38% Growth in New Investments, First Nine Months 2001 over 2000

  Follow-On Offering Raises $51 MM

Our recent follow-on offering raised approximately $50 MM. On September 6, 1.8 MM shares of common stock were sold to the public at $28.25 per share for a total gross proceeds of approximately $50.9 MM. The sale was underwritten by First Union Securities Inc., a subsidiary of Wachovia Corporation (NYSE: WB) who did a terrific job considering the underwriting was closed September 12th. We have raised over $350 MM in the last 12 months and now have nearly $1 billion in capital resources. Click here for more information.

  Strategic Relationship with Gladstone Capital: Combined $50 MM Available

American Capital and Gladstone Capital (Nasdaq: GLAD), a newly formed business development company, have agreed to refer middle market investment opportunities to each other. In addition, American Capital purchased $3.6 MM, or 3 percent, of Gladstone Capital's common stock at its IPO at $15 per share.

"As senior lenders continue to pull back, having a relationship with a cash flow financing source such as Gladstone Capital will allow us to better serve the financing needs of strong middle market companies," said Malon Wilkus, American Capital Chairman, President and CEO. "American Capital and Gladstone Capital will be able to invest a combined $50 MM of senior cash flow, mezzanine and equity capital per investment." Click here for more information.

$32 MM in Mezzanine Investments: $20 MM in ThreeSixty Sourcing; $12 MM in BLI Holdings Corp.
$15 MM Bridge Financing in ThreeSixty Sourcing

American Capital invested $32 MM in mezzanine transactions in the third quarter and $61 MM in the last 12 months. In September, we invested $35 MM in ThreeSixty Sourcing Ltd., a leading global sourcing firm that manages the Asia-based sourcing for primarily U.S.-based consumer products companies. We were able to step in to the shoes of senior lenders and provide the necessary senior credit to speed the transaction to completion. We funded a $15 MM senior credit bridge facility and invested $20 MM in senior subordinated debt with warrants. Equity sponsor is Brentwood Associates, a Los Angeles based private equity firm. The investment financed the spin-off of ThreeSixty into a stand-alone company.

Click here to learn more about the ThreeSixty transaction.

In August, we invested $12 MM in BLI Holdings Corp., an outsource manufacturer and packager for the personal care products industry. American Capital's investment took the form of senior subordinated debt and was used to refinance BLI's existing debt. Maintaining their original investments are private equity firms Bain Capital and Charles River Capital Partners.

Click here to learn more about the BLI transaction.

Email Jeri J. Harman, Principal, in American Capital's Los Angeles office, or call her at (818) 676-1222 to discuss ThreeSixty or BLI.

American Capital Mezzanine Investments in Support of Private Equity Firms, LTM ended 9/30/01
Total Invested: $61 MM

  $24.5 MM in Logex Corporation

In July we invested $24.5 MM in the buyout of Logex Corporation, the nation's largest contract carrier of industrial gases. The investment took the form of senior and junior subordinated debt with warrants, preferred stock and common stock. Logex management participated in the buyout, investing in the preferred and common stock.

Click here for more information about Logex.
Email John Thornton, Principal, or call him at (415) 591-1020 in our San Francisco office.

  $2 MM in Omnova Solutions

We invested $2 MM in Omnova Solutions, Inc. (NYSE: OMN) in the form of subordinated debt to fund the continued purchase of inventory from Decorative Surfaces International, an American Capital portfolio company. The investment is part of approximately $10 MM in total subordinated debt commitments we have made to Omnova to support its acquisition of certain business lines and assets of DSI. American Capital's continuing investment is helping DSI rationalize and consolidate its operations into its new state-of-the-art facility where it produces positive EBITDA, reduce its total debt loan and concentrate on creating long term value. American Capital's total investment in Omnova is now approximately $6.3 MM.

  Exit Event: L.A. Studios Earns 19% Annual Return

In September our portfolio company L.A. Studios purchased our equity position for $800,000 and prepaid a portion of its outstanding subordinated debt, with $2.6 MM of subordinated notes remaining. In April 1998 we invested $3.25 MM in the form of senior subordinated debt with warrants. This exit event is expected to generate a compounded annual return of 19%.

L.A. Studios is the premier post-production audio group in Los Angeles, with a highly talented and skilled workforce working at a cutting-edge facility financed, in part, by American Capital. This transaction should facilitate retaining and attracting talented employees because it will result in the employees, through an ESOP, gaining majority ownership of the company.

Click here for more information about L.A. Studios.
Email Roland Cline, Principal and Managing Director, or call him at (415) 591-1020 in our San Francisco office.

  Exit Event: Cornell Corrections Earns 32% Annual Return

We sold a portion of our $30 MM subordinated debt investment in Cornell Corrections, Inc., one of the leading private sector providers of correctional, juvenile detention, pre-release and treatment services in the United States. American Capital will recognize a gain on the sale of the subordinated debt and warrants of $267,000, a 32% compounded annual return.

Click here for more information about Cornell.

  $3.4 MM in Chance Coach to Support Continuing Rollout

We invested $3.4 MM in portfolio company Chance Coach in the form of a demand note to support the ongoing development and roll out of the Opus, a new municipal transit bus offering easier access, lower fuel costs, simplified maintenance and longer service life than any other vehicle in its class. The Opus has been well-received and has a growing backlog. American Capital's total investment in Chance is now approximately $31 MM.

Click here for more information about Chance Coach.

  $3.4 MM in The Inca Group

We invested $3.4 MM in the common equity of The Inca Group, a leading manufacturer of steel products for the construction, distribution and manufacturing industries. Inca will use the proceeds for working capital. American Capital's total investment in Inca is now $23 MM.

Click here for more information about Inca.

  $1 MM in Chromas Technologies

We invested $1 MM of subordinated debt in Chromas Technologies, Inc., a manufacturer of digital and analog printing presses for the packaging and labeling industry. Chromas has introduced an innovative digital printing press that allows printers to economically produce multiple high resolution graphics during a single print run without the need to change plates or print heads. American Capital's investment supports Chromas through the current downturn in capital goods purchasing. American Capital's total investment in Chromas is now approximately $26 MM.

Click here for more information about Chromas.

  New York Office Adds Principals

Mark Opel has recently rejoined American Capital as a Principal in the company's New York office. Mark manages American Capital's marketing and business development, which includes centralized deal generation from intermediaries, private equity groups, lenders and other sources of investment opportunities. He has more than 15 years of financial and operating experience with middle market companies. He served as President at energy development company SunLight Power International and chief operating officer at energy services company SYCOM Corporation, where he managed the financing of over $100 MM of independent energy projects.

In addition, he worked as a management consultant at Strategic Planning Associates (now Mercer Management Consulting) and, early in his career, as an investment banker at American Capital. He is a graduate of Harvard College and Harvard Business School. Email Mark or call him at (800) 243-9340.

Brian Graff joined American Capital in July 2001 as a Principal in the New York office. Prior to joining American Capital, Mr. Graff was a Principal with Odyssey Investment Partners, a $760 MM private equity fund specializing in leveraged buy-outs and growth financings for middle-market companies. Prior to Odyssey, Brian was a Senior Vice President of GE Equity, where he was responsible for direct equity investments in the form of LBOs, LBUs and growth financings. Prior to GE, he was a Director of Mergers & Acquisitions at Automatic Data Processing, Inc. Brian has been involved with completing over a dozen private equity transactions worth over $750 MM. He holds a B.S. degree in Accounting from the State University of New York at Binghamton, an M.B.A. from NYU's Stern School of Business and is a CPA. Email Brian or call him at (212) 213-2009.

American Capital is currently seeking additional Principals to staff its New York, Chicago and Los Angeles offices and will consider additional locations.

This newsletter contains forward-looking statements. The statements regarding expected results of American Capital Strategies are subject to various factors and uncertainties, including the uncertainties associated with the timing of transaction closings, changes in interest rates, availability of transactions, changes in regional or national economic conditions, or changes in the conditions of the industries in which American Capital has made investments.