of investments	(28,440		)	23,784
Total shareholders’ equity	640,265			445,167
Total liabilities and shareholders’ equity	$	904,184		$	613,999

See accompanying notes.

22

 AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

DECEMBER 31, 2001

(Dollars in thousands)

Company	Industry	Investment	Cost			Fair Value
A&M Cleaning Products, Inc.	Manufacturing — Household Cleaning Products	Subordinated Debt	$	5,070		$	5,167
		Common Stock Warrants, 18.4% of Co. (1)	1,643			2,237
		Redeemable Preferred Stock	532			532
			7,245			7,936
A.H. Harris & Sons, Inc.	Wholesale & Retail — Construction Material	Subordinated Debt	9,434			9,525
		Common Stock Warrants, 10.0% of Co. (1)	534		`	1,050
			9,968			10,575
Aeriform Corporation (2)	Manufacturing — Packaged Industrial Gas	Senior Debt	5,159			5,160
		Subordinated Debt	22,022			22,097
		Common Stock Warrants, 50.1% of Co. (1)	4,360			4,360
		Redeemable Preferred Stock	101			101
			31,642			31,718
Atlantech International	Manufacturing — Polymer-based Products	Subordinated Debt with Non-Detachable Warrants	13,094			13,188
		Common Stock Warrants, 6.5% of Co. (1)	6,007			5,675
		Redeemable Preferred stock with Non-Detachable Common Stock, 1.0% of Co.	1,027			701
			20,128			19,564
Auxi Health, Inc. (2)	Healthcare — Home Healthcare	Subordinated Debt	14,386			14,573
		Common Stock Warrants, 17.9% of Co. (1)	2,784			—
		Preferred Stock, 55.8% of Co. (1)	2,599			1,856
			19,769			16,429
Biddeford Textile Corp.	Manufacturing — Electronic Blankets	Senior Debt	2,746			2,772
		Common Stock Warrants, 10.0% of Co. (1)	1,100			—
			3,846			2,772
BLI Holdings Corp.	Manufacturing and Packaging — Personal Care Items	Subordinated Debt	12,153			12,153
Capital.com, Inc. (2)	Internet — Financial Portal	Preferred Stock, 85.0% of Co. (1)	1,492			700
Case Logic	Manufacturing — Storage Products Designer & Marketer	Subordinated Debt with Non-Detachable Warrants, 8.9% of Co. (1)	20,630			20,826
		Preferred Stock, less than 0.1% of Co.	134			134
			20,764			20,960
Caswell-Massey Holdings Corp.	Wholesale & Retail — Toiletries	Senior Debt	1,065			1,065
		Subordinated Debt	1,803			1,836
		Common Stock Warrants, 24.0% of Co. (1)	552			581
			3,420			3,482
Chance Coach, Inc. (2)	Manufacturing — Buses	Senior Debt	9,615			9,655
		Subordinated Debt	8,583			9,174
		Common Stock Warrants, 43.0% of Co. (1)	4,041			3,469
		Redeemable Preferred Stock (1)	4,616			4,616
		Preferred Stock, Convertible into 20.0% of Co. (1)	2,080			2,080
		Common Stock, 20.4% of Co. (1)	1,896			1,645
			30,831			30, 639
Chromas Technologies (2)	Manufacturing — Printing Presses	Senior Debt	11,703			11,703
		Subordinated Debt	9,789			9,990
		Common Stock, 35.0% of Co. (1)	1,500			—
		Common Stock Warrants, 25.0% of Co. (1)	1,071			987
		Redeemable Preferred Stock, 40.0% of Co. (1)	6,258			1,930
			30,321			24,610

23

CST Industries, Inc.	Manufacturing — Bolted Steel Tanks	Subordinated Debt		7,969	7,969
		Common Stock Warrants, 13.0% of Co. (1)		1,090	1,737
				9,059	9,706
Confluence Holdings Corp.	Manufacturing — Canoes & Kayaks	Subordinated Debt		12,596	12,823
		Common Stock, less than 0.1% of Co. (1)		537	—
		Common Stock Warrants, 0.4% of Co. (1)		2,163	1,564
				15,296	14,387
Crosman Corporation	Manufacturing — Small Arms	Subordinated Debt		3,998	4,033
		Common Stock Warrants, 3.5% of Co. (1)		330	330
				4,328	4,363
Cycle Gear, Inc. (2)	Wholesale & Retail — Motor Cycle Accessories	Senior Debt		750	750
		Subordinated Debt		5,557	5,675
		Common Stock Warrants, 41.6% of Co. (1)		434	1,664
		Redeemable Preferred Stock		1,549	1,549
				8,290	9,638
Decorative Surfaces International, Inc. (2)	Manufacturing — Decorative Paper & Vinyl Products	Subordinated Debt		17,577	17,936
		Common Stock Warrants, 48.3% of Co. (1)		4,571	—
		Preferred Stock, Convertible into less than 0.1% of Co. (1)		803	—
				22,951	17,936
Dixie Trucking Company, Inc. (2)	Transportation — Overnight Shorthaul Delivery	Subordinated Debt		5,134	5,168
		Common Stock Warrants, 49.0% of Co.  (1)		141	—
				5,275	5,168
Electrolux, LLC	Manufacturing — Vacuum Cleaners	Membership Interest, 2.5% of Co. (1	)	246	1,219
Erie County Plastics Corporation	Manufacturing — Molded Plastics	Subordinated Debt		9,122	9,197
		Common Stock Warrants, 8.7% of Co. (1)		1,170	1,027
				10,292	10,224
EuroCaribe Packing Company, Inc. (2)	Manufacturing — Meat Processing	Senior Debt		8,674	8,749
		Subordinated Debt		5,379	3,672
		Common Stock Warrants, 37.1% of Co. (1)		1,110	—
		Redeemable Preferred Stock (1)		4,302	—
				19,465	12,421
European Touch LTD. II (2)	Manufacturing— Salon Appliances	Senior Debt		9,452	9,452
		Subordinated Debt		11,282	11,282
		Common Stock Warrants, 71.0% of Co. (1)		3,856	3,856
		Common Stock, 29.0% of Co. (1)		1,500	1,500
				26,090	26,090
Fulton Bellows & Components, Inc. (2)	Manufacturing — Bellows	Senior Debt		15,321	15,324
		Subordinated Debt		6,602	6,893
		Common Stock Warrants, 26.4% of Co. (1)		1,305	1,197
		Preferred Stock, Convertible into 48.6% of Co. (1)		5,734	2,617
				28,962	26,031
Gladstone Capital Corporation	Investment Company	Common Stock, 3.0%  of Co.		3,600	4,440
Goldman Industrial Group	Manufacturing — Machine Tools, Metal Cutting Types	Subordinated Debt (1)		27,066	26,109
		Common Stock Warrants, 15.0% of Co. (1)		2,822	—
				29,888	26,109
IGI, Inc.	Healthcare — Veterinary Vaccines	Subordinated Debt		5,564	5,627
		Common Stock Warrants, 17.0% of Co. (1)		2,003	1,725
				7,567	7,352

24

Iowa Molding Tool, Inc. (2)	Manufacturing — Specialty Equipment	Subordinated Debt	26,364	26,685
		Common Stock, 25.0% of Co. (1)	3,200	3,200
		Common Stock Warrants, 46.2% of Co. (1)	5,919	5,919
			35,483	35,804
JAAGIR, LLC	Service — IT Staffing & Consulting	Subordinated Debt	2,890	2,930
		Common Stock Warrants, 4.1% of Co. (1)	271	271
			3,161	3,201
JAG Industries, Inc. (2)	Manufacturing — Metal Fabrication & Tablet Manufacturing	Senior Debt	1,002	1,002
		Subordinated Debt	2,448	2,520
		Common Stock Warrants, 75.0% of Co. (1)	505	—
			3,955	3,522
Kelly Aerospace, Inc.	Manufacturing — General Aviation & Performance Automotive	Senior Debt	7,847	7,877
		Subordinated Debt	8,769	8,779
		Common Stock Warrants, 15.0% of Co. (1)	1,589	1,589
			18,205	18, 245
Lion Brewery, Inc. (2)	Manufacturing — Malt Beverages	Subordinated Debt	5,955	6,039
		Common Stock Warrants, 54.0% of Co. (1)	675	7,145
			6,630	13,184
Logex Corporation (2)	Industrial Gases — Transportation	Subordinated Debt	15,942	15,947
		Common Stock Warrants, 85.2% of Co. (1)	5,825	5,825
		Preferred Stock	2,984	2,984
			24,751	24,756
Lubricating Specialties Co.	Manufacturing — Lubricant & Grease	Subordinated Debt	14,750	14,864
		Common Stock Warrants, 21.0% of Co. (1)	791	791
			15,541	15,655
MBT International, Inc. (2)	Wholesale & Retail — Musical Instrument Distributor	Senior Debt	3,300	3,300
		Subordinated Debt	7,000	7,134
		Common Stock Warrants, 30.6% of Co. (1)	1,214	991
		Preferred Stock, Convertible into 53.1% of Co. (1)	2,250	1,722
			13,764	13,147
Marcal Paper Mills, Inc. (2)	Manufacturing — Towel, Tissue & Napkin Products	Senior Debt	16,417	16,417
		Subordinated Debt	16,922	16,922
		Common Stock Warrants, 25.0% of Co. (1)	5,001	5,001
			38,340	38,340
Middleby Corporation	Manufacturing — Foodservice Equipment	Subordinated Debt	22,354	22,354
		Common Stock Warrants, 5.5% of Co. (1)	2,536	2,536
			24,890	24,890
Mobile Tool International, Inc.	Manufacturing — Aerial Lift Equipment	Subordinated Debt	2,699	2,699
New Piper Aircraft, Inc.	Manufacturing — Aircraft Manufacturing	Subordinated Debt	18,356	18,436
		Common Stock Warrants, 6.5% of Co. (1)	2,231	4,832
			20,587	23,268
Numatics, Inc.	Manufacturing — Pneumatic Valves	Senior Debt	31,197	31,197
o2wireless Solutions, Inc.	Telecommunications — Wireless Communications Network Services	Common Stock Warrants, 8.0% of Co. (1)	2,407	4,005
Omnova Solutions, Inc.	Manufacturing — Performance Chemicals and Decorative & Building Products	Subordinated Debt	5,663	5,663

25

Parts Plus Group	Wholesale & Retail — Auto Parts Distributor	Subordinated Debt (1)	4,681	2,706
		Common Stock Warrants, 5.0% of Co. (1)	333	—
		Preferred Stock, Convertible into 1.5% of Co. (1)	556	—
			5,570	2,706
Patriot Medical Technologies, Inc. (2)	Service — Repair Services	Senior Debt	2,315	2,315
		Subordinated Debt	2,758	2,825
		Common Stock Warrants, 15.1% of Co. (1)	612	510
		Preferred Stock, Convertible into 16.1% of Co.	1,195	283
			6,880	5,933
Plastech Engineered Products, Inc.	Manufacturing — Automotive Component Systems	Subordinated Debt	27,290	27,290
		Common Stock Warrants, 2.1% of Co. (1)	2,577	2,577
			29,867	29,867
Starcom Holdings, Inc.	Construction — Electrical Contractor	Subordinated Debt	21,267	21,516
		Common Stock, 2.6% of Co. (1)	616	116
		Common Stock Warrants, 16.2% of Co. (1)	3,914	3,068
			25,797	24,700
Sunvest Industries, LLC (2)	Manufacturing — Contract Manufacturing	Senior Debt	4,287	4,287
		Subordinated Debt	5,263	5,323
		Common Stock Warrants, 73.0% of Co. (1)	1,518	1,518
		Redeemable Preferred Stock (1)	347	347
			11,415	11,475
The Inca Group  (2)	Manufacturing — Steel Products	Subordinated Debt	16,754	16,960
		Common Stock, 60.1% of Co. (1)	5,100	3,967
		Common Stock Warrants, 24.9% of Co. (1)	3,060	2,065
			24,914	22,992
The L.A. Studios, Inc.	Wholesale & Retail — Audio Production	Subordinated Debt	2,118	2,138
Texstars, Inc. (2)	Manufacturing — Aviation and Transportation Accessories	Senior Debt	15,055	15,064
		Subordinated Debt	6,988	6,990
		Common Stock, 39.4% of Co. (1)	1,500	1,500
		Common Stock Warrants, 40.5% of Co. (1)	1,542	1,542
			25,085	25,096
ThreeSixty Sourcing, Ltd.	Provider of Outsourced Manufacturing — Management Services	Senior Debt	14,925	14,926
		Subordinated Debt	18,606	18,608
		Common Stock Warrants, 5.0% of Co. (1)	1,386	1,386
			34,917	34,920
TransCore Holdings, Inc.	Information Technology — Transportation Information Management Services	Subordinated Debt	23,636	23,977
		Common Stock Warrants, 6.4% of Co. (1)	4,368	7,783
		Convertible Preferred Stock, 0.9% of Co.	2,900	2,900
			30,904	34,660
Tube City, Inc.	Manufacturing — Mill Services	Subordinated Debt	11,687	11,933
		Common Stock Warrants, 23.5% of Co. (1)	3,498	5,767
			15,185	17,700
Warner Power, LLC (2)	Manufacturing — Power Systems & Electrical Ballasts	Senior Debt	572	583
		Subordinated Debt	4,007	4,070
		Common Stock Warrants, 53.1% of LLC (1)	1,629	1,458
			6,208	6,111
Weston ACAS Holdings, Inc. (2)	Service — Environmental Consulting Services	Subordinated Debt	21,844	21,850
		Common Stock, 10.0% of Co. (1)	1,932	1,932
		Common Stock Warrants, 27.6% of Co. (1)	5,246	5,246
		Redeemable Preferred Stock	1,158	1,158
			30,180	30,186

26

Westwind Group Holdings, Inc.	Service — Restaurants	Preferred Stock, Convertible into less than 0.1% of Co.	3,530		1,117
		Common Stock, 10.0% of Co. (1)	—		—
			3,530		1,117
Interest Rate Basis Swap Agreements	Pay Fixed / Receive Floating	9 Contracts / Notional Amounts Totaling $102,919	—		(5,218		)
	Pay Floating /  Receive Floating	8 Contracts / Notional Amounts Totaling $161,246	—		(315		)
			—		(5,533		)
Totals			$	882,731	$	858,266

(1) Non-income producing

(2) Affiliate, as defined by at least a 20% fully-diluted ownership of company

See accompanying notes.

27

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2000

(Dollars in thousands)

Company	Industry	Investment		Cost		Fair Value
A&M Cleaning Products, Inc.	Manufacturing — Household Cleaning Products	Subordinated Debt		$	5,045	$	5,045
		Common Stock Warrants, 21.9% of Co. (1)		1,643		2,237
		Redeemable Preferred Stock		447		447
				7,135		7,729
A.H. Harris & Sons, Inc.	Wholesale & Retail — Construction Material	Subordinated Debt		9,494		9,494
		Common Stock Warrants, 10.0% of Co. (1)		534		1,050
				10,028		10,544
Aeriform Corporation	Manufacturing — Packaged Industrial Gas	Subordinated Debt		8,346		8,346
Atlantech International	Manufacturing — Polymer-based Products	Subordinated Debt with Non-Detachable Warrants		18,781		18,781
		Redeemable Preferred Stock with Non-Detachable Common Stock, 1.3% of Co.		1,007		1,007
				19,788		19,788
Auxi Health, Inc. (2)	Healthcare — Home Healthcare	Subordinated Debt		12,546		12,546
		Common Stock Warrants, 17.9% of Co. (1)		2,599		1,856
		Preferred Stock, Convertible into 55.8% of Co.		2,578		2,578
				17,723		16,980
Biddeford Textile Corp.	Manufacturing — Electronic Blankets	Senior Debt		1,552		1,552
		Common Stock Warrants, 10.0% of Co. (1)		1,100		942
		Common stock, 17.8% of Co. (1)		592		1,470
				3,244		3,964
BIW Connector Systems, LLC	Manufacturing — Specialty Connectors	Senior Debt		2,553		2,553
		Subordinated Debt		4,940		4,940
		Common Stock Warrants, 8.0% of Co. (1)		652		2,068
				8,145		9,561
Capital.com, Inc. (2)	Internet — Financial Portal	Preferred Stock, 85.0% of Co. (1	)	1,492		1,492
Case Logic	Manufacturing — Storage Products Designer and Marketer	Subordinated Debt with Non-Detachable Warrants, 9.6% of Co.		19,958		19,958
Caswell-Massey Holdings Corp.	Wholesale & Retail — Toiletries	Senior Debt		1,833		1,833
		Subordinated Debt		1,745		1,745
		Common Stock Warrants, 24.0% of Co. (1)		552		1,092
				4,130		4,670
Centennial Broadcasting, Inc.	Media — Radio Stations	Subordinated Debt		18,778		18,778
Chance Coach, Inc. (2)	Manufacturing — Buses	Senior Debt		2,411		2,411
		Subordinated Debt		8,147		8,147
		Common Stock, 20.4% of Co. (1)		1,896		2,793
		Common Stock Warrants, 43.0% of Co. (1)		4,041		5,950
		Preferred Stock, Convertible into 20.0% of Co.		2,000		2,793
				18,495		22,094
Chromas Technologies (2)	Manufacturing — Printing Presses	Senior Debt		10,452		10,452
		Subordinated Debt		4,447		4,447
		Common Stock, 35.0% of Co. (1)		1,500		1,500
		Common Stock Warrants, 25.0% of Co. (1)		1,071		1,071
		Redeemable Preferred Stock, 40.0% of Co.		4,080		4,080
				21,550		21,550
Confluence Holdings Corp. (2)	Manufacturing — Canoes & Kayaks	Subordinated Debt		10,648		10,648
		Common Stock, 6.0% of Co. (1)		537		37
		Common Stock Warrants, 20.4% of Co. (1)		1,630		1,352
				12,815		12,037

(1) Non-income producing

(2) Affiliate, as defined by at least a 20% fully-diluted ownership of company

See accompanying notes.

28

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2000

(Dollars in thousands)

Company	Industry	Investment	Cost		Fair Value
Cornell Companies, Inc.	Service — Private Corrections	Subordinated Debt	$	28,929	$	28,929
		Common Stock Warrants, 2.2% of Co. (1)	1,102		1,071
			30,031		30,000
Crosman Corporation	Manufacturing — Small Arms	Subordinated Debt	3,854		3,854
		Common Stock Warrants, 3.5% of Co. (1)	330		330
			4,184		4,184
Cycle Gear, Inc. (2)	Wholesale & Retail — Motor Cycle Accessories	Senior Debt	750		750
		Subordinated Debt	4,344		4,344
		Common Stock Warrants, 34.0% of Co. (1)	374		884
			5,468		5,978
Decorative Surfaces International, Inc. (2)	Manufacturing — Decorative Paper & Vinyl Products	Subordinated Debt	12,878		12,878
		Common Stock Warrants, 42.3% of Co. (1)	4,571		—
		Preferred Stock, Convertible into 2.9% of Co.	803		—
			18,252		12,878
Dixie Trucking Company, Inc. (2)	Transportation — Overnight Shorthaul Delivery	Subordinated Debt	4,079		4,079
		Common Stock Warrants, 32.0% of Co. (1)	141		553
			4,220		4,632
Electrolux, LLC	Manufacturing — Vacuum Cleaners	Membership Interest, 2.5% of Co. (1)	246		2,000
Erie County Plastics Corporation	Manufacturing — Molded Plastics	Subordinated Debt	8,920		8,920
		Common Stock Warrants, 8.0% of Co. (1)	1,170		1,170
			10,090		10,090
Erie Forge and Steel, Inc.	Manufacturing — Steel Products	Common Stock, 18.6% of Co. (1)	500		—
EuroCaribe Packing Company, Inc. (2)	Manufacturing — Meat Processing	Senior Debt	7,959		7,959
		Subordinated Debt	9,048		7,048
		Common Stock Warrants, 37.1% of Co. (1)	1,110		—
			18,117		15,007
Fulton Bellows & Components, Inc. (2)	Manufacturing — Bellows	Senior Debt	13,100		13,100
		Subordinated Debt	6,771		6,771
		Common Stock Warrants, 20.0% of Co. (1)	1,305		1,305
		Preferred Stock, Convertible into 40.0% of Co.	3,191		3,191
			24,367		24,367
Goldman Industrial Group	Manufacturing — Machine Tools, Metal Cutting Types	Subordinated Debt	27,280		27,280
		Common Stock Warrants, 15.0% of Co. (1)	2,822		2,822
			30,102		30,102
IGI, Inc.	Healthcare — Veterinary Vaccines	Subordinated Debt	5,294		5,294
		Common Stock Warrants, 18.7% of Co. (1)	2,003		1,878
			7,297		7,172
Iowa Mold Tooling, Inc. (2)	Manufacturing — Specialty Equipment	Subordinated Debt	23,562		23,562
		Common Stock, 28.7% of Co. (1)	3,200		3,200
		Common Stock Warrants, 53.0% of Co. (1)	5,918		5,918
			32,680		32,680
JAAGIR, LLC	Service — IT Staffing & Consulting	Subordinated Debt	2,789		2,789
		Common Stock Warrants, 4.0% of Co. (1)	271		271
			3,060		3,060
JAG Industries, Inc. (2)	Manufacturing — Metal Fabrication & Tablet Manufacturing	Senior Debt	1,142		1,142
		Subordinated Debt	2,446		2,446
		Common Stock Warrants, 75.0% of Co. (1)	505		—
			4,093		3,588

(1) Non-income producing

(2) Affiliate, as defined by at least a 20% fully-diluted ownership of company

See accompanying notes.

29

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2000

(Dollars in thousands)

Company	Industry	Investment	Cost		Fair Value
Lion Brewery, Inc. (2)	Manufacturing — Malt Beverages	Subordinated Debt	$	5,996	$	5,996
		Common Stock Warrants, 54.0% of Co. (1)	675		7,688
			6,671		13,684
Lubricating Specialties Co.	Manufacturing — Lubricant & Grease	Senior Debt	7,206		7,206
		Subordinated Debt	14,718		14,718
		Common Stock Warrants, 21.0% of Co.  (1)	791		791
			22,715		22,715
MBT International, Inc. (2)	Wholesale & Retail — Musical Instrument Distributor	Senior Debt	3,300		3,300
		Subordinated Debt	6,810		6,810
		Common Stock Warrants, 30.6% of Co. (1)	1,214		1,214
		Preferred Stock, Convertible into 53.1% of Co. (1)	2,250		2,250
			13,574		13,574
Mobile Tool International, Inc.	Manufacturing — Aerial Lift Equipment	Common Stock	246		2,168
New Piper Aircraft, Inc.	Manufacturing — Aircraft Manufacturing	Subordinated Debt	18,211		18,211
		Common Stock Warrants, 4.0% of Co. (1)	2,231		3,578
			20,442		21,789
o2wireless Solutions, Inc.	Telecommunications — Wireless Communications Network Services	Common Stock Warrants, 8.0% of Co. (1)	2,521		16,670
Parts Plus Group	Wholesale & Retail — Auto Parts Distributor	Subordinated Debt	4,329		4,329
		Common Stock Warrants, 3.6% of Co. (1)	333		333
		Preferred Stock, Convertible into 1.7% of Co. (1)	555		117
			5,217		4,779
Patriot Medical Technologies, Inc. (2)	Service — Repair Services	Senior Debt	2,805		2,805
		Subordinated Debt	2,767		2,767
		Common Stock Warrants, 15.0% of Co. (1)	612		612
		Preferred Stock, Convertible into 16.0% of Co.	1,104		1,104
			7,288		7,288
Starcom Holdings, Inc.	Construction — Electrical Contractor	Subordinated Debt	19,199		19,199
		Common Stock, 2.8% of Co. (1)	616		866
		Common Stock Warrants, 17.5% of Co. (1)	3,914		5,415
			23,729		25,480
Sunvest Industries, LLC (2)	Manufacturing — Contract Manufacturing	Senior Debt	5,000		5,000
		Subordinated Debt	5,295		5,295
		Common Stock Warrants, 73.0% of Co. (1)	705		705
		Redeemable preferred Stock (1)	1,000		1,000
			12,000		12,000
The Inca Group  (2)	Manufacturing — Steel Products	Subordinated Debt	15,858		15,858
		Common Stock, 27.7% of Co. (1)	1,700		2,010
		Common Stock Warrants, 57.3% of Co. (1)	3,060		4,136
			20,618		22,004
The L.A. Studios, Inc.	Wholesale & Retail — Audio Production	Subordinated Debt	2,555		2,555
		Common Stock Warrants, 17.0% of Co. (1)	902		1,176
			3,457		3,731
TransCore Holdings, Inc.	Information Technology — Transportation Information Management Services	Subordinated Debt	22,908		22,908
		Common Stock Warrants, 10.2% of Co. (1)	4,686		5,369
		Redeemable Preferred Stock	571		571
			28,165		28,848
Tube City Olympic of Ohio, Inc.	Manufacturing — Mill Services	Senior Debt	7,909		7,909

(1) Non-income producing

(2) Affiliate, as defined by at least a 20% fully-diluted ownership of company

See accompanying notes.

30

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2000

(Dollars in thousands)

Company	Industry	Investment	Cost		Fair Value
Tube City, Inc.	Manufacturing — Mill Services	Subordinated Debt	$	6,460	$	6,460
		Common Stock Warrants, 14.8% of Co. (1)	2,523		3,040
			8,983		9,500
Warner Power, LLC (2)	Manufacturing — Power Systems & Electrical Ballasts	Senior Debt	1,125		1,125
		Subordinated Debt	3,959		3,959
		Common Stock Warrants, 53.1% of LLC (1)	1,629		4,587
			6,713		9,671
Westwind Group Holdings, Inc.	Service — Restaurants	Subordinated Debt	3,011		1,673
		Common Stock Warrants, 5.0% of Co. (1)	350		—
			3,361		1,673
Wrenchead.com, Inc.	Internet — Auto Parts Distributor	Common Stock, 1.0% of Co. (1)	—		104
Interest Rate Basis Swap Agreements	Pay Fixed / Receive Floating	9 Contracts / Notional Amounts Totaling $102,123	—		(582		)
	Pay Floating / Receive Floating	8 Contracts / Notional Amounts Totaling $166,030	—		(488		)
			—		(1,070		)
Totals			$	557,944	$	585,746

(1) Non-income producing

(2) Affiliate, as defined by at least a 20% fully-diluted ownership of company

See accompanying notes.

31

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share data)

		Year Ended December 31, 2001			Year Ended December 31, 2000			Year  Ended December 31, 1999
Operating income:
Interest and dividend income		$	88,286		$	58,733		$	30,833
Fees		15,951			11,319			8,602
Total operating income		104,237			70,052			39,435
Operating expenses:
Interest		10,343			9,691			4,716
Salaries and benefits		14,571			11,259			7,479
General and administrative		7,698			6,432			4,170
Total operating expenses		32,612			27,382			16,365
Operating income before income taxes		71,625			42,670			23,070
Income tax benefit		—			2,000			912
Net operating income		71,625			44,670			23,982
Net realized gain on investments		5,369			4,539			3,636
(Decrease) increase in net unrealized appreciation of investments		(58,389		)	(53,582		)	69,583
Net increase (decrease) in shareholders’ equity resulting from operations		$	18,605		$	(4,373	)	$	97,201
Net operating income per common share:	Basic	$	2.27		$	2.00		$	1.75
	Diluted	$	2.24		$	1.96		$	1.68
Earnings (loss) per common share:	Basic	$	0.59		$	(0.20	)	$	7.07
	Diluted	$	0.58		$	(0.19	)	$	6.80
Weighted average shares of common stock outstanding:
	Basic	31,487			22,323			13,744
	Diluted	32,001			22,748			14,294

See accompanying notes.

32

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

	Preferred Stock		Common Stock			Capital in Excess of Par Value			Notes Receivable From Sale of Common Stock			(Distributions in Excess of) Undistributed Net Realized Earnings			Unrealized Appreciation (Depreciation) of Investments			Total Shareholders’ Equity
			Shares	Amount
Balance at January 1, 1999	$	—	11,081	$	111	$	145,245		$	(300	)	$	(116	)	$	7,783		$	152,723
Issuance of common stock	—		5,605	57		89,151			—			—			—			89,208
Issuance of common stock under stock option plans	—		1,520	15		22,832			(22,752		)	—			—			95
Issuance of common stock under the Dividend Reinvestment Plan	—		36	—		693			—			—			—			693
Repurchase of common stock warrants	—		—	—		(2,165		)	—			—			—			(2,165		)
Issuance of restricted shares	—		10	—		166			—			—			—			166
Net increase in shareholders’ equity resulting from operations	—		—	—		—			—			27,618			69,583			97,201
Distributions	—		—	—		—			—			(26,176		)	—			(26,176		)
Balance at December 31, 1999	$	—	18,252	$	183	$	255,922		$	(23,052	)	$	1,326		$	77,366		$	311,745
Issuance of common stock	—		9,430	94		185,224			—			—			—			185,318
Issuance of common stock under stock option plans	—		290	3		6,699			(6,702		)	—			—			—
Issuance of common stock under the Dividend Reinvestment Plan	—		31	—		742			—			—			—			742
Repayments of notes receivable from sale of common stock	—		—	—		—			2,365			—			—			2,365
Net decrease in shareholders’ equity resulting from operations	—		—	—		—			—			49,209			(53,582		)	(4,373		)
Distributions	—		—	—		—			—			(50,630		)	—			(50,630		)
Balance at December 31, 2000	$	—	28,003	$	280	$	448,587		$	(27,389	)	$	(95	)	$	23,784		$	445,167
Issuance of common stock	—		8,930	90		226,243			—			—			—			226,333
Issuance of common stock under stock option plans	—		1,045	10		23,413			(23,423		)	—			—			—
Issuance of common stock under the Dividend Reinvestment Plan	—		39	—		1,048			—			—			—			1,048
Repayments of notes receivable from sale of common stock	—		—	—		—			23,669			—			—			23,669
Net increase in shareholders’ equity resulting from operations	—		—	—		—			—			76,994			(58,389		)	18,605
Cumulative effect of change in accounting principle	—		—	—		—			—			(6,165		)	6,165			—
Distributions			—	—		—			—			(74,557		)	—			(74,557		)
Balance at December 31, 2001	$	—	38,017	$	380	$	699,291		$	(27,143	)	$	(3,823	)	$	(28,440	)	$	640,265

See accompanying notes.

33

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Year Ended December 31, 2001			Year Ended December 31, 2000			Year Ended December 31, 1999
Operating activities:
Net increase (decrease) in shareholders’ equity resulting from operations	$	18,605		$	(4,373	)	$	97,201
Adjustments to reconcile net increase (decrease) in shareholders’ equity resulting from operations to net cash provided by operating activities:
Unrealized depreciation (appreciation) of investments	58,389			53,582			(69,583		)
Net realized gain on investments	(5,369		)	(4,538		)	(3,636		)
Accretion of loan discounts	(9,090		)	(4,317		)	(2,049		)
Increase in accrued payment-in-kind dividends and interest	(15,713		)	(5,550		)	(3,038		)
Collection of loan origination fees	1,840			—			—
Amortization of deferred finance costs	718			1,187			854
Increase in interest receivable	(8,022		)	(2,518		)	(856		)
Receipt of note for prepayment penalty	—			(884		)	—
Increase in other assets	(2,721		)	(2,790		)	(5,798		)
(Decrease) increase in other liabilities	(2,374		)	2,946			6,090
Net cash provided by operating activities	36,263			32,745			19,185
Investing activities:
Proceeds from sale of investments	9,952			2,004			27,823
Collection of payment-in-kind notes	5,008			1,261			—
Collection of accreted loan discounts	623			257			208
Principal repayments	67,863			30,603			31,674
Purchases of investments	(381,758		)	(276,138		)	(171,595		)
Purchases of securities	—			—			(12,900		)
Repayments of notes receivable issued in exchange for common stock	23,669			2,365			—
Net cash used in investing activities	(274,643		)	(239,648		)	(124,790		)
Financing activities:
Repayments of short term notes payable, net	—			—			(5,000		)
Proceeds from asset securitization	28,214			87,200			—
Drawings on (repayments of) revolving credit facilities, net	79,644			(10,543		)	48,545
Repayments of notes payable	(11,919		)	—			—
Increase in deferred financing costs	(319		)	(2,243		)	(2,427		)
Issuance of common stock	227,381			185,318			89,451
Repurchase of common stock warrants	—			—			(2,165		)
Distributions paid	(77,300		)	(44,050		)	(26,158		)
Net cash provided by financing activities	245,701			215,682			102,246
Net increase (decrease) in cash and cash equivalents	7,321			8,779			(3,359		)
Cash and cash equivalents at beginning of period	11,569			2,790			6,149
Cash and cash equivalents at end of period	$	18,890		$	11,569		$	2,790
Supplemental Disclosures:
Cash paid for interest	$	10,047		$	7,830		$	4,385
Non-cash financing activities:
Issuance of common stock in conjunction with dividend reinvestment	$	1,048		$	742		$	693
Notes receivable issued in exchange for common stock associated with the exercise of employee stock options	$	23,423		$	6,702		$	22,752
Net repayment of short term notes payable	$	—		$	—		$	80,948
Receipt of short term note in exchange for principal repayment of long term note	$	—		$	8,424		$	22,752

See accompanying notes.

34

AMERICAN CAPITAL STRATEGIES, LTD.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars in thousands except per share data)

	Year Ended December 31, 2001			Year Ended December 31, 2000			Year Ended December 31, 1999			Year Ended December 31, 1998			Three Months Ended December 31, 1997
Per Share Data (2)
Net asset value at beginning of the period	$	15.90		$	17.08		$	13.80		$	13.61		$	13.60
Net operating income (1)	2.27			2.00			1.79			1.30			0.16
Realized gain on investments	0.17			0.21			0.20			—			—
(Decrease) increase in unrealized appreciation on investments (1)	(1.85		)	(2.41		)	5.08			0.23			0.06
Net increase (decrease) in shareholders’ equity resulting from operations	$	0.59		$	(0.20	)	$	7.07		$	1.53		$	0.22
Issuance of common stock	1.79			0.70			0.71			—			—
Effect of antidilution (dilution)	0.86			0.49			(2.76		)	—			—
Distribution of net investment income	(2.30		)	(2.17		)	(1.74		)	(1.34		)	(0.21		)
Net asset value at end of period	$	16.84		$	15.90		$	17.08		$	13.80		$	13.61
Per share market value at end of period	$	28.35		$	25.19		$	22.75		$	17.25		$	18.13
Total return (3) (4)	22.33		%	20.82		%	44.36		%	2.16		%	22.23		%
Shares outstanding at end of period	38,017			28,003			18,252			11,081			11,069
Ratio/Supplemental Data
Net assets at end of period	$	640,265		$	445,167		$	311,745		$	152,723		$	150,652
Average Net assets	$	542,716		$	378,456		$	232,234		$	151,688		$	150,596
Ratio of operating expenses, net of interest expense, to average net assets (5)	4.10		%	4.68		%	5.02		%	5.34		%	4.34		%
Ratio of interest expense to average net assets	1.91		%	2.56		%	2.03		%	0.04		%	—
Ratio of operating expenses to average net assets (5)	6.01		%	7.24		%	7.05		%	5.38		%	4.34		%
Ratio of net operating income to average net assets (5)	13.20		%	11.80		%	10.33		%	9.43		%	4.42		%

(1)Adoption of the provisions in the AICPA Audit and Accounting Guide for Investment Companies effective for the year ended December 31, 2001 decreased net operating income per share $0.03, and increased unrealized depreciation on investments per share $0.03, for the year ended December 31, 2001.

(2)Basic per share data.

(3)Total return equals the increase (decrease) of the ending market value over the beginning market value plus reinvested dividends, divided by the beginning market value.

(4)   Amount was not annualized for the results of the three-month period ended December 31, 1997.

(5)   Amount was annualized for the results of the three-month period ended December 31, 1997.

See accompanying notes.

35

Note 1. Organization

American Capital Strategies, Ltd., a Delaware corporation (the “Company”), was incorporated in 1986 to provide financial advisory services to and invest in middle market companies.  On August 29, 1997, the Company completed an initial public offering (“IPO”) of 10,382 shares of common stock (“Common Stock”), and became 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”). On October 1, 1997, the Company began operations so as to qualify to be taxed as a regulated investment company (“RIC”) as defined in Subtitle A, Chapter 1, under Subchapter M of the Internal Revenue Code of 1986 as amended (the “Code”). As contemplated by these transactions, the Company materially changed its business plan and format from structuring and arranging financing for buyout transactions on a fee for services basis to primarily being a lender to and investor in middle market companies.  As a result of the changes, the Company is operating as a holding company whose predominant source of operating income has changed from financial performance and advisory fees to interest and dividends earned from investing the Company’s assets in debt and equity of businesses. The Company’s investment objectives are to achieve current income from the collection of interest and dividends, as well as long-term growth in its shareholders’ equity through appreciation in value of the Company’s equity interests.

The Company is the parent of American Capital Financial Services (“ACFS”) and through ACFS continues to provide financial advisory services to businesses, principally the Company’s portfolio companies.  The Company is headquartered in Bethesda, Maryland, and has offices in New York, San Francisco, Los Angeles, Philadelphia, Chicago, and Dallas.  The Company’s reportable segments are its investing operations as a business development company and the financial advisory operations of its wholly owned subsidiary, ACFS (see Note 13).  The Company has no foreign operations.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States and Article 6 of Regulation S-X of the Code of Federal Regulations.  The Company consolidates its investment in ACFS.

Valuation of Investments

Investments are carried at fair value, as determined in good faith by the Board of Directors.  Securities that are publicly traded are valued at the closing price on the valuation date.  For debt and equity securities of companies that are not publicly traded, or for which the Company has various degrees of trading restrictions, the Company prepares an analysis consisting of traditional valuation methodologies to estimate the enterprise value of the portfolio company issuing the securities.  The methodologies consist of valuation estimates based on; valuations of comparable public companies, recent sales of comparable companies, discounting the forecasted cash flows of the portfolio company and the liquidation value of the company's assets.  The Company will use weighting of some or all of the above valuation methods.  In valuing convertible debt, equity or other securities the Company will value its equity investment based on its pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value.  The Board of Directors will value non-convertible debt securities at cost plus amortized original issue discount ("OID") to the extent that the estimated enterprise value of the portfolio company exceeds the outstanding debt of the company.  If the estimated enterprise value is less than the outstanding debt of the company, the Board of Directors will reduce the value of the Company's debt investment beginning with the junior most debt such that the enterprise value less the value of the outstanding debt is zero.  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 (see Note 3).

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost which approximates fair value.

Interest and Dividend Income Recognition

Interest income is recorded on the accrual basis to the extent that such amounts are expected to be collected.  OID is accreted into interest income using the effective interest method.  OID initially represents the value of equity warrants obtained in conjunction with the acquisition of debt securities.  Loan origination fees collected upon the funding of a loan are deferred and accreted into interest income over the life of the loan using the effective interest method.  Dividend income is recognized on the ex-dividend date.  The Company stops accruing interest on its investments when it is determined that interest is no longer collectible.  For loans with payment-in-kind (“PIK”) interest features, the Company bases income accruals on the valuation of the PIK notes received from the

36

borrower.  If the portfolio company valuation indicates a value of the PIK notes that is not sufficient to cover the contractual interest, the Company will not accrue interest income on the notes.

Fee Income Recognition

Fees primarily include financial advisory, transaction structuring and prepayment premiums.  Financial advisory fees represent amounts received for providing advice and analysis to middle market companies and are recognized as earned based on services provided.  Transaction structuring fees represent amounts received for structuring, financing, and executing transactions and are generally payable only if the transaction closes and are recognized as earned when the transaction is completed.  Prepayment premiums are recognized as they are received.

Realized Gain or Loss and Unrealized Appreciation or Depreciation of Investments

Realized gain or loss is recorded at the disposition of an investment and is the difference between the net proceeds from the sale and the cost basis of the investment using the specific identification method.  Unrealized appreciation or depreciation reflects the difference between the Board of Directors’ valuation of the investments and the cost basis of the investments.

Distributions to Shareholders

Distributions to shareholders are recorded on the ex-dividend date.

Federal Income Taxes

The Company operates to qualify to be taxed as a RIC under the Internal Revenue Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine “taxable income.”  The Company has distributed and currently intends to distribute sufficient dividends to eliminate taxable income; therefore, the statement of operations contains no provision for income taxes for the years ended December 31, 2001, 2000, and 1999.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reported.  Actual results could differ from those estimates.

Property and Equipment

Property and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets ranging from three to seven years.

Management Fees

The Company is self-managed and therefore does not incur management fees payable to third parties.

Reclassifications

Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.

Concentration of Credit Risk

The Company places its cash and cash equivalents with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.

Recent Accounting Pronouncements

The AICPA Audit and Accounting Guide for Investment Companies (“the Guide”) was revised and its changes are effective for the Company’s 2001 annual financial statements.  Changes to the Guide affect the Company in two areas: 1) consolidation of operating subsidiaries and 2) the accounting for loan discounts and premiums.

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In implementing the provisions of the Guide, the Company has consolidated its investment in ACFS.  Previously, the Company had accounted for its investment in ACFS under the equity method.  This change had no effect on net operating income or net asset value.  Prior year financial statements have been presented on a consolidated basis to conform to the current year’s presentation.

Under the provisions of the Guide, premiums and discounts on debt securities, including loan origination fees, are required to be amortized or accreted over the life of the investment using the effective interest method.  Pursuant to the prior Guide, the Company’s previous policy was to recognize loan origination fees when they were collected.

In adopting this new requirement, the Company calculated the cumulative effect of the change in accounting for origination fees for all loans originated through December 31, 2000, and recorded a $6,200 increase in the value of debt investments and a $6,200 increase in the corresponding debt discount.  In addition, the Company recorded an increase of $6,200 in net unrealized appreciation and a $6,200 decrease in distributions in excess of net realized earnings.  The net impact of these changes results in the Company’s net asset value remaining unchanged as specified in the guidance.  For the year ended December 31, 2001, the Company has recorded $1,840 of origination fees as discounts and accreted $941 of discounts into interest income using the effective interest method.  The impact of this change was a decrease in 2001 net operating income of $899, an increase in unrealized depreciation of $1,334, and an increase in net realized gains of $517.  Upon early repayment of loans, collections of unamortized discounts are recognized as realized gains.

Note 3. Investments

Investments consist of securities issued by publicly- and privately-held companies, which have been valued at $863,799 as of December 31, 2001. These securities consist of senior debt, subordinated debt with equity warrants, preferred stock and common stock.  The debt securities have effective interest rates ranging from 5.3% to 32.4% and are payable in installments with final maturities generally from 5 to 10 years and are generally collateralized by assets of the borrower.  The Company’s investments in equity warrants, common stock, and certain investments in preferred stock do not produce current income.  The net unrealized appreciation in investments for Federal income tax purposes is the same as for book purposes.  At December 31, 2001, one loan with a principal balance of $6,477 was 0-30 days past due, one loan with a principal balance of $22,152 was 31-60 days past due, one loan with a principal balance of $14,400 was 61-90 days past due, and three loans with a total principal balance of $40,119 were greater than 90 days past due.  In addition, four of the Company’s investments with a total principal balance of $49,900 are on non-accrual status.

Summaries of the composition of the Company’s portfolio of publicly and non-publicly traded securities as of December 31, 2001 and 2000 at cost and fair value are shown in the following table:

COST	December 31, 2001		December 31, 2000
Senior debt	18.3	%	12.4	%
Subordinated debt	57.7	%	61.8	%
Subordinated debt with non-detachable warrants	4.5	%	6.9	%
Preferred stock	4.9	%	3.5	%
Common stock warrants	12.0	%	13.1	%
Common stock	2.6	%	2.3	%
FAIR VALUE	December 31, 2001		December 31, 2000
Senior debt	18.7	%	11.8	%
Subordinated debt	58.7	%	58.2	%
Subordinated debt with non-detachable warrants	4.6	%	6.6	%
Preferred stock	2.9	%	3.3	%
Common stock warrants	12.8	%	17.1	%
Common stock	2.3	%	3.0	%

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The following table shows the portfolio composition by industry grouping at cost and at fair value:

COST	December 31, 2001		December 31, 2000
Manufacturing	72.1	%	66.0	%
Wholesale & Retail	9.1	%	7.5	%
Service	5.0	%	7.8	%
Information Technology	3.5	%	5.0	%
Transportation	3.4	%	0.8	%
Healthcare	3.1	%	4.5	%
Construction	2.9	%	4.3	%
Financial Services	0.4	%	0.0	%
Telecommunications	0.3	%	0.4	%
Internet	0.2	%	0.3	%
Media	0.0	%	3.4	%
FAIR VALUE	December 31, 2001		December 31, 2000
Manufacturing	71.8	%	65.0	%
Wholesale & Retail	9.2	%	7.4	%
Service	4.7	%	7.2	%
Information Technology	4.0	%	4.9	%
Transportation	3.5	%	0.8	%
Construction	2.9	%	4.3	%
Healthcare	2.8	%	4.1	%
Financial Services	0.5	%	0.0	%
Telecommunications	0.5	%	2.8	%
Internet	0.1	%	0.3	%
Media	0.0	%	3.2	%

Management expects that the largest percentage of its investments will continue to be in manufacturing companies, but diversified into different sectors as defined by Standardized Industrial Classification  (“SIC”) codes.  The current investment composition within the manufacturing segment includes investments in 33 different manufacturing SIC codes, with the largest percentages being 5.9% in SIC code 2600 (“Paper and Allied Products”), and 9.1% in SIC code 3531 (“Construction Machinery and Equipment”) as of December 31, 2001 and 2000, respectively.

The following table shows the portfolio composition by geographic location at cost and at fair value:

COST	December 31, 2001		December 31, 2000
Northeast	22.8	%	18.1	%
Mid-Atlantic	22.5	%	27.0	%
Southeast	16.0	%	21.1	%
Southwest	14.6	%	13.5	%
North-Central	14.5	%	9.2	%
South-Central	9.6	%	11.1	%
FAIR VALUE	December 31, 2001		December 31, 2000
Northeast	27.1	%	18.2	%
Mid-Atlantic	17.4	%	25.9	%
Southeast	16.2	%	22.5	%
Southwest	14.9	%	13.3	%
North-Central	14.8	%	9.3	%
South-Central	9.6	%	10.8	%

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Note 4. Commitments and Obligations

Borrowings

As of December 31, 2001 and 2000, the Company, through ACAS Funding Trust I (“Trust I”), an affiliated business trust, had $147,600 and $68,000, respectively, in borrowings outstanding under a $225,000 revolving debt-funding facility. The facility expires during April 2003.  Trust I is collateralized by $494,900 of the Company’s loans.  The full amount of principal will be amortized over a 24-month period at the end of the term and interest is payable monthly.  Interest on borrowings under this facility is charged at one month LIBOR (1.88% at December 31, 2001) plus 125 basis points.  During the years ended December 31, 2001 and 2000, the Company had weighted average outstanding borrowings under this facility of $66,600 and $94,700, respectively.

On December 20, 2000, the Company completed a $115,400 asset securitization.  In conjunction with the transaction, the Company established ACAS Business Loan Trust 2000-1 (“Trust II”), an affiliated business trust, and contributed to Trust II $153,700 in loans.  Subject to certain conditions precedent, the Company will remain servicer of the loans.  Simultaneously with the initial contribution, Trust II was authorized to issue $69,200 Class A notes and $46,200 Class B notes to institutional investors and  $38,300 of Class C notes were retained by an affiliate of Trust II.  The Class A notes carry an interest rate of one-month LIBOR plus 45 basis points, the Class B notes carry an interest rate of one-month LIBOR plus 150 basis points.  As of December 31, 2000, Trust II had issued all $69,200 of Class A notes, and $18,000 of Class B notes; in January 2001, Trust II issued the remaining $28,200 of the Class B notes.  The notes are backed by loans to 29 of the Company’s portfolio companies.  The Class A notes mature on March 20, 2006, and the Class B notes mature on August 20, 2007.  The transfer of the assets to Trust II and the related sale of notes by Trust II have been treated as a financing arrangement by the Company under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.  Repayments received on the loans are first applied to the Class A notes, and then to the Class B notes.  As required by the terms of Trust II, the Company has entered into interest rate swaps to mitigate the related interest rate risk (see Note 8).  During the years ended December 31, 2001 and 2000, the weighted average outstanding balance of the Class A and B notes was $109,448 and $2,859, respectively.  At December 31, 2001 and 2000 total borrowings outstanding under the asset securitization was $103,495 and $87,200, respectively.

The weighted average interest rates on all of the Company’s borrowings, including amortization of deferred finance costs, for the years ended December 31, 2001, 2000, and 1999 were 5.88%, 9.93%, and 9.70% respectively.

For the above borrowings, the fair value of the borrowings approximates cost.

Commitments

The Company has non-cancelable operating leases for office space and office equipment.  The leases expire over the next eight years and contain provisions for certain annual rental escalations. Rent expense for operating leases for the years ended December 31, 2001, 2000, and 1999 was approximately $1,507, $797, and $643, respectively.

Future minimum lease payments under non-cancelable operating leases at December 31, 2001 were as follows:

2002	$	1,398
2003	1,382
2004	1,310
2005	532
2006 and thereafter	2,126
Total	$	6,748

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In addition, at December 31, 2001, the Company had commitments under loan agreements to fund up to $8,609 to three portfolio companies.  These commitments are composed of two working capital credit facilities and one acquisition credit facility.  The commitments are subject to the borrowers meeting certain criteria.  The terms of the borrowings subject to commitment are comparable to the terms of other debt securities in the Company’s portfolio.  The contractual payment terms of the Company’s borrowings and operating lease obligations at December 31, 2001 are as follows:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Revolving Debt Funding Facility	$	147,646	$	—	$	147,646	$	—	$	—
Notes Payable	103,495		6,534		84,396		12,565		—
Operating Leases	6,748		1,398		3,224		1,060		1,066

Note 5. Stock Option Plan

The Company applies APB No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related interpretations in accounting for its stock-based compensation plan.  In accordance with SFAS 123, “Accounting for Stock-Based Compensation” (SFAS 123), the Company elected to continue to apply the provisions of APB 25 and provide pro forma disclosure of the Company’s consolidated net operating income and net increase (decrease) in shareholders’ equity resulting from operations calculated as if compensation costs were computed in accordance with SFAS 123.  The 1997 Stock Option Plan (the “1997 Plan”) provided for the granting of options to purchase up to 1,328 shares of common stock at a price of not less than the fair market value of the common stock on the date of grant to employees of the Company. In May 1998, the Company authorized 500 additional shares to be granted under the 1997 Plan.  During May 2000, shareholders approved the 2000 Stock Option Plan (the “2000 Plan”) which provided for the granting of options to purchase 2,000 shares of common stock.  In May 2001, the Company authorized 1,800 additional shares to be granted under the 2000 Plan.  As of December 31, 2001, there are 94 and 181 shares available to be granted under the 1997 and 2000 Plans, respectively.

On November 6, 1997, the Board of Directors authorized the establishment of a stock option plan for the non-employee directors (the “Director Plan”). Shareholders at the annual meeting held on May 14, 1998 approved the Director Plan.  The Company received approval of the plan from the Securities and Exchange Commission on May 14, 1999.   The Company has issued from 15 to 20 options to each of the non-employee directors for a total grant of 125 options.  At December 31, 2001, there are 25 shares available for grant under the Director Plan.

Options granted under the 1997 and 2000 Plans may be either incentive stock options within the meaning of Section 422 of the Code or nonstatutory stock options; options granted under the Director Plan are nonstatutory stock options.  Only employees of the Company and its subsidiaries are eligible to receive incentive stock options under the 1997 and 2000 Plans.  Options under both the 1997 and 2000 Plans and the Director Plan generally vest over a three-year period.  Incentive stock options must have a per share exercise price of no less than the fair market value on the date of the grant.  Nonstatutory stock options granted under the 1997 and 2000 Plans and the Director Plan must have a per share exercise price of no less than the fair market value on the date of the grant.  Options granted under both plans may be exercised for a period of no more than ten years from the date of grant.  The following table summarizes the effect of incentive stock options on consolidated net operating income and the increase (decrease) in shareholders’ equity resulting from operations:

	Year Ended December 31,2001		Year Ended December 31, 2000			Year Ended December 31, 1999
Net operating income
As reported	$	71,625	$	44,670		$	23,982
Pro forma	$	59,786	$	37,477		$	21,964
Net increase (decrease) in shareholders’ equity resulting from operations
As reported	$	18,605	$	(4,373	)	$	97,201
Pro forma	$	6,766	$	(11,566	)	$	95,183

The effects of applying SFAS 123 for pro forma disclosures are not likely to be representative of the effects on reported consolidated net operating income and net increase (decrease) in shareholders’ equity resulting from operations for future years.

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For options granted during the year ended December 31, 2001, the Company estimated a fair value per option on the date of grant of $5.07 using a Black-Scholes option pricing model and the following assumptions: dividend yield 8.1%, risk-free interest rate 4.3%, expected volatility factor .41, and expected lives of the options of 5 years.

For options granted during the year ended December 31, 2000, the Company estimated a fair value per option on the date of grant of $4.72 using a Black-Scholes option pricing model and the following assumptions: dividend yield 8.6%, risk-free interest rate 5.0%, expected volatility factor .43, and expected lives of the options of 5 years.

For options granted during the year ended December 31, 1999, the Company estimated a fair value per option on the date of grant of $6.12 using a Black-Scholes option pricing model and the following assumptions: dividend yield 7.7%, risk-free interest rate 6.4%, expected volatility factor .32, and expected lives of the options of 7 years. 

A summary of the status of the Company’s stock option plans as of and for the years ended December 31, 2001 and 2000 is as follows:

	Year Ended December 31, 2001				Year Ended December 31, 2000
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Options outstanding, beginning of year	1,504		$	21.97	354		$	17.60
Granted	2,335		$	26.42	1,529		$	22.81
Exercised	(1,045	)	$	22.84	(290	)	$	21.53
Canceled	(154	)	$	22.62	(89	)	$	20.47
Options outstanding, end of year	2,640		$	25.52	1,504		$	21.97
Options exercisable at year end	2,616				1,459

The following table summarizes information about stock options outstanding at December 31, 2001:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at December 31, 2001	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at December 31, 2001	Weighted Average Exercise Price
$15.00 to $21.99	101	6.9 Years	$	18.86	88	$	18.45
$22.00 to $22.99	529	8.4 Years	$	22.83	519	$	22.83
$23.00 to $25.99	478	9.2 Years	$	25.18	478	$	25.18
$26.00 to $27.99	1,085	9.4 Years	$	26.23	1,084	$	26.23
$28.00 to $28.88	447	9.9 Years	$	28.87	447	$	28.87
$15.00 to $28.88	2,640	9.2 Years	$	25.52	2,616	$	25.55

During 2001 and 2000, the Company issued 1,045 and 290 shares, respectively, of common stock to employees of the Company, pursuant to option exercises, in exchange for notes receivable totaling $23,423 and $6,702, respectively.  These transactions were executed pursuant to the 2000 and the 1997 Plans, which allow the Company to lend to its employees funds to pay for the exercise of stock options.  All loans made under this arrangement are fully secured by the value of the common stock purchased and are otherwise full recourse loans.  Certain of the loans are also secured by pledges of life insurance policies.  Interest is charged and paid on such loans at a market rate of interest.

Note 6. Capital Stock

In June, September, and December 2001, the Company sold 5,175, 1,800, and 1,955 shares of common stock, respectively, in three follow-on equity offerings.  The net proceeds of the offerings of approximately $226,333 were used to repay outstanding borrowings under the revolving debt funding facility and to fund investments.

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In May and November 2000, the Company sold 6,325 and 3,105 shares of common stock, respectively, in two follow-on equity offerings.  The net proceeds of the offerings of approximately $185,318 were used to repay outstanding borrowings under the revolving debt funding facility and to fund investments.

In August 1999, the Company sold 5,605 shares of common stock.  The net proceeds of the offering of approximately $89,208 were used to repay outstanding borrowings under the revolving debt funding facility and to fund investments.

The Company declared dividends of $74,557, $50,630, and $26,176, or $2.30, $2.17, and $1.74 per share for the years ended December 31, 2001, 2000, and 1999, respectively.

On August 29, 1997, the Company completed its IPO and sold 10,382 shares of its common stock at a price of $15.00 per share.  Pursuant to the terms of the Company’s agreement with the underwriter of the offering, the Company issued 443 common stock warrants (“Warrants”) to the underwriter.  The Warrants have a term of five years from the date of issuance and may be exercised at a price of $15.00 per share.  During August and December 2001, the underwriter exercised 15 of these warrants.  During December 1999, the Company repurchased 394 of these Warrants at a price of $5.50 per warrant.  As of December 31, 2001, there are 34 Warrants outstanding.

Note 7. Realized Gain on Investments

During August and December 2001, the Company exited its investment in Cornell Companies, Inc. (“Cornell”) through a sale of its common stock warrants and the prepayment of its subordinated debt.  The Company received $31,669 in total proceeds from the sale and recognized a net realized gain of $2,140.  The realized gain was comprised of $1,257 of unamortized OID on the subordinated debt and $883 of gain on the common stock warrants.  In conjunction with the sale, the Company also recorded $751 of unrealized depreciation to reverse previously recorded unrealized appreciation.

During December 2001, the Company sold its investment in BIW Connector Systems, LLC  (“BIW”).  The Company’s investment in BIW included senior debt and senior subordinated debt with common stock warrants.  The Company received $8,380 in total proceeds from the sale and recognized a net realized gain of $1,823.  The realized gain was comprised of $418 of unamortized OID on the subordinated debt and $1,405 of gain on the common stock warrants.  In conjunction with the sale, the Company also recorded $1,416 of unrealized depreciation to reverse previously recorded unrealized appreciation.

During April 2001, the Company converted its common stock investment in Mobile Tool, Inc., to subordinated debt by exercising its put rights.  The Company realized a gain of $2,452 on this conversion.  In conjunction with the sale, the Company also recorded $1,738 of unrealized depreciation to reverse previously recorded unrealized appreciation.

In addition, during 2001, the Company realized losses of $500 and $592 on the write-off of its common stock investments on the sale of Erie Forge & Steel, and on Biddeford Textile Corp, which filed for bankruptcy protection under Chapter 11.  The Company also recorded unrealized appreciation of $500 and $592, respectively; to reverse previously recorded unrealized depreciation.

During January and September 2001, the Company sold its common stock warrants in The L.A. Studios, Inc.  The Company received net proceeds of $950 from the sale and realized a gain of $24. The realized gain was comprised of $126 of unamortized OID, net of a $102 loss on the common stock warrants.  In conjunction with the sale, the Company also recorded $24 of unrealized depreciation to reverse previously recorded unrealized appreciation.

During 2000, one of the Company’s portfolio companies, o2wireless, completed an initial public offering.  In conjunction with the offering, o2wireless repaid the Company’s $13,000 subordinated note.  In addition, the Company exercised and sold 180 of the 2,737 common stock warrants it owns.  Because of these transactions, the Company realized a gain of $4,303 which was comprised of $2,475 of unamortized OID and $1,828 of gain on the sale of the exercised warrants.

During March 1999, the Company sold its investment in Four-S Baking Company (“Four-S”).  The Company’s investment included senior debt, subordinated debt, preferred stock, common stock and common stock warrants.  The Company received $7,200 in total proceeds from the sale and realized a gain of $316.  The realized gain was comprised of $331 of unamortized OID on the subordinated debt and a net loss of $15 on the common stock and warrants.  In addition, the Company earned prepayment fees of $87 from the early repayment of the senior and subordinated debt.  In conjunction with the sale, the Company also recorded $177 of unrealized depreciation to reverse previously recorded unrealized appreciation.

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During June 1999, the Company received a prepayment of subordinated debt from Specialty Transportation Services, Inc. (“STS”) in the amount of $7,500.  In conjunction with the repayment, the Company received prepayment fees of $225 and realized a gain of $551 from unamortized OID.  In October 1999, the Company received a prepayment of the remaining balance of its subordinated debt investment in STS of $515, including prepayment penalties.  In addition, STS repurchased from the Company the common stock and common stock purchase warrants owned by the Company for total consideration of $3,000.  The Company recorded $1,844 of realized gains and reversed $1,806 of previously unrealized appreciation on the sale of the subordinated debt, common stock and common stock purchase warrants.  In addition, STS paid a $1,000 fee to cancel an investment-banking contract between ACFS and STS.

Note 8. Interest Rate Risk Management

The Company has entered into interest rate swap agreements with two large commercial banks as part of its strategy to manage interest rate risks and to fulfill its obligation under the terms of its revolving debt funding facility and asset securitization.  The Company uses interest rate swap agreements for hedging and risk management only and not for speculative purposes.  During the year ended December 31, 2001, the Company entered into 17 interest rate swap agreements with an aggregate notional amount of $264,165.  Pursuant to these swap agreements, the Company pays either a variable rate equal to the prime lending rate (4.75% and 9.50% at December 31, 2001 and 2000, respectively) and receives a floating rate of the one-month LIBOR (1.88% and 6.57% at December 31, 2001 and 2000, respectively), or pays a fixed rate and receives a floating rate of the one-month LIBOR.  At December 31, 2001 and 2000, the swaps had a remaining weighted average maturity of approximately 4.6 and 5.6 years, respectively.  At December 31, 2001 and 2000, the fair value of the interest rate swap agreements represented a liability of $5,533 and $1,070, respectively.  The following table presents the notional principal amounts of interest rate swaps by class:

Type of Interest Rate Swap	Number of Contracts	Notional Value at December 31,2001		Notional Value at December 31, 2000
Pay fixed, receive LIBOR floating	9	$	102,919	$	102,123
Pay prime floating, receive LIBOR floating	8	161,246		166,030
Total	17	$	264,165	$	268,153

Note 9. Income Taxes

The Company operates to qualify to be taxed as a RIC under the Internal Revenue Code. Generally, a RIC is entitled to deduct dividends it pays to its shareholders from its income to determine taxable income.  The Company has distributed and currently intends to distribute sufficient dividends to eliminate taxable income. Therefore, the statement of operations contains no provision for income taxes for the years ended December 31, 2001, 2000, and 1999.  The Company’s consolidated operating subsidiary, ACFS, is subject to federal income tax, but operated at a loss during the years ended December 31, 2001, 2000, and 1999.  An income tax benefit of $2,000 and $912 was recorded during the years ended December 31, 2000 and 1999, respectively.  At December 31, 2001 and 2000, ACFS had a deferred tax asset of $3,938 and $3,131, respectively, that has been fully reserved, and is comprised primarily of net operating loss carry forwards.

The aggregate gross unrealized appreciation of the Company’s investments over cost for Federal income tax purposes was $23,199 and $42,164 as of December 31, 2001 and 2000, respectively.   The aggregate gross unrealized depreciation of the Company’s investments under cost for Federal income tax purposes was $42,131 and $13,292 at December 31, 2001 and 2000, respectively.  The net unrealized depreciation under cost was $18,932 at December 31, 2001, and the net unrealized appreciation over cost was $28,872 at December 31, 2000.  The aggregate cost of securities for Federal income tax purposes was $882,731 and$557,944 as of December 31, 2001 and 2000, respectively.

The Company obtained a ruling in April 1998 from the IRS which the Company had requested to clarify the tax consequences of the conversion from taxation under subchapter C to subchapter M in order for the Company to avoid incurring a tax liability associated with the unrealized appreciation of assets whose fair market value exceeded their basis immediately prior to conversion. Under the terms of the ruling, the Company elected to be subject to rules similar to the rules of Section 1374 of the Internal Revenue Code with respect to any unrealized gain inherent in its assets, upon its conversion to RIC status (built-in gain).  Generally, this treatment allows deferring recognition of the built-in gain.  If the Company were to divest itself of any assets in which it had built-in gains before the end of a ten-year recognition period, the Company would then be subject to tax on its built-in gain.

During 2001, 2000 and 1999, the Company paid Federal income taxes of $0, $759 and $309, respectively, on retained realized gains recorded during the tax years ended September 30, 2001, 2000 and 1999.  The payments were treated as deemed distributions because taxes were paid on behalf of the shareholders.  As a result, the Company did not record income tax expense.

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Note 10. Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (“ESOP”), which includes all employees and is fully funded on a pro rata basis by the Company. Contributions are made at the Company’s discretion up to the lesser of $30 or 25% of annual compensation expense for each employee.  Employees are not fully vested until completing five years of service.  For the years ended December 31, 2001, 2000, and 1999, the Company contributed $187, $179, and $88 to the ESOP, respectively, or 3% of total eligible employee compensation.

The Company sponsors an employee stock ownership trust to act as the depository of employer contributions to the ESOP as well as to administer and manage the actual trust assets that are deposited into the ESOP.

Note 11. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2001, 2000, and 1999:

	Year Ended December 31, 2001		Year Ended December 31, 2000			Year Ended December 31, 1999
Numerator for basic and diluted earnings (loss) per share	$	18,605	$	(4,373	)	$	97,201
Denominator for basic weighted average shares	31,487		22,323			13,744
Employee stock options	217		80			167
Contingently issuable shares*	282		328			303
Warrants	15		17			80
Dilutive potential shares	514		425			550
Denominator for diluted weighted average shares	32,001		22,748			14,294
Basic earnings (loss) per share	$	0.59	$	(0.20	)	$	7.07
Diluted earnings (loss) per share	$	0.58	$	(0.19	)	$	6.80

*Contingently issuable shares are unvested shares outstanding that secure employee stock option loans.

Note 12. Related Party Transactions

The Company has provided loans to employees for the exercise of options under the 1997 and 2000 Stock Option Plans. The loans require the current payment of interest at a market rate, have varying terms not exceeding nine years and have been recorded as a reduction of shareholders’ equity.  The loans are evidenced by full recourse notes that are due upon maturity or 60 days following termination of employment, and the shares of common stock purchased with the proceeds of the loan are posted as collateral.  During the year ended December 31, 2001, the Company issued $23,423 in loans to 33 employees for the exercise of options and related taxes.  During the year ended December 31, 2000, the Company issued $6,702 in loans to 21 employees for the exercise of options and related taxes.  The Company recognized interest income from these loans of $1,331 and $1,340 during the years ended December 31, 2001 and 2000, respectively.

In connection with the issuance of the notes in 1999, the Company entered into agreements to purchase split dollar life insurance for three executive officers.  The aggregate cost of the split dollar life insurance of $2,811 is being amortized over a ten-year period as long as each executive officer continues employment.  During the period the loans are outstanding, the Company will have a collateral interest in the cash value and death benefit of these policies as additional security for the loans.  Additionally, as long as the policy premium is not fully amortized, the Company will have a collateral interest in such items generally equal to the unamortized cost of the policies.  In the event of an individual’s termination of employment with the Company before the end of such ten-year period, or, his election not to be bound by non-compete agreements, such individual must reimburse the company the unamortized cost of his policy.  As of December 31, 2001, one employee has left the Company, but is bound by a non-compete agreement.  For the years ended December 31, 2001 and 2000, the Company recorded $284 and $282 of amortization expense on the insurance policies, respectively.

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Note 13.  Segment Data

The Company’s reportable segments are its investing operations as a business development company (“ACAS”) and the financial advisory operations of its wholly owned subsidiary, ACFS.  The Company’s accounting policies for segments are the same as those described in the “Summary of Significant Accounting Policies”.  The following table presents segment data for the year ended December 31, 2001:

	ACAS			ACFS			Consolidated
Interest and dividend income	$	88,286		$	—		$	88,286
Fee income	1,395			14,556			15,951
Total operating income	89,681			14,556			104,237
Interest	10,343			—			10,343
Salaries and benefits	2,357			12,214			14,571
General and administrative	3,050			4,648			7,698
Total operating expenses	15,750			16,862			32,612
Net operating income (loss)	73,931			(2,306		)	71,625
Net realized gain on investments	5,369			—			5,369
Decrease in unrealized appreciation of investments	(58,389		)	—			(58,389		)
Net increase (decrease) in shareholders’ equity resulting from operations	$	20,911		$	(2,306	)	$	18,605
Total assets	$	887,242		$	16,942		$	904,184

The following table presents segment data for the year ended December 31, 2000:

	ACAS			ACFS			Consolidated
Interest and dividend income	$	58,733		$	—		$	58,733
Fee income	3,995			7,324			11,319
Total operating income	62,728			7,324			70,052
Interest	9,691			—			9,691
Salaries and benefits	2,179			9,080			11,259
General and administrative	2,414			4,018			6,432
Total operating expenses	14,284			13,098			27,382
Operating income (loss) before income taxes	48,444			(5,774		)	42,670
Income tax benefit	—			2,000			2,000
Net operating income (loss)	48,444			(3,774		)	44,670
Realized gain on investments	4,538			1			4,539
Decrease in unrealized appreciation of investments	(53,582		)	—			(53,582		)
Net decrease in shareholders’ equity resulting from operations	$	(600	)	$	(3,773	)	$	(4,373	)
Total assets	$	599,364		$	14,635		$	613,999

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Note 14. Selected Quarterly Data (Unaudited)

The impact of the adoption of the accounting change, as discussed in Note 2, is illustrated by the following tables.  The first table presents the Company’s quarterly consolidated operating results after adoption of the Guide.  The second table presents the Company’s quarterly consolidated operating results using the Company’s accounting policies prior to the adoption of the Guide:

	Three Months Ended March 31, 2001			Three Months Ended June 30, 2001		Three Months Ended September 30, 2001			Three Months Ended December 31, 2001		Year Ended December 31, 2001
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Total operating income	$	22,693		$	25,876	$	25,439		$	30,229	$	104,237
Net operating Income ("NOI")	15,052			16,033		19,112			21,428		71,625
Net (decrease) increase in shareholders’ equity resulting from operations	$	(9,902	)	$	11,251	$	(1,661	)	$	18,917	$	18,605
NOI per common share, basic	$	0.54		$	0.57	$	0.56		$	0.60	$	2.27
NOI per common share, diluted	$	0.53		$	0.56	$	0.55		$	0.59	$	2.24
(Loss) earnings per common share, basic	$	(0.35	)	$	0.39	$	(0.05	)	$	0.52	$	0.59
(Loss) earnings per common share, diluted	$	(0.35	)	$	0.39	$	(0.05	)	$	0.52	$	0.58
Basic Shares O/S	27,856			28,331		33,965			35,684		31,487
Diluted Shares O/S	28,278			28,883		34,524			36,254		32,001
	Three Months Ended March 31, 2001			Three Months Ended June 30, 2001		Three Months Ended September 30, 2001			Three Months Ended December 31, 2001		Year Ended December 31, 2001
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Total operating income	$	22,792		$	26,020	$	25,589		$	30,735	$	105,136
Net operating Income	15,151			16,177		19,262			21,934		72,524
Net (decrease) increase in shareholders’ equity resulting from operations	$	(9,601	)	$	11,594	$	(1,302	)	$	19,630	$	20,321
NOI per common share, basic	$	0.54		$	0.57	$	0.57		$	0.61	$	2.30
NOI per common share, diluted	$	0.54		$	0.56	$	0.56		$	0.61	$	2.27
(Loss) earnings per common share, basic	$	(0.34	)	$	0.41	$	(0.04	)	$	0.55	$	0.65
(Loss) earnings per common share, diluted	$	(0.34	)	$	0.40	$	(0.04	)	$	0.54	$	0.64
Basic Shares O/S	27,856			28,331		33,965			35,684		31,487
Diluted Shares O/S	28,278			28,883		34,524			36,254		32,001

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10.               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information in response to this Item is incorporated herein by reference to the information provided in the Company’s Proxy Statement for its Annual Meeting of Shareholders to be held May 8, 2002 (the “2002 Proxy Statement”) under the headings “ELECTIONS OF DIRECTORS” and “SECTION (16) (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE”.

ITEM 11.               EXECUTIVE COMPENSATION

Information in response to this Item is incorporated herein by reference to the information provided in the 2002 Proxy Statement under the heading “COMPENSATION OF EXECUTIVE OFFICERS” and “DIRECTOR COMPENSATION”.

ITEM 12.               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information in response to this Item is incorporated herein by reference to the information provided in the 2002 Proxy Statement under the heading “Security Ownership of Management and Certain Beneficial Owners.”

ITEM 13.               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information in response to this Item is incorporated herein by reference to the information provided in the 2002 Proxy Statement under the heading “Certain Transactions.”

PART IV

ITEM 14.               EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) The following financial statements are filed herewith:

AMERICAN CAPITAL STRATEGIES, LTD.

Report of Independent Auditors

Consolidated Balance Sheets as of December 31, 2001 and 2000

Consolidated Schedule of Investments as of December 31, 2001 and 2000

Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000, and 1999.

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2001, 2000, and 1999.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999.

Consolidated Financial Highlights for the Years Ended December 31, 2001, 2000, 1999, and 1998 and the Three Months Ended December 31, 1997.

Notes to Financial Statements

(2) No financial statement schedules of the Company are filed herewith because (i) such schedules are not required or (ii) the information required has been presented in the aforementioned financial statement.

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(3)            The following exhibits are filed herewith or incorporated herein by reference

Exhibit	Description
*3.1	American Capital Strategies, Ltd. Second Amended and Restated of Certificate of Incorporation, incorporated herein by reference to Exhibit a of the Pre-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File No. 333-29943) filed August 12, 1997, as amended by a certain Amendment No. 1 filed as Exhibit 3.1 to Form 10-K for the year ended December 31, 1999 filed March 31, 2000, and as further amended by a Certificate of Amendment No. 2 in the form filed as Appendix I to the Definitive Proxy Statement for the 2000 Annual Meeting filed on April 5, 2000.
*3.2	American Capital Strategies, Ltd. Second Amended and Restated Bylaws, incorporated herein by reference to Exhibit b of the Pre-Effective Amendment Number 1 to the Registration Statement Form N-2 (File No. 333-29943) filed on August 12, 1997.
*4.1.	Instruments defining the rights of holders of securities: See Article IV of the Company’s Second Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 2.a of the Amendment No. 1 to the Form N-2 filed by the Company, filed on August 12, 1997 (Commission File No. 333-29943).
*4.2	Instruments defining the rights of holders of securities: See Section I of the Company’s Second Amended and Restated Bylaws, incorporated herein by reference to Exhibit 2.b of the Amendment No. 1 to the Form N-2 filed by the Company, filed on August 12, 1997 (Commission File No. 333-29943).
*10.1	Loan Funding and Servicing Agreement among ACS Funding Trust I, American Capital Strategies, Ltd., Variable Funding Capital Corporation, First Union Capital Markets Corp., First Union National Bank, Norwest Bank Minnesota, N.A. and certain investors named therein, together with all exhibits thereto, dated as of March 31, 1999, incorporated herein by reference to Exhibit 10.2 of Form 10-Q for the quarter ended March 31, 1999, filed May 17, 1999, as amended by a certain Amendment No. 1 dated as of June 30, 1999, an Amendment No. 2 dated as of September 24, 1999 and an Amendment No. 3 dated as of December 14, 1999, each of which is incorporated by reference to Exhibit 10.19 of Form 10-K for the year ended December 31, 1999 filed March 31, 2000, as further amended by an Amendment No. 4 dated as of June 16, 2000 and an Amendment No. 5 dated as of December 20, 2001, each of which is incorporated herein by reference to Exhibit 10.1 of Form 10-K for the year ended December 31, 2000 filed April 2, 2001, as further amended by an Amendment 10.6 dated as of March 29, 2001, incorporated herein by reference to Exhibit 10 of Form 10-Q for the quarter ended March 31, 2000, and as further amended by an Amendment No. 7 dated as of April 19, 2001, incorporated herein by reference to Exhibit 2.K.3 of Registration Statement on Form N-2 (File No. 333-63200) filed June 15, 2001.
*10.2	Pledge and Security Agreement among American Capital Strategies, Ltd., ACS Funding Trust I and Norwest Bank Minnesota, N.A., dated as of March 31, 1999, incorporated herein by reference to Exhibit 10.6 on Form 10-Q for the quarter ended March 31, 1999, filed May 17, 1999, as amended by an Amendment No. 1 dated as of December 20, 2001, incorporated herein by reference to Exhibit 10.2 of Form 10-K for the year ended December 31, 2000 filed April 2, 2001.
*10.3	Purchase and Sale Agreement between ACS Funding Trust I and American Capital Strategies, Ltd., dated as of March 31, 1999, incorporated herein by reference to Exhibit 10.1 of Form 10-Q for the quarter ended March 31, 1999, filed May 17, 1999, as amended by an Amendment No. 1 dated as of December 20, 2001, incorporated herein by reference to Exhibit 10.3 of Form 10-K for the year ended December 31, 2000 filed April 2, 2001.
*10.4	ACAS Transfer Agreement between American Capital Strategies, Ltd., and ACAS Funding Trust 2000-1, dated as of December 20, 2000, incorporated herein by reference to Exhibit 10.4 of Form 10-K for the year ended December 31, 2000 filed April 2, 2001.
*10.5	Transfer And Servicing Agreement, among ACAS Business Loan Trust 2000–1, ACAS Business Loan LLC, 2000-1, Wells Fargo Bank Minnesota, National Association, American Capital Strategies, Ltd. dated as of December 20, 2000, incorporated herein by reference to Exhibit 10.5 of Form 10-K for the year ended December 31, 2000 filed April 2, 2001.
*10.6	Indenture between Wells Fargo Bank Minnesota, National Association, as Indenture Trustee and ACAS Business Loan Trust, dated as of December 20, 2000, incorporated herein by reference to Exhibit 10.6 of Form 10-K for the year ended December 31, 2000 filed April 2, 2001.
*10.7	Limited Liability Company Operating Agreement of ACAS Business Loan LLC, 2000-1 by and among American Capital Strategies, Ltd., William Holloran and Evelyne S. Steward, incorporated herein by reference to Exhibit 10.7 of Form 10-K for the year ended December 31, 2000 filed April 2, 2001.
†*10.8	American Capital Strategies, Ltd., 2000 Employee Stock Option Plan, incorporated by reference to Appendix II to the Definitive Proxy Statement for the 2000 Annual Meeting filed on April 5, 2000, as amended by Amendment No. 1, in the form filed as Exhibit II to the Definitive Proxy Statement for the 2001 Annual Meeting filed on April 3, 2001.
†*10.9	American Capital Strategies, Ltd., 2000 Disinterested Director Stock Option Plan, incorporated by reference to Appendix II to the Definitive Proxy Statement for the 2000 Annual Meeting filed on April 5, 2000.

49

†*10.10	Amended and Restated Employment Agreement between the Company and Adam Blumenthal, dated May 9, 2001, incorporated herein by reference to Exhibit 2.i.2 of the Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-36818), filed May 29, 2001.
†*10.11	Employment Agreement between the Company and Ira Wagner, dated as of May 16, 2001, incorporated herein by reference to Exhibit 2.i.20 of the Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-36818), filed May 29, 2001.
†*10.12	Stock Option Exercise Agreement between the Company and Malon Wilkus, dated March 7, 2001, incorporated herein by reference to Exhibit 2.i.23 of the Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-36818), filed May 29, 2001.
†*10.13	Stock Option Exercise Agreement between the Company and Malon Wilkus, dated March 2, 2001, incorporated herein by reference to Exhibit 2.i.24 of the Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-36818), filed May 29, 2001.
†*10.14	Purchase Note by Malon Wilkus in favor of the Company, dated March 7, 2001, incorporated herein by reference to Exhibit 2.i.27 of the Post Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-36818), filed May 29, 2001.
†*10.15	Purchase Note by Malon Wilkus in favor of the Company, dated March 2, 2001, incorporated herein by reference to Exhibit 2.i.28 of the Post-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-36818), filed May 29, 2001.
*10.16	Amended, Restated and Substituted FUNB Note in the aggregate principal amount of $30,000,000 made by ACS Funding Trust I in favor of First Union National Bank, dated as of March 31, 1999, incorporated herein by reference to Exhibit 2.k.5 of Registration Statement on Form N-2 (File No. 333-63200), filed June 15, 2001.
*10.17	Strategic Relationship Agreement dated as of September 25, 2001 by and between the Company and Gladstone Capital Corporation, incorporated herein by reference to Exhibit 10.1 of Form 10-Q for the quarter ended September 30, 2001.
*10.18	Release and Covenants Agreement dated as of August 7, 2001 by and between the Company and David J. Gladstone, incorporated herein by reference to Exhibit 10.2 of Form 10-Q for the quarter ended September 30, 2001.
*21	Subsidiaries of the Company and jurisdiction of incorporation, incorporated herein by reference to Item 27 of the Post-Effective Amendment Number 1 to the Registration Statement on Form N-2 (File No. 333- 79377), filed August 5, 1999.
23	Consent of Ernst & Young LLP, filed herewith.

* Fully or partly previously filed

† Management contract or compensatory plan

(b)	Reports on Form 8-K
	NONE
(c)	Exhibits. See the exhibits filed herewith
(d)	Additional financial statement schedules
	NONE

50

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 STRATEGIES, LTD.

By:	/s/ John R. Erickson
	John R. Erickson
	Executive Vice President and Chief Financial Officer

Date:  April 4, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
Malon Wilkus	Chairman, President and Chief Executive Officer
Adam Blumenthal	Vice-Chairman and Director
John R. Erickson	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Kenneth D. Peterson, Jr.	Director
Alvin N. Puryear	Director
Neil M. Hahl	Director
Philip R. Harper	Director
Stan Lundine	Director
Mary C. Baskin	Director
Eugene L. Podsiadlo	Director

51