The publically traded private equity fund that owns Confluence Watersports has cut its dividend, eliminated its stock buy-back program and will implement further costs cutting in a move to preserve cash.
American Capital, Ltd. said it is taking the moves because GAAP mark-to-market accounting rules are forcing them to write down the value of their assets by $731 million more than the company thinks they are actually worth. With $17 billion in capital resources under management, ACAS is the only private equity fund and the largest alternative asset management company in the S&P 500.
“The week ending October 10th should be considered a wake up call for any company that has to value its assets using market yield analysis as required under Generally Accepted Accounting Principles,” commented Malon Wilkus, American Capital Chairman and CEO. “During that week, market prices were reflecting tremendous forced selling of assets, overnight credit for the best rated companies disappeared and LIBOR was irrationally priced. Stock prices declined severely, but bond yields became virtually immeasurable because of the complete lack of liquidity in the credit markets. Most firms marking-to-market their assets under GAAP at the end of this week experienced tremendous depreciation, irrespective of the underlying performance of their assets. Through the third quarter of 2008, American Capital has had to depreciate its assets by about $731 million beyond what we believe will be the realizable value of our assets on settlement or maturity of our investments, after taking into account credit quality. This gives us great concern, since American Capital is subject to minimum tangible net worth requirements under our loan agreements. Therefore, American Capital is implementing a number of measures to build our capital base and delever our balance sheet. Our decisions to retain capital gains, reduce our dividend, implement further cost reductions, eliminate our stock buy-back program and acquire European Capital will build our capital base and generally reduce our debt. It is a great time to be levered less than 1:1 debt to equity, however it has become evident that in this environment, there is a need to be levered even less.”
AMERICAN CAPITAL, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2008 and 2007
(in millions, except per share data)
(unaudited)
Three Months Ended Three Months Ended
September 30, September 30, 2008
Versus 2007
2008 2007 $ %
OPERATING INCOME:
Investing operating income(1) $253 $266 $(13) -5%
Asset management and advisory
operating income(2) 25 44 (19) -43%
Total operating income 278 310 (32) -10%
OPERATING EXPENSES:
Interest 50 79 (29) -37%
Salaries, benefits and
stock-based compensation 52 59 (7) -12%
General and administrative 21 25 (4) -16%
Total operating expenses 123 163 (40) -25%
OPERATING INCOME BEFORE
INCOME TAXES 155 147 8 5%
(Provision) benefit for
income taxes (2) 6 (8) NM
NET OPERATING INCOME 153 153 – 0%
Net realized gain on investments
Portfolio company investments 73 70 3 4%
Taxes on realized gains (49) (4) (45) -1125%
Foreign currency transactions (13) – (13) 100%
Derivative agreements (14) 5 (19) NM
Total net realized (loss)
gain (3) 71 (74) -104%
REALIZED EARNINGS 150 224 (74) -33%
Net unrealized (depreciation)
appreciation of investments
Portfolio company investments (599) (197) (402) -204%
Foreign currency translation (90) 49 (139) NM
Derivative agreements (9) (55) 46 84%
Total net unrealized
(depreciation) appreciation (698) (203) (495) -244%
NET (DECREASE) INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS
(“EARNINGS”) $(548) $21 $(569) NM
NET OPERATING INCOME PER
COMMON SHARE*:
Basic $0.74 $0.82 $(0.08) -10%
Diluted $0.74 $0.81 $(0.07) -9%
REALIZED EARNINGS PER COMMON
SHARE*:
Basic $0.72 $1.20 $(0.48) -40%
Diluted $0.72 $1.18 $(0.46) -39%
EARNINGS PER COMMON SHARE*:
Basic $(2.63) $0.11 $(2.74) NM
Diluted $(2.63) $0.11 $(2.74) NM
