AMERICAN CAPITAL, LTD - FORM 10-K/A - EX-99.1 - EXHIBIT 99.1

Attached files

file	filename
EX-23.2 - EXHIBIT 23.2 - AMERICAN CAPITAL, LTD	acas10ka123112ex232.htm
EX-31.1 - EXHIBIT 31.1 - AMERICAN CAPITAL, LTD	acas10ka123112ex311.htm
10-K/A - FORM 10-K/A - AMERICAN CAPITAL, LTD	acas10ka123112.htm
EX-32 - EXHIBIT 32 - AMERICAN CAPITAL, LTD	acas10ka123112ex32.htm
EX-31.2 - EXHIBIT 31.2 - AMERICAN CAPITAL, LTD	acas10ka123112ex312.htm
EX-99.2 - EXHIBIT 99.2 - AMERICAN CAPITAL, LTD	acas10ka123112ex992.htm
EX-23.3 - EXHIBIT 23.3 - AMERICAN CAPITAL, LTD	acas10ka123112ex233.htm

Exhibit 99.1

Consolidated Financial Statements of European Capital Limited

The accompanying consolidated financial statements of European Capital Limited, a wholly-owned portfolio company of American Capital, Ltd., are being provided pursuant to Rule 3-09 of Regulation S-X. These consolidated financial statements are as of December 31, 2012 and 2011 and for each of the three years ended December 31, 2012 and are prepared in accordance with accounting principles generally accepted in the United States.

In accordance with Rule 3-09 of Regulation S-X, only the 2010 consolidated financial statements and financial highlights are required to be audited under U.S. Generally Accepted Auditing Standards. The consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012 and 2011 are unaudited.

Report of Independent Auditors to the Board of European Capital Limited

We have audited the accompanying consolidated statements of operations, changes in net assets, and cash flows of European Capital Limited for the year ended December 31, 2010, and the consolidated financial highlights for the year ended December 31, 2010. These financial statements and 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 audit.

We conducted our audit in accordance with the 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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights of European Capital Limited. referred to above present fairly, in all material respects, the consolidated results of its operations, changes in its net assets and its cash flows for the year ended December 31, 2010 and its consolidated financial highlights for the year ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Guernsey, Channel Islands

28 March 2013



EUROPEAN CAPITAL LIMITED
CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

		31 December
	Notes	2012			2011
		(unaudited)			(unaudited)
Assets
Investments at fair value (Cost basis of €1,650,113 and €1,555,191, respectively)	3	€	1,126,862		€	973,607
Cash and cash equivalents		2,573			2,803
Restricted cash and cash equivalents		87,569			142,056
Interest receivable		3,603			5,588
Derivative agreements at fair value		9			—
Other		5,191			4,529
Total assets		€	1,225,807		€	1,128,583

Liabilities and Shareholders' Equity
Debt (maturing within one year €1,074 and €2,356, respectively)	5	€	441,846		€	439,017
Due to European Capital Financial Services (Guernsey) Limited		2,123			1,439
Derivative agreements at fair value		26,571			24,238
Other	6	50,467			37,153
Total liabilities		521,007			501,847

Commitments and contingencies
Shareholders' equity:
Ordinary shares (nil par value, authorised to issue unlimited number of shares, 160,994 issued and 159,443 outstanding)	8	224,475			224,475
Undistributed net realised earnings	8	1,098,368			1,078,718
Net unrealised foreign currency depreciation		(101,090		)	(110,079		)
Net unrealised depreciation of investments		(516,953		)	(566,378		)
Total shareholders' equity		704,800			626,736

Total liabilities and shareholders' equity		€	1,225,807		€	1,128,583

Net asset value per ordinary share		€	4.42		€	3.93



EUROPEAN CAPITAL LIMITED
CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data)

		Year Ended 31 December
	Notes	2012			2011			2010
		(unaudited)			(unaudited)			(audited)
Operating Income:
Interest and dividend income		€	69,227		€	105,724		€	118,457
Fee and other income		723			915			1,385
Total operating income	9	69,950			106,639			119,842
Operating Expenses:
Interest		23,818			26,471			46,492
Management fee	10	22,695			22,666			17,313
General and administrative		2,248			4,718			8,228
Total operating expenses		48,761			53,855			72,033
Net Operating Income Before Income Taxes		21,189			52,784			47,809
Provision for income taxes		(50		)	(88		)	(146		)
Net Operating Income		21,139			52,696			47,663

Net loss on extinguishment of debt		—			(8,240		)	—

Net realised foreign currency gains (losses)		4,815			(5,307		)	22,786

Net realised losses on investments		(6,304		)	(25,334		)	(52,660		)

Total Net Realised Earnings	8	19,650			13,815			17,789

Net foreign currency unrealised appreciation (depreciation)	8	8,989			(11,932		)	(4,965		)

Net unrealised appreciation (depreciation) of investments	8	49,425			(4,223		)	91,754

Net Increase (Decrease) in Net Assets Resulting from Operations		€	78,064		€	(2,340	)	€	104,578



EUROPEAN CAPITAL LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(in thousands, except per share data)

		Year Ended 31 December
	Notes	2012			2011			2010
		(unaudited)			(unaudited)			(audited)
Operations:
Net operating income		€	21,139		€	52,696		€	47,663
Net loss on extinguishment of debt		—			(8,240		)	—
Net foreign currency gains (losses)		4,815			(5,307		)	22,786
Net realised losses on investments		(6,304		)	(25,334		)	(52,660		)
Net foreign currency unrealised appreciation (depreciation)		8,989			(11,932		)	(4,965		)
Net unrealised appreciation (depreciation) of investments		49,425			(4,223		)	91,754
Net increase (decrease) in net assets resulting from operations		78,064			(2,340		)	104,578

Shareholder distribution
Distribution of capital	7	—			—			(3,407		)
Total decrease in net assets resulting from shareholder distributions		—			—			(3,407		)

Total increase (decrease) in net assets		78,064			(2,340		)	101,171

Net assets at beginning of year		626,736			629,076			527,905

Net assets at end of year		€	704,800		€	626,736		€	629,076

Net asset value per share		€	4.42		€	3.93		€	3.95

Shares outstanding at end of year		159,443			159,443			159,443



EUROPEAN CAPITAL LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)

	Year Ended 31 December
	2012			2011			2010
	(unaudited)			(unaudited)			(audited)
Operating activities:
Net increase (decrease) in net assets resulting from operations	€	78,064		€	(2,340	)	€	104,578
Adjustment to reconcile net increase (decrease) in net assets resulting
from operations to net cash (used in) provided by
operating activities:
Payment-in-kind interest and non-cash dividend income	(31,209		)	(58,829		)	(61,640		)
Accretion of deferred fee income	(813		)	(530		)	(775		)
Amortisation of deferred financing costs	1,188			1,221			1,534
Foreign exchange movements	(13,804		)	17,239			(17,821		)
Net loss on extinguishment of debt	—			8,240			—
Net realised losses on investments	6,304			25,334			52,660
Net (appreciation) depreciation of investments	(49,425		)	4,223			(91,754		)
Increase (decrease) in payables due to affiliates, net	795			81			(354		)
(Increase) decrease in interest receivable	5,314			1,823			(813		)
Increase (decrease) in interest payable	3,574			(30,940		)	22,523
(Increase) decrease in other assets	(592		)	760			(1,484		)
Decrease in other liabilities	(2,559		)	(1,249		)	(3,978		)
Net cash (used in) provided by operating activities	(3,163		)	(34,967		)	2,676

Investing activities:
Purchases of investments	(126,521		)	(19,662		)	(2,424		)
Principal repayments	68,872			123,512			192,122
Collection of payment-in-kind interest and dividends	9,440			31,952			47,894
Proceeds from loan syndications and loan sales	1,809			37,038			5,218
Proceeds from sale of equity instruments	2,050			1,293			37,724
(Payments on) proceeds from derivative contracts, net	(6,973		)	4,468			4,799
Net cash (used in) provided by investing activities	(51,323		)	178,601			285,333

Financing activities:
(Repayment) issuance of secured senior debt (Senior Secured Floating Rate Notes), net	(21,522		)	269,775			—
Repayments of secured senior debt (Secured Senior Notes), net	—			(134,175		)	(81,967		)
Repayments of secured revolving credit facility, net	—			(180,520		)	(165,684		)
Repayments of unsecured revolving credit facility, net	—			—			(84,839		)
Draws on (repayment of) unsecured revolving credit facility with affiliate, net	23,188			28,388			(3,016		)
Decrease (increase) in debt service escrows	53,120			(120,911		)	15,497
Increase in deferred financing costs	—			(6,463		)	(708		)
(Redemption of) issuance of preferred share capital	(305		)	—			24
Net cash provided by (used in) financing activities	54,481			(143,906		)	(320,693		)

Net decrease in cash and cash equivalents	(5		)	(272		)	(32,684		)
Foreign exchange movements in cash and cash equivalents	(225		)	69			(407		)
Cash and cash equivalents at beginning of period	2,803			3,006			36,097
Cash and cash equivalents at end of period	€	2,573		€	2,803		€	3,006
Supplemental Disclosures:
Cash paid for interest	€	19,055		€	56,191		€	22,435
Cash paid for taxes	€	166		€	461		€	159



EUROPEAN CAPITAL LIMITED
CONSOLIDATED FINANCIAL HIGHLIGHTS

(in thousands, except per share data)

	Year Ended 31 December
	2012			2011			2010
	(unaudited)			(unaudited)			(audited)
Per Share Data (1):
Net asset value at beginning of period	€	3.93		€	3.95		€	1.22

Net operating income	0.13			0.33			0.12
Net loss on extinguishment of debt	—			(0.05		)	—
Net foreign currency gains (losses)	0.03			(0.03		)	0.06
Net realised losses on investments	(0.04		)	(0.16		)	(0.13		)
Net foreign currency unrealised appreciation (depreciation)	0.06			(0.08		)	(0.01		)
Net unrealised appreciation (depreciation) of investments	0.31			(0.03		)	0.23
Total increase (decrease) in net assets resulting from operations	0.49			(0.02		)	0.27
Distribution of capital	—			—			(0.02		)
Other (2)	—			—			2.48
Net asset value at end of period	€	4.42		€	3.93		€	3.95

Ratios/Supplemental Data:
Total return (loss) (constant investment) (3)	10.5		%	(0.3		)%	16.3		%
Shares outstanding at end of period	159,443			159,443			159,443
Weighted average number of shares	159,443			159,443			393,827
Net assets at end of period	€	704,800		€	626,736		€	629,076
Average net assets (4)	€	661,141		€	668,382		€	578,565
Average debt outstanding (5)	€	450,519		€	441,954		€	602,860
Average debt per share	€	2.83		€	2.77		€	3.78
Ratio of operating expenses, net of interest expense, to average net assets	3.77		%	4.10		%	4.41		%
Ratio of interest expense to average net assets	3.60		%	3.96		%	8.04		%
Ratio of operating expenses to average net assets	7.38		%	8.06		%	12.45		%
Ratio of net operating income to average net assets	3.20		%	7.88		%	8.24		%

(1) Basic weighted average per share data.
(2) Represents the impact of (i) other components in the changes in net assets including other capital transactions and (ii) the different share amounts used in calculating per share data principally the issue and buyback of shares as a result of calculating certain per share data based upon the weighted average basic shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date.
(3) Total return (loss) (constant investment) is based on the product of returns calculated on constant invested capital and geometrically linked based on capital cash flow dates.
(4) Average net assets are calculated based on a quarterly basis.
(5) Average debt outstanding is calculated on a daily basis.

EUROPEAN CAPITAL LIMITED CONSOLIDATED SCHEDULE OF INVESTMENTS 31 December 2012 (unaudited) (in thousands, except per share data)

	Country of			Shares/	Principal / notional (2)	Cost (2)	Fair value (2)
Company (1)	incorporation	Industry	Investments	Warrants	€	€	€
Alliance Boots Holdings Limited	UK	Specialty Retail	Senior Debt (3)		10,400	9,959	9,959
Bartec GmbH	Germany	Machinery	Senior Debt (3)		2,800	2,800	2,800
Beig Midco Limited (Igloo Group)	UK	Food Products	Senior Debt (3)		5,000	5,029	5,029
Bellotto Holdings Limited (Hillarys Blinds)	UK	Household Durables	Preferred Stock (4)		18,336	17,839	19,700
			Preferred Stock (4)	5,395,083		12,607	13,135
			Common Stock (5)	1,470,791		73,563	1,097
						104,009	33,932
Bienfaisance Holding S.A.S. (Global Design Technologies (GDT))	France	Machinery	Senior Debt (3)		25,463	25,563	23,133
Blitz F06-582 GmbH (Metall Technologie Holding)	Germany	Machinery	Mezzanine Debt (3)		19,389	19,261	19,261
			Preferred Stock (4)		582	582	582
			Common Stock (5)	12,500,000		12,500	24,969
						32,343	44,812
Blue Topco GmbH (Euro Druckservice)	Germany	Commercial Services & Supplies	Mezzanine Debt (3)(6)		13,771	10,075	—
CCM Pharma Debtco Limited	UK	Pharmaceuticals	Senior Debt (3)		8,324	8,294	8,294
Cordatus CLO II plc (CVC Cordatus CLO II)	—	Diversified Financial Services	CLO		5,000	3,312	3,081
Cornwall Bidco Limited (Civica)	UK	Software	Mezzanine Debt (3)		46,219	47,757	46,110
DC Green Beteiligungs GmbH (DruckChemie)	Germany	Chemicals	Mezzanine Debt (3)(6)		33,368	25,000	—
Delsey Holdings S.A.S.	France	Textiles, Apparel & Luxury Goods	Senior Debt (3)(7)		99,270	99,270	77,385
Duke Street Capital Oasis Acquisitions Limited (Oasis)	UK	Health Care Providers & Servicers	Mezzanine Debt (3)		28,202	31,465	27,896
Eaton Vance CDO X plc	—	Diversified Financial Services	CLO		7,000	3,636	5,670
Emperor Bidco Limited (Bestinvest)	UK	Diversified Financial Services	Mezzanine Debt (6)		22,257	17,063	16,847
			Preferred Stock (4)(5)		5,295	2,766	—
			Common Stock (5)	15,052		20	—
						19,849	16,847
Euro-Galaxy II CLO B.V. (AIG Global Investment Corp Limited)	—	Diversified Financial Services	CLO		5,500	7,564	5,972
F Jupiter S.A.S. (Selecta)	France	Machinery	Senior Debt (3)		21,065	22,192	13,212
			Mezzanine Debt (3)		13,980	14,314	8,091
						36,506	21,303
Fat Face World Borrowings Limited	UK	Textiles, Apparel & Luxury Goods	Senior Debt (3)		27,710	32,518	13,474
FB Raphael 1 Limited (Farrow & Ball)	UK	Chemicals	Mezzanine Debt (3)		15,278	16,400	15,175
			Preferred Stock (4)		95,885	107,571	95,885
			Common Stock (5)	68,125		65	55,173
			Warrants (5)	4,058		—	3,315
						124,036	169,548
FDS Group S.A.S.	France	Energy Equipment & Services	Senior Debt (3)		28,839	28,633	29,214
			Warrants (5)	2,921		—	861
						28,633	30,075
Financière H S.A.S. (Audika)	France	Health Care Equipment & Supplies.	Mezzanine Debt (3)(6)		10,012	7,965	2,416
			Mezzanine Debt (6)		87,276	47,816	—
			Common Stock (5)	1,055,664		21,113	—
						76,894	2,416
Financière Newglass S.A.S. (Devglass)	France	Building Products	Mezzanine Debt (3)		6,628	7,103	7,103
			Convertible Bonds		20,010	20,966	20,966
			Common Stock (5)	8,000,000		8,000	7,462
						36,069	35,531
Financière OFIC S.A.S. (Onduline)	France	Building Products	Warrants (5)	1,574,600		—	10,371

EUROPEAN CAPITAL LIMITED CONSOLIDATED SCHEDULE OF INVESTMENTS 31 December 2012 (unaudited) (in thousands, except per share data)

	Country of			Shares/	Principal / notional (2)	Cost (2)	Fair value (2)
Company (1)	incorporation	Industry	Investments	Warrants	€	€	€
Financière Poinsetia S.A.S. (Alliance)	France	Auto Components	Senior Debt (3)		6,000	6,000	5,043
			Mezzanine Debt (3)		17,495	17,709	16,309
						23,709	21,352
Financière Robin S.A.S. (Sud Robinetterie)	France	Oil, Gas & Consumable Fuels	Mezzanine Debt (3)		44,324	46,704	42,262
			Warrants (5)	2,167,300		—	—
						46,704	42,262
Financière Tarmac S.A.S. (Batisanté)	France	Commercial Services & Supplies	Senior Debt		5,392	4,047	5,392
			Mezzanine Debt		16,537	16,823	16,823
			Mezzanine Debt (6)		21,571	13,860	8,132
			Convertible Bonds (5)		11,293	8,647	—
			Pref Common Stock (4)(5)		2,744	6,660	—
						50,037	30,347
Finartex S.A.S. (Vivarte )	France	Specialty Retail	Senior Debt (3)		8,000	8,000	5,431
Foodco Pastries Spain SL (Telepizza)	Spain	Hotels, Restaurants & Leisure	Mezzanine Debt (3)		7,874	7,888	5,209
Hilding Anders AB	Sweden	Household Durables	Mezzanine Debt (6)		23,382	14,609	—
			Common Stock (5)	867,362		14,609	—
						29,218	—
HoGi Beteiligungs GmbH (Hofmann)	Germany	Food Products	Mezzanine Debt (3)		42,267	42,853	42,265
			Preferred Stock (4)		1,715	2,579	2,344
			Preferred Stock (4)	3,246,750		3,247	4,355
			Common Stock (5)	59,650		60	3,263
						48,739	52,227
Holding Saint Augustine S.A.S. (Soflog)	France	Air Freight & Logistics	Mezzanine Debt (3)(6)		18,110	12,350	137
			Mezzanine Debt (3)(6)		26,201	12,900	—
			Mezzanine Debt (6)		1,103	867	—
			Common Stock (5)	10,000		3,000	—
						29,117	137
IEE Holding 1 S.A. (International Electronics and Engineering)	Luxembourg	Electronic Equipment, Instruments & Components	Warrants (5)	72,919		26,887	3,280
Lavena Holding 4 Gmbh (Pro Sieben Sat1)	Germany	Media	Senior Debt (3)		4,521	4,522	4,061
			Mezzanine Debt (3)		8,183	8,305	7,552
						12,827	11,613
Magic NewCo 5 S.à r.l. (Mysis)	Luxembourg	Electronic Equipment, Instruments & Components	Senior Debt (3)		4,988	4,850	4,850
Mail Acquisitions Holdings Limited (DX Services)	UK	Commercial Services & Supplies	Senior Debt (3)		13,441	16,231	6,270
			Common Stock (5)	5,231		43,191	—
						59,422	6,270
Materis S.A.S. (Materis)	France	Building Products	Senior Debt (3)		9,000	9,061	6,738
			Mezzanine Debt (3)(6)		14,735	14,610	9,224
						23,671	15,962
Miles 33 Limited	UK	Media	Senior Debt		10,753	11,115	10,753
			Mezzanine Debt (3)		11,734	12,790	11,921
			Preferred Stock (4)(5)		42,319	28,859	19,925
			Common Stock (5)	600,000		883	—
						53,647	42,599
Mobipark S.A.S. (Parkeon)	France	Machinery	Senior Debt (3)(7)		9,214	8,000	—
			Mezzanine Debt (6)		8,711	7,377	—
			Convertible Bonds (5)		2,153	620	—
						15,997	—

EUROPEAN CAPITAL LIMITED CONSOLIDATED SCHEDULE OF INVESTMENTS 31 December 2012 (unaudited) (in thousands, except per share data)

	Country of			Shares/	Principal / notional (2)	Cost (2)	Fair value (2)
Company (1)	incorporation	Industry	Investments	Warrants	€	€	€
Modacin France S.A.S. (Camaieu)	France	Textiles, Apparel & Luxury Goods	Senior Debt (3)		20,000	19,733	12,205
			Mezzanine Debt (3)(6)		16,232	10,338	3,485
						30,071	15,690
MP Equity S.A.S. (Marco Polo Foods)	France	Food Products	Mezzanine Debt (3)(6)		12,150	9,212	3,848
			Convertible Bonds (6)		5,244	3,796	—
			Common Stock (5)	379,610		3,796	—
						16,804	3,848
Nielsen Finance LLC (VNU)	USA	Media	Senior Debt (3)		5,000	5,025	5,025
NorCell Sweden Holding 3 AB (Con Hem)	UK	Electronic Equipment, Instruments & Components	Senior Debt (3)		4,000	4,027	4,027
NoteMachine Acquisitions Limited	UK	Electronic Equipment, Instruments & Components	Senior Debt (3)		11,762	11,935	11,781
OCI Euro Fund I B.V. (Octagon OCI Euro Fund I)	—	Diversified Financial Services	CLO		5,000	4,830	3,013
Opica AB (Capio)	Sweden	Health Care Providers & Servicers	Senior Debt (3)		2,110	2,110	1,900
Otnorbidco AS (Othello)	Norway	Pharmaceuticals	Mezzanine Debt (3)		46,386	41,959	43,245
Oswestry Acquico Limited (Iceland Foods)	UK	Food & Staples Retailing	Senior Debt (3)		10,000	9,988	9,988
Parts Holding Coörperatief U.A	France	Auto Components	Common Stock (5)	568,624		—	2,276
Poult Holding S.A.S.	France	Food Products	Senior Debt		5,437	3,991	5,278
			Senior Debt (3)		3,000	2,366	2,597
			Mezzanine Debt (3)		15,476	15,777	14,494
						22,134	22,369
Qidnax AB (Scandic Hotel)	Sweden	Hotels, Restaurants & Leisure	Mezzanine Debt (3)		12,450	12,191	8,711
Qioptiq S.à.r.l.	Luxembourg	Electronic Equipment, Instruments & Components	Mezzanine Debt (3)		52,617	49,169	55,768
Scaffi S.A.S. (Entrepose)	France	Real Estate Management & Development	Mezzanine Debt		6,532	6,754	6,754
			Warrants (5)	197,850		—	101
						6,754	6,855
Sortalogic Europe S.A.S. (CEPL)	France	Air Freight & Logistics	Mezzanine Debt (3)(6)		38,195	30,000	5,096
Telenet International Finance S.à r.l.	Belgium	Electronic Equipment, Instruments & Components	Senior Debt (3)		9,000	8,986	8,986
Tiama 2 S.A.S.	France	Machinery	Mezzanine Debt (3)(6)		31,912	23,079	10,790
Unipex Neptune International S.A.S.	France	Chemicals	Senior Debt (3)		11,092	11,147	11,147
Whisky Hold Co Limited (Whitworths Group)	UK	Food Products	Mezzanine Debt		26,968	32,131	27,267
			Preferred Stock (4)		11,411	11,589	11,416
			Common Stock (5)	1,250,067		54,838	22,487
						98,558	61,170
Zodiac Marine and Pool S.A. (Zenith)	France	Marine	Senior Debt (3)(6)		28,379	22,707	—
			Mezzanine Debt (3)(6)		43,929	27,345	—
						50,052	—
						1,650,113	1,126,862
(1) Certain of the securities are issued by affiliate(s) of the portfolio company listed.
(2) Principal represents the original principal of an investment plus any compounded PIK translated, where relevant, at the exchange rate ruling at the balance sheet date. Cost represents the cost of investments at historical exchange rates when the investment is denominated in currencies other than the euro. Fair value is the market value of the investment translated where relevant, at the exchange rate ruling at the balance sheet date. The difference between fair value and cost in the above table is a combination of the amounts shown as appreciation (depreciation) and foreign currency appreciation (depreciation) in consolidated statement of operations.
(3) All or a portion of the securities are pledged as collateral under various secured financing arrangements.
(4) Preferred Common Stock includes loan stock which carries a PIK-only component and on occasion has conversion rights.
(5) Non-income producing.
(6) Debt security is on non-accrual status and therefore considered non-income producing.
(7) PIK component of income from Debt security is being provided against.

EUROPEAN CAPITAL LIMITED CONSOLIDATED SCHEDULE OF INVESTMENTS 31 December 2011 (unaudited) (in thousands, except per share data)

	Country of			Shares/	Principal / notional (2)	Cost (2)	Fair value (2)
Company (1)	incorporation	Industry	Investments	Warrants	€	€	€
Bellotto Holdings Limited (Hillarys Blinds)	UK	Household Durables	Preferred Stock (4)		15,910	15,048	15,910
			Preferred Stock (4)(5)	5,395,083	6,438	5,263	5,386
			Common Stock (5)	1,470,791		73,563	—
						93,874	21,296
Bienfaisance Holding SAS (Global Design Technologies (GDT))	France	Machinery	Senior Debt (3)		24,709	24,806	21,163
Blitz F06-582 GmbH (Metall Technologie Holding)	Germany	Machinery	Mezzanine Debt (3)		18,004	18,179	18,179
			Preferred Stock (4)		571	571	571
			Common Stock (5)	12,500,000		12,500	17,664
						31,250	36,414
Blue Topco GmbH (Euro Druckservice)	Germany	Commercial Services & Supplies	Mezzanine Debt (3)(5)			10,075	—
Cordatus CLO II plc (CVC Cordatus CLO II)	—	Diversified Financial Services	CLO		5,000	3,887	2,311
Cornwall Bidco Limited (Civica)	UK	Software	Mezzanine Debt (3)		42,644	45,155	39,631
Cosmos Holding (Unipex Group)	France	Chemicals	Mezzanine Debt (3)		19,032	16,382	18,839
			Convertible Bonds		223	231	231
			Warrants (5)	2,972,484		74	37
						16,687	19,107
DC Green Beteiligungs GmbH (DruckChemie)	Germany	Chemicals	Mezzanine Debt (3)		30,641	30,651	25,037
Delsey Holdings S.A.S.	France	Textiles, Apparel & Luxury Goods	Senior Debt (3)		99,270	99,236	64,916
DMWSL 462 Limited (Fitness First)	UK	Hotels, Restaurants & Leisure	Mezzanine Debt		138	304	283
			Common stock (5)	4,910		3	20
			Warrants (5)	28,914		—	237
						307	540
Duke Street Capital Oasis Acquisitions Limited (Oasis)	UK	Health Care Providers & Servicers	Mezzanine Debt (3)		23,419	27,119	21,755
Eaton Vance CDO X plc	—	Diversified Financial Services	CLO		7,000	5,074	4,481
Emperor Bidco Limited (Bestinvest)	UK	Diversified Financial Services	Mezzanine Debt (6)		19,301	11,552	6,378
			Preferred Stock (4)(5)			2,766	—
			Common Stock (5)	15,052		20	—
						14,338	6,378
Euro-Galaxy II CLO B.V. (AIG Global Investment Corp Limited)	—	Diversified Financial Services	CLO		5,500	8,381	4,517
F Jupiter S.A.S. (Selecta)	France	Machinery	Senior Debt (3)		20,936	22,192	13,148
			Mezzanine Debt (3)		12,747	13,041	7,515
						35,233	20,663
Fat Face World Borrowings Limited	UK	Textiles, Apparel & Luxury Goods	Senior Debt (3)		25,272	30,519	11,839
FB Raphael 1 Limited (Farrow & Ball)	UK	Chemicals	Mezzanine Debt (3)		14,405	15,852	14,285
			Preferred Stock (4)		73,462	97,182	83,584
			Common Stock (5)	68,125		65	34,764
			Warrants (5)	4,058		—	1,791
						113,099	134,424
Financière H S.A.S. (Audika)	France	Health Care Equipment & Supplies.	Mezzanine Debt (3)		9,454	9,593	7,487
			Mezzanine Debt (6)		75,066	67,200	19,619
			Common Stock (5)	1,055,664		21,113	—
						97,906	27,106
Financière Newglass S.A.S. (Devglass)	France	Building Products	Mezzanine Debt (3)		5,751	6,163	6,163
			Convertible Bonds		18,163	19,031	19,031
			Common Stock (5)	8,000,000		8,000	3,293
						33,194	28,487
Financière OFIC S.A.S. (Onduline)	France	Building Products	Warrants (5)	1,574,600		—	5,530

EUROPEAN CAPITAL LIMITED CONSOLIDATED SCHEDULE OF INVESTMENTS 31 December 2011 (unaudited) (in thousands, except per share data)

	Country of			Shares/	Principal / notional (2)	Cost (2)	Fair value (2)
Company (1)	incorporation	Industry	Investments	Warrants	€	€	€
Financière Poinsetia S.A.S. (Alliance)	France	Auto Components	Senior Debt (3)		6,000	6,000	5,043
			Mezzanine Debt (3)		16,649	16,852	15,452
						22,852	20,495
Financière Robin S.A.S. (Sud Robinetterie)	France	Oil, Gas & Consumable Fuels	Mezzanine Debt (3)		40,925	43,036	30,897
			Warrants (5)	2,167,300		—	—
						43,036	30,897
Financière Tarmac S.A.S. (Batisanté)	France	Commercial Services & Supplies	Mezzanine Debt (6)		36,619	25,575	18,293
			Convertible Bonds (5)			8,647	—
			Pref Common Stock		228	6,660	—
						40,882	18,293
Finartex S.A.S. (Vivarte )	France	Specialty Retail	Senior Debt (3)		8,000	8,000	5,125
Foodco Pastries Spain SL (Telepizza)	Spain	Hotels, Restaurants & Leisure	Mezzanine Debt (3)		7,431	7,443	5,507
Hilding Anders AB	Sweden	Household Durables	Mezzanine Debt (3)(6)			14,609	—
			Common Stock (5)	867,362		14,609	—
						29,218	—
HoGi Beteiligungs GmbH (Hofmann)	Germany	Food Products	Mezzanine Debt (3)		40,110	40,654	39,341
			Preferred Stock (4)		1,715	2,404	2,135
			Preferred Stock (4)	3,246,750	3,247	3,247	3,965
			Common Stock (5)	59,650		60	2,530
						46,365	47,971
Holding Saint Augustine S.A.S. (Soflog)	France	Air Freight & Logistics	Mezzanine Debt (3)(6)			12,350	—
			Mezzanine Debt (3)(6)		22,734	12,900	—
			Mezzanine Debt (6)			867	—
						26,117	—
IEE Holding 2 S.A. (International Electronics and Engineering)	Luxembourg	Electronic Equipment & Instruments	Warrants (5)	72,919		26,887	1,557
Lavena Holding 4 Gmbh (Pro Sieben Sat1)	Germany	Media	Senior Debt (3)		4,521	4,521	2,939
			Mezzanine Debt (3)		7,898	8,017	3,390
						12,538	6,329
Mail Acquisitions Holdings Limited (DX Services)	UK	Commercial Services & Supplies	Senior Debt (3)		13,126	16,231	6,537
			Common Stock (5)	5,231		43,191	—
						59,422	6,537
Materis S.A.S. (Materis)	France	Building Products	Senior Debt (3)		9,000	9,000	6,312
			Mezzanine Debt (3)		13,162	14,218	8,635
						23,218	14,947
Matinvest 2 S.A.S. (Deutsche Connectors)	France	Electronic Equipment & Instruments	Senior Debt (3)		2,334	2,079	2,223
			Mezzanine Debt (3)		5,388	4,952	5,250
						7,031	7,473
Miles 33 Limited	UK	Media	Mezzanine Debt (3)		10,906	12,209	11,079
			Preferred Stock (4)(5)		35,750	30,353	25,684
			Common Stock (5)	600,000		883	—
						43,445	36,763
Mobipark S.A.S. (Parkeon)	France	Machinery	Senior Debt (3)		8,789	8,000	—
			Mezzanine Debt (3)(6)			7,376	—
			Convertible Bonds (5)			620	—
						15,996	—
Modacin France S.A.S. (Camaieu)	France	Textiles, Apparel & Luxury Goods	Senior Debt (3)		20,000	19,672	14,011
			Mezzanine Debt (3)		15,524	15,634	11,404
						35,306	25,415

EUROPEAN CAPITAL LIMITED CONSOLIDATED SCHEDULE OF INVESTMENTS 31 December 2011 (unaudited) (in thousands, except per share data)

	Country of			Shares/	Principal / notional (2)	Cost (2)	Fair value (2)
Company (1)	incorporation	Industry	Investments	Warrants	€	€	€
MP Equity S.A.S. (Marco Polo Foods)	France	Food Products	Mezzanine Debt (3)			9,212	—
			Convertible Bonds (6)			3,796	—
			Common Stock (5)	379,610		3,796	—
						16,804	—
OCI Euro Fund I B.V. (Octagon OCI Euro Fund I)	—	Diversified Financial Services	CLO		5,000	5,237	2,311
Opica AB (Capio)	Sweden	Health Care Providers & Servicers	Senior Debt (3)		2,110	2,110	1,899
Otnorbidco AS (Othello)	Norway	Pharmaceuticals	Mezzanine Debt (3)		44,785	39,217	39,920
Parts Holdings Coöperatief U.A.	France	Auto Components	Common Stock (5)	568,624		—	959
Poult Holding S.A.S.	France	Food Products	Senior Debt (3)		1,000	1,000	813
			Mezzanine Debt (3)		14,728	14,898	12,952
						15,898	13,765
Qidnax AB (Scandic Hotel)	Sweden	Hotels, Restaurants & Leisure	Mezzanine Debt (3)(6)		11,029	7,761	6,022
Qioptiq S.à.r.l.	Luxembourg	Electronic Equipment & Instruments	Mezzanine Debt (3)		50,862	45,416	50,833
Redwing Holdings 2 Limited (Capital Safety)	UK	Machinery	Senior Debt (3)		13,514	13,023	13,514
			Mezzanine Debt (3)		17,772	16,964	17,777
						29,987	31,291
Scaffi S.A.S. (Entrepose)	France	Real Estate Management & Development	Mezzanine Debt		6,216	6,418	6,418
			Warrants (5)	197,850		—	101
						6,418	6,519
Sortalogic Europe SAS (CEPL)	France	Air Freight & Logistics	Mezzanine Debt (3)		35,907	36,574	28,931
Terreal Holding S.A.S.	France	Building Products	Warrants (5)	1,679,470		—	—
Tiama 2 S.A.S.	France	Machinery	Mezzanine Debt (3)(6)		28,834	23,079	8,887
Tokheim Holding S.A.	France	Specialty Retail	Senior Debt (3)		14,000	13,987	12,522
Whisky Hold Co Limited (Whitworths Group)	UK	Food Products	Mezzanine Debt		23,240	29,285	23,875
			Preferred Stock (4)		9,385	9,792	9,389
			Common Stock (5)	1,265,694		55,027	13,580
						94,104	46,844
Zodiac Marine and Pool S.A. (Zenith)	France	Marine	Senior Debt (3)(6)		26,960	22,707	—
			Mezzanine Debt (3)(6)		41,176	27,345	—
						50,052	—
						1,555,191	973,607

(1) Certain of the securities are issued by affiliate(s) of the portfolio company listed.
(2) Principal represents the original principal of an investment plus any compounded PIK translated, where relevant, at the exchange rate ruling at the balance sheet date. Cost represents the cost of investments at historical exchange rates when the investment is denominated in currencies other than the euro. Fair value is the market value of the investment translated where relevant, at the exchange rate ruling at the balance sheet date. The difference between fair value and cost in the above table is a combination of the amounts shown as appreciation (depreciation) and foreign currency appreciation (depreciation) in the consolidated statement of operations.
(3) All or a portion of the securities are pledged as collateral under various secured financing arrangements.
(4) Preferred Common Stock includes loan stock which carries a PIK-only component and on occasion has conversion rights.
(5) Non-income producing.
(6) Debt security is on non-accrual status and therefore considered non-income producing.
(7) PIK component of Debt security is being provided against

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Note 1. Organisation

European Capital Limited (together with its consolidated subsidiaries referred to as “European Capital”, “we” and “us”) is an investment company incorporated on 25 August 2005 in Guernsey, Channel Islands for pan-European equity, mezzanine and senior debt investment. The investment objective of European Capital is to provide its investor with dividend income and the potential for share value appreciation by investing in debt and equity investments in private and public companies headquartered primarily in Europe. European Capital Limited is the parent and sole shareholder of European Capital S.A. SICAR, a company incorporated in Luxembourg as an investment company. Through this company we invest in and sponsor management and employee buyouts, invest in private equity buyouts and provide capital directly to private and middle market companies in Europe. European Capital S.A. SICAR is the parent and sole shareholder of ECAS S.à r.l. and ECAS II S.à r.l., investment companies incorporated in Luxembourg. Through these companies we invest in debt instruments in transactions in management and employee buyouts, private equity buyouts and transactions that provide capital directly to private and middle market companies in Europe. European Capital S.A. SICAR is the parent and sole shareholder of ECAS Agent S.A.S., a company incorporated in France, which provides bond paying agency services to European Capital's portfolio companies incorporated in France.

European Capital has affiliated vehicles, ECAS 2007-1 Loan B.V. and ECAS 2011-1 Loan B.V. that were established to facilitate secured borrowing arrangements whereby assets were transferred to the affiliated vehicle and notes were sold by the vehicle. These transfers of assets are treated as secured borrowing arrangements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 860, Transfers and Financing (“ASC 860”) and our consolidated financial statements include the accounts of the affiliated vehicle established for secured financing arrangements. ECAS 2007-1 Loan B.V. was liquidated on 19 June 2012.

American Capital, Ltd (“American Capital”), a United States based investor in equity and mezzanine debt securities, wholly owns the ordinary shares of European Capital. American Capital reports European Capital as an investment within its accounts. A fund management agreement is in place between European Capital and European Capital Financial Services (Guernsey) Limited (the “Investment Manager”), a wholly-owned subsidiary of American Capital Asset Management, LLC, a wholly-owned portfolio company of American Capital.

European Capital's fiscal year end is 31 December.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying annual consolidated financial statements have been prepared in accordance with accounting principles generally acceptable in the United States (“US GAAP”). The figures presented for the year ended 31 December 2010 are audited and the years ended 31 December 2011 and 2012 are unaudited.

Use of Estimates in Preparation of Consolidated Accounts

The preparation of consolidated accounts in conformity with US GAAP 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 consolidated accounts, and revenues and expenses during the period reported. Actual results could differ from those estimates.

Consolidation

Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for Investment Companies, codified in FASB ASC 946, Financial Services - Investment Companies, we are precluded from consolidating any entity other than another investment company. An exception to this general principle occurs if the investment company has a controlling investment in an operating company that provides services to the investment company. The consolidated accounts of European Capital include the accounts of European Capital Limited, European Capital S.A. SICAR, ECAS S.à r.l., ECAS II S.à r.l., ECAS Agent S.A.S., ECAS 2007-1 Loan B.V and ECAS 2011-1 Loan B.V. Investments in other investment companies or funds are recorded as investments in the accompanying consolidated accounts and are not consolidated. All intercompany accounts have been eliminated on consolidation.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

Valuation of Investments

Our investments are carried at fair value in accordance with FASB ASC Topic 820, Fair Value Measurement and Disclosures (“ASC 820”). Unrestricted publicly traded securities for which market quotations are readily available are valued at the closing market quote on the valuation date and restricted publicly traded securities and privately held securities are valued as determined in good faith by our Board of Directors. For restricted securities of companies that are publicly traded, the value is based on the closing market quote on the valuation date less a discount for the restriction.

ASC 820 provides a framework for measuring the fair value of assets and liabilities and provides guidance regarding a fair value hierarchy, which prioritises information used to measure fair value and the effect of fair value measurements on earnings. Due to the uncertainty inherent in the valuation process, estimates of fair value may differ significantly from the values that would have been used had a ready market for 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 realised on these investments to be different than the valuations currently assigned.

ASC 820 defines fair value in terms of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The price used to measure the fair value is not adjusted for transaction costs while the cost basis of our investments may include initial transaction costs. Under ASC 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

The market in which we would sell our private finance investments is the mergers and acquisitions (“M&A”) market. Under ASC 820, we have identified the M&A market as our principal market for portfolio companies only if we have the ability to control the decision to sell the portfolio company as of the measurement date. We determine whether we have the ability to control the decision to sell the portfolio company based on our ability to control or gain control of the board of directors of the portfolio company as of the measurement date and rights within the shareholders agreement. For investments in portfolio companies for which we do not have the ability to control or gain control as of the measurement date and for which there is no active market, our principal market under ASC 820 is a hypothetical secondary market.

Accordingly, we use the M&A market as our principal market for our investments in portfolio companies that we control or can gain control as of the measurement date, and we use a hypothetical secondary market for investments in portfolio companies that we do not control or cannot gain control as of the measurement date. However, to the extent that an active market exists, we will consider that as our principal market. Our valuation policy considers the fact that no ready market exists for substantially all of our investments and that fair value for our investments must typically be determined using unobservable inputs.

Enterprise Value Waterfall Methodology

For investments in portfolio companies for which we have identified the M&A market as the principal market, we estimate the fair value based on the enterprise value waterfall (“Enterprise Value Waterfall”) valuation methodology. For minority equity securities in which the principal market is the hypothetical secondary market, we also estimate the fair value using the Enterprise Value Waterfall valuation methodology.

Under the Enterprise Value Waterfall valuation methodology, we estimate the enterprise value of the portfolio company and then waterfall the enterprise value over the portfolio company's securities in order of their preference relative to one another. The Enterprise Value Waterfall valuation methodology assumes the loans and equity securities are sold together to the same market participant in the M&A market which we believe is consistent with how market participants would transact for these items in order to maximise their value. In applying the Enterprise Value Waterfall valuation methodology, we consider that in a change of control transaction our loans are generally required to be repaid at par and that a buyer cannot assume the loans.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

To estimate the enterprise value of the portfolio company, we prepare an analysis of traditional valuation methodologies including valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, estimating the liquidation or collateral value of the portfolio company's assets, third party valuations of the portfolio company, offers from third parties to buy the company and considering the value of recent investments in the equity securities of the portfolio company. Significant inputs in these valuation methodologies to estimate enterprise value include the historical or projected operating results of the portfolio company, selection of comparable companies, discounts or premiums to the prices of comparable companies and discount rates applied to the forecasted cash flows. The operating results of a portfolio company may be unaudited, projected or pro forma financial information and may require adjustments for non-recurring items or to normalise the operating results that may require significant judgment in its determination. In evaluating the operating results, we also analyse the impact of exposure to litigation, loss of customers or other contingencies. The selection of a population of comparable companies requires significant judgment including a qualitative and quantitative analysis of the comparability of the companies. In determining a discount or premium, if any, to prices of comparable companies, we use significant judgment for factors such as size, marketability and relative performance. In determining a discount rate to apply to forecasted cash flows, we use significant judgment in the development of an appropriate discount rate including the evaluation of an appropriate risk premium. Further, a change in the future growth assumptions in projected future financial results could have a directionally opposite change in the assumptions used for determining an appropriate discount rate.

In valuing convertible debt, equity or other similar securities, we value our investment based on its priority in the waterfall and based on our pro rata share of the residual equity value available after deducting all outstanding debt from the estimated enterprise value. We value non-convertible debt securities at the face amount of the debt to the extent that the estimated enterprise value of the portfolio company exceeds the outstanding debt of the portfolio company. If the estimated enterprise value is less than the outstanding debt of the company, we reduce the value of our debt investment beginning with the most junior debt such that the enterprise value less the value of the outstanding debt is zero.

Market Yield Valuation Methodology

For debt and redeemable preferred equity investments in portfolio companies for which we are required to identify the hypothetical secondary market as the principal market, we determine the fair value based on the assumptions that hypothetical market participants would use to value the security in a current hypothetical sale using a market yield (“Market Yield”) valuation methodology based on an exchange valuation premise under ASC 820.

For debt and redeemable preferred equity of our private finance portfolio for which we do not control or cannot gain control as of the measurement date, we estimate the fair value based on such factors as third-party broker quotes and our own assumptions in the absence of market observable data, including estimated remaining life, current market yield and interest rate spreads of similar loans and securities as of the measurement date. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. We estimate the remaining life based on market data of the average life of similar loans. However, if we have information available to us that the loan is expected to be repaid in the near term, we would use an estimated life based on the expected repayment date, including considering the current maturity date of the loan. The average life used to estimate the fair value of our loans may be shorter than the legal maturity of the loans since our loans have historically been prepaid prior to the maturity date. The current interest rate spreads used to estimate the fair value of our loans are based on our experience of current interest rate spreads on similar loans. We use significant judgment in determining the estimated remaining life as well as the current market yield and interest rate spreads. If there is a significant deterioration in the credit quality of a loan, we may consider other factors that a hypothetical market participant would use to estimate fair value, including the proceeds that would be received in a liquidation analysis.

We also value our investments in securities of collateralised debt obligations and collateralised loan obligations (“Structured Products”) using the Market Yield valuation methodology. We estimate the fair value based on such factors as third-party broker quotes, sales of the same or similar securities, and our cash flow forecasts subject to assumptions a market participant would use regarding the investments' underlying collateral including, but not limited to, assumptions of default and recovery rates, reinvestment spreads and prepayment rates. Cash flow forecasts are discounted using a market participant's market yield assumptions that are derived from multiple sources including, but not limited to, third-party broker quotes, industry research reports, and transactions of securities and indices with similar structure and risk characteristics. We weight the use of third-party broker quotes, if any, in determining fair value based

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

on our understanding of the level of actual transactions used by the broker to develop the quote, whether the quote was an indicative price or binding offer, depth and consistency of broker quotes and the correlation of changes in broker quotes with underlying performance and other market indices.

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 is equivalent to fair value.

Restricted Cash

Cash accounts restricted per our secured credit facilities for collection of interest and principal payments that are required to be used to pay interest and principal on the credit facility are classified as restricted cash. In addition, cash accounts restricted as reserves per our secured credit facilities are classified as restricted cash. Restricted cash also includes cash posted as collateral against various derivative contracts. Restricted cash is carried at cost which approximates fair value.

Loans to Investment Manager Employees

Loans to employees of the Investment Manager are recorded at fair value. This is calculated by taking the outstanding principal amount of the loans and reducing it to the fair value of the shares associated with the arrangement. The face value of the loan is revalued to fair market value at each balance sheet date, with the movement being recognised in net unrealised appreciation (depreciation) of investments on the Consolidated Statements of Operations.

Interest and Dividend Income Recognition

Interest income is recorded on an accruals basis to the extent that such amounts are expected to be collected. Original issue discount (“OID”) and purchase discounts and premiums are accreted into interest income using the effective interest method. OID initially represents the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and loan origination fees that represent yield enhancement. Dividend income is recognised on the ex-dividend date for common equity securities and on an accruals basis for preferred equity securities to the extent that such amounts are expected to be collected or realised. In determining the amount of dividend income to recognise, if any, from cash distributions on common equity securities, we will assess many factors including a portfolio company's cumulative undistributed income and operating cash flow. Cash distributions from common equity securities received in excess of such undistributed amount are recorded first as a reduction of our investment and then as a realised gain on investment. We stop accruing interest or dividends on our investments when it is determined that the interest or dividend is not collectible. We assess the collectability of the interest and dividends based on many factors including the portfolio company's ability to service our loan based on current and projected cash flows as well as the current valuation of the enterprise. For investments with payment-in-kind (“PIK”) interest and cumulative dividends, we base income and dividend accruals on the valuation of the PIK notes or securities received from the borrower or redemption value of the security. If the portfolio company valuation indicates a value of the PIK notes or securities that is not sufficient to cover the contractual interest or dividend, we will generally not accrue interest or dividend income on the notes or securities and record an allowance for any accrued interest or dividend receivable as a reduction of interest or dividend income in the period we determine it is not collectible.

Interest income on Structured Products is recognised on the effective interest method as required by FASB ASC 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets (“ASC 325-40”). Under ASC 325-40, at the time of purchase, we estimate the future expected cash flows and determine the effective interest rate based on these estimated cash flows and our cost basis. Subsequent to the purchase and on a quarterly basis, these estimated cash flows are updated and a revised yield is calculated prospectively based on the current amortised cost of the investment. To the extent the current quarterly estimated cash flows decrease from the prior quarterly estimated cash flows, the revised yield is calculated prospectively based on the amortised cost basis of the investment calculated in accordance with ASC 320-10-35, Investment-Debt and Equity Securities. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies. These include the amount and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass through or coupon rate, and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying loans and the timing of and magnitude of projected credit losses on the loans underlying the securities have to be estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimates and interest income. As a result, actual results may differ significantly from these estimates.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

Realised Gains or Losses and Unrealised Appreciation or Depreciation of Portfolio Investments

Realised gains or losses (“net realised gain (loss) on investments”) are recorded at the disposal of an investment and are the difference between the net proceeds from the sale and the cost of the investment using the specific identification method. We include the fair value of all financial assets received in our net sale proceeds in determining the realised gain or loss at disposal, including anticipated sale proceeds held in escrow at the time of sale. For an investment with a fair value of zero, we record a realised loss on the investment in the period we record a loss for taxation purposes. Unrealised appreciation or depreciation (“net unrealised appreciation (depreciation) of investments”) reflects the movement in the difference between the Board of Directors' valuation of the investments and the cost of the investments.

Derivative Financial Instruments

We use interest rate and currency derivative financial instruments to manage interest rate, currency and market risk. We have policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. We do not hold or issue derivative financial instruments for speculative purposes. All derivative financial instruments are recorded at fair value with changes in value reflected in net unrealised appreciation (depreciation) of investments on the Consolidated Statements of Operations during the reporting period. For currency derivatives, the fair value is based on the estimated net present value of the future cash flows using the exchange rate in effect at the balance sheet date. The fair value of interest rate and market risk based derivative agreements is based on the estimated net present value of the future cash flows using a forward interest rate yield curve in effect as of the measurement date. The fair value of derivative financial instruments is adjusted for non-performance risk, if any, including an evaluation of our credit risk and our counterparty's credit risk.

Our derivatives are considered economic hedges that do not qualify for hedge accounting under FASB ASC Topic 815, Derivatives and Hedging. We record the accrual of the periodic settlements of interest rate and currency derivatives in net unrealised appreciation (depreciation) of investments on the Consolidated Statements of Operations and subsequently record the amount in net realised gains (losses) on investments on the Consolidated Statements of Operations on the settlement date.

Distributions to Shareholders

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

Income Taxes

European Capital Limited is a Guernsey incorporated entity which is exempt from corporate income tax under The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. This exemption does not apply to its subsidiary entities.

European Capital S.A. SICAR is structured as a société d'investissement en capital à risque ('SICAR'), a specific type of Luxembourg investment vehicle. European Capital S.A. SICAR is subject to tax in Luxembourg at a combined corporate income tax rate of 28.8% in 2012 (2011: 28.8%; 2010: 29.63%) (the rate for Luxembourg City)). However, specific tax exemptions apply to entities incorporated under the SICAR regime, the key one being that income and gains recognised by a SICAR from investments in risk bearing 'transferable securities' are exempt from Luxembourg corporate income taxes. We operate to structure the investments of European Capital S.A. SICAR as transferable securities and as such the majority of its income should fall within this exemption.

ECAS S.à r.l. and ECAS II S.à r.l. are Sociétés à responsabilité limitée (“S.à r.l.”), corporate companies comparable to limited liability companies. S.à r.l.'s are not tax transparent under Luxembourg law and as such ECAS S.à r.l. and ECAS II S.à r.l. are fully subject to corporate income tax at a combined rate of 28.8% in 2012 (2011: 28.8%; 2010: 29.63%) (the rate for Luxembourg City)) on its income. However, as a result of adjustments made under Luxembourg tax law, the taxable profits of ECAS S.à r.l. and ECAS II S.à r.l. can be lower than their accounting profits.

ECAS 2007-1 Loan B.V. and ECAS 2011-1 Loan B.V. are incorporated in The Netherlands as private companies with limited liability (besloten vennootschap met beperkte aansprakelijkheid). Companies of this nature are fully subject to corporate income tax on their profits; as such ECAS 2007-1 Loan B.V and ECAS 2011-1 Loan B.V. are subject to corporate income tax at a combined rate of 20% in 2012 (2011: 20%) on its taxable income.

Debt

Debt is stated at the amount payable, net of any unamortised premium or discount.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

Deferred Financing Costs

Financing costs related to long-term debt obligations are deferred and amortised over the life of the debt using the effective interest rate method.

Redeemable Preferred Shares

European Capital's redeemable preferred shares are considered mandatorily redeemable financial instruments that are considered freestanding financial liabilities under FASB ASC 480, “Distinguishing Liabilities from Equity.” In addition, European Capital elected the fair value option for the redeemable preferred shares under FASB ASC Topic 825, “Financial Instruments.” Accordingly, European Capital records the financial liability of the redeemable preferred shares at fair value in other liabilities in the accompanying Consolidated Balance Sheets with the changes in fair value recorded in net unrealised appreciation (depreciation) of investments in the accompanying Consolidated Statements of Operations.

Foreign Exchange Gains and Losses

The consolidated accounts are presented in euro, which is the functional and reporting currency of European Capital. Foreign currency transactions are translated into the functional currency using exchange rates prevailing, or approximating thereto, at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of these transactions are recognised as foreign currency gains (losses) in the accompanying Consolidated Statements of Operations. Gains and losses arising from the translation of monetary assets and liabilities not denominated in the functional currency at period end exchange rates are recognised as foreign currency appreciation (depreciation) in the accompanying Consolidated Statements of Operations. Gains and losses arising from the translation of changes in value of investments not denominated in the functional currency at period end exchange rates are recognised as net unrealised appreciation (depreciation) of investments in the accompanying Consolidated Statements of Operations.

Transfer of Financial Assets

For a transfer of financial assets to be considered a sale, the transfer must meet the sale criteria of ASC 860 under which we must surrender control over the transferred assets. The assets must be isolated from us, even in bankruptcy or other receivership; the purchaser must have the right to pledge or sell the assets transferred and we may not have an option or obligation to reacquire the assets. If the sale criteria are not met, the transfer is considered to be a secured borrowing, the assets remain on our Consolidated Balance Sheets and the sale proceeds are recognised as a liability.

Recent Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”), which requires an entity to provide enhanced disclosures about balance sheet offsetting and related arrangements including (i) a description of the rights of offset associated with relevant agreements and (ii) both net and gross information, including amounts of financial collateral, for relevant assets and liabilities. The purpose of the ASU 2011-11 is to enhance comparability between those companies that prepare their financial statements on the basis of US GAAP and those that prepare their financial statements in accordance with IFRS and enables users of the financial statements to understand the effect or potential effect of the offsetting arrangements on the balance sheet.

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with ASC Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. ASU 2011-11 as clarified by ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and for interim periods within those years. Disclosures are required retrospectively for all comparative periods presented in an entity's financial statements. We do not believe the adoption of ASU 2011-11 as clarified by ASU 2013-01 will have a material impact on our consolidated financial statements.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

Note 3. Investments

The following table shows the breakdown of the cost and fair value by asset class of our portfolio investments as of 31 December 2012 and 2011 is as follows:



	31 December 2012				31 December 2011
	(unaudited)				(unaudited)
	Cost		Fair Value		Cost		Fair Value
Senior debt	€	408,100	€	303,973	€	303,082	€	182,005
Mezzanine debt	731,818		482,190		764,127		530,033
Convertible bonds	34,029		20,966		32,325		19,262
Preferred stock	194,298		167,341		173,286		146,624
Common stock	262,527		120,008		259,793		74,404
Equity warrants	—		14,648		—		7,659
Structured products	19,341		17,736		22,578		13,620
Total	€	1,650,113	€	1,126,862	€	1,555,191	€	973,607

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


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


•	Level 2: Level 2 are inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly


•	Level 3: Level 3 are unobservable and cannot be corroborated by observable market data. See Note 2 for the investment valuation policies used to determine the fair value of these investments.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

The following fair value hierarchy table sets forth our assets and liabilities that are measured at fair value on a recurring basis by level as of 31 December 2012 and 2011:



	31 December 2012
	(unaudited)
	Level 1		Level 2			Level 3			Total
Senior debt	€	—	€	58,959		€	245,014		€	303,973
Mezzanine debt	—		—			482,190			482,190
Convertible bonds	—		—			20,966			20,966
Preferred stock	—		—			167,341			167,341
Common stock	—		—			120,008			120,008
Equity warrants	—		—			14,648			14,648
Structured products	—		—			17,736			17,736
Investments at fair value	—		58,959			1,067,903			1,126,862
Derivative agreements, net	—		(26,562		)	—			(26,562		)
Redeemable preferred shares	—		—			(36,393		)	(36,393		)
Total liabilities	—		(26,562		)	(36,393		)	(62,955		)
Total	€	—	€	32,397		€	1,031,510		€	1,063,907



	31 December 2011
	(unaudited)
	Level 1		Level 2			Level 3			Total
Senior debt	€	—	€	—		€	182,005		€	182,005
Mezzanine debt	—		—			530,033			530,033
Convertible bonds	—		—			19,262			19,262
Preferred stock	—		—			146,624			146,624
Common stock	—		—			74,404			74,404
Equity warrants	—		—			7,659			7,659
Structured products	—		—			13,620			13,620
Investments at fair value	—		—			973,607			973,607
Derivative agreements, net	—		(24,238		)	—			(24,238		)
Redeemable preferred shares	—		—			(32,864		)	(32,864		)
Total liabilities	—		(24,238		)	(32,864		)	(57,102		)
Total	€	—	€	(24,238	)	€	940,743		€	916,505

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

The following table sets forth a summary of changes in the fair value of investments measured using Level 3 inputs during the years ended 31 December 2012 and 2011:



(unaudited)	Senior debt			Mezzanine debt			Convertible bonds			Preferred stock			Common stock			Equity warrants			Structured products			Redeemable preferred shares			Total
Balance, 31 December 2011	€	182,005		€	530,033		€	19,262		€	146,624		€	74,404		€	7,659		€	13,620		€	(32,864	)	€	940,743
Realised Gain (Loss) ⁽¹⁾	1,861			(201		)	—			—			(1		)	1,561			—			(276		)	2,944
Reversal of Prior Period (Appreciation) Depreciation on Realisation ⁽²⁾	1,465			689			—			—			37			—			—			276			2,467
Unrealised Appreciation (Depreciation) ⁽²⁾⁽³⁾	15,147			(12,032		)	—			(3,228		)	39,437			6,989			7,353			(3,834		)	49,832
Purchases ⁽⁴⁾	79,452			7,422			1,949			21,012			3,002			—			2,007			(3		)	114,841
Sales ⁽⁵⁾	(1,809		)	—			(245		)	—			(266		)	(1,561		)	—			—			(3,881		)
Settlements, net ⁽⁶⁾	(34,291		)	(43,967		)	—			—			—			—			(5,244		)	308			(83,194		)
Exchange	1,184			246			—			2,933			3,395			—			—			—			7,758
Balance, 31 December 2012	€	245,014		€	482,190		€	20,966		€	167,341		€	120,008		€	14,648		€	17,736		€	(36,393	)	€	1,031,510



(unaudited)	Senior debt			Mezzanine debt			Convertible bonds			Preferred stock			Common stock			Equity warrants			Structured products			Redeemable preferred shares			Total
Balance, 31 December 2010	€	200,281		€	667,910		€	22,121		€	116,500		€	48,004		€	8,820		€	12,130		€	(3,431	)	€	1,072,335
Realised Gain (Loss) ⁽¹⁾	23			(13,148		)	—			—			(15,813		)	112			—			—			(28,826		)
Reversal of Prior Period (Appreciation) Depreciation on Realisation ⁽²⁾	2,482			16,899			—			—			15,543			—			—			—			34,924
Unrealised Appreciation (Depreciation) ⁽²⁾⁽³⁾	7,394			(13,369		)	(11,437		)	(4,343		)	14,137			(1,161		)	3,560			(29,433		)	(34,652		)
Purchases ⁽⁴⁾	3,506			40,320			7,331			24,876			2,874			—			2,120			—			81,027
Sales ⁽⁵⁾	(9,102		)	(33,277		)	—			(903		)	(308		)	(112		)	—			—			(43,702		)
Settlements, net ⁽⁶⁾	(23,617		)	(141,204		)	1,247			6,660			6,893			—			(4,190		)	—			(154,211		)
Exchange	1,038			5,902			—			3,834			3,074			—			—			—			13,848
Balance, 31 December 2011	€	182,005		€	530,033		€	19,262		€	146,624		€	74,404		€	7,659		€	13,620		€	(32,864	)	€	940,743

(1) Included in net realised gain (loss) on investments in the Consolidated Statements of Operations. Excludes gain (loss) on foreign currency transactions on assets and liabilities that are denominated in a foreign currency. Also, excludes realised gain (loss) from other assets and liabilities not measured at fair value.

(2) Included in net unrealised appreciation (depreciation) on investments in the Consolidated Statements of Operations.

(3) Excludes unrealised appreciation (depreciation) related to foreign currency translation of assets and liabilities not measured at fair value that are denominated in a foreign currency.

(4) Includes increases in the cost basis of investments resulting from new and add-on portfolio investments, the accrual or allowance of PIK interest or cumulative dividends and the amortisation of discounts, premiums and closing fees.

(5) Includes the sale of equity investments, collection of cumulative dividends, loan syndications and loan sales.

(6) Includes principal repayments on debt investments, collection of PIK interest, collection of accreted loan discounts, the exchange of one or more existing securities for one or more new securities.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

Significant Unobservable Inputs

The following table summarises the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of 31 December 2012:



(unaudited)
						Range
	Fair Value			Valuation Technique	Unobservable Input	Minimum	Maximum	Weighted Average
ENTERPRISE VALUE WATERFALL METHODOLOGY
Senior Debt	€	16,145		Enterprise discounted cash flows	Discount rate	11%	16%	13%
					Terminal value growth rate	3%	3%	3%
				Public Comparable companies	Premium or (discount) to multiples of comparable companies	(40%)	(10%)	(32%)
					Control premium	—%	23%	23%
				Sales of comparable companies	Premium or (discount) to multiples of comparable transactions	(45%)	5%	(18%)
Mezzanine Debt	131,453			Enterprise discounted cash flows	Discount rate	11%	18%	14%
					Terminal value growth rate	2%	4%	3%
				Public Comparable companies	Premium or (discount) to multiples of comparable companies	(40%)	10%	(10%)
					Control premium	17%	24%	22%
				Sales of comparable companies	Premium or (discount) to multiples of comparable transactions	(45%)	5%	(7%)
Preferred Equity and Convertible Bonds	181,608			Enterprise discounted cash flows	Discount rate	11%	18%	14%
Preferred Equity and Convertible Bonds	181,608			Enterprise discounted cash flows	Discount rate	11%	18%	14%
					Terminal value growth rate	3%	4%	4%
				Public Comparable companies	Premium or (discount) to multiples of comparable companies	(40%)	10%	(4%)
					Control premium	17%	24%	22%
				Sales of comparable companies	Premium or (discount) to multiples of comparable transactions	(50%)	15%	(32%)
Common Equity	120,008			Enterprise discounted cash flows	Discount rate	10%	18%	15%
					Terminal value growth rate	2%	4%	3%
				Public Comparable companies	Premium or (discount) to multiples of comparable companies	(40%)	10%	1%
					Control premium	17%	24%	21%
				Sales of comparable companies	Premium or (discount) to multiples of comparable transactions	(50%)	25%	(3%)
Equity Warrants	14,648			Enterprise discounted cash flows	Discount rate	11%	16%	13%
					Terminal value growth rate	3%	4%	4%
				Public Comparable companies	Premium or (discount) to multiples of comparable companies	(10%)	30%	9%
					Control premium	22%	22%	22%
				Sales of comparable companies	Premium or (discount) to multiples of comparable transactions	(30%)	(10%)	(30%)
Redeemable Preferred Shares	(36,393		)	Enterprise discounted cash flows	Discount rate	19%	19%	19%
Redeemable Preferred Shares	(36,393		)	Enterprise discounted cash flows	Discount rate	19%	19%	19%
					(Discount) due to lack of control and marketability	(35%)	(35%)	(35%)

MARKET YIELD METHODOLOGY
Senior Debt	228,869			Enterprise discounted cash flows	Market yield	7%	22%	15%
					Estimated remaining life	0.5 yrs	4.0 yrs	3.1 yrs
Mezzanine Debt	350,737			Enterprise discounted cash flows	Market yield	6%	25%	14%
					Estimated remaining life	0.5 yrs	4.0 yrs	3.1 yrs
Preferred Equity and Convertible Bonds	6,699			Enterprise discounted cash flows	Market yield	15%	16%	16%
Preferred Equity and Convertible Bonds	6,699			Enterprise discounted cash flows	Market yield	15%	16%	16%
					Estimated remaining life	4.0 yrs	4.0 yrs	4.0 yrs
Structured Products	17,736			Enterprise discounted cash flows	Discount rate	1.9%	3.6%	2.7%
					Constant prepayment Rate	30%	30%	30%
					Constant default Rate	2%	4%	4%

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

As of 31 December 2012, 14 (2011: 11) portfolio companies with loans at cost totalling €307,173 (2011: €244,947) and at fair value totalling €59,975 (2011: €39,940) were on non-accrual status and no loans were past due (2011: €nil).

The following table show the composition summaries of our investment portfolio at cost and fair value as a percentage of total investments as of 31 December 2012 and 31 December 2011:



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
COST
Subordinated debt	44.3	%	49.1	%
Senior debt	24.7	%	19.5	%
Common equity	15.9	%	16.7	%
Preferred equity	11.8	%	11.1	%
Convertible bonds	2.1	%	2.1	%
Structured Products	1.2	%	1.5	%
Equity warrants	—	%	—	%
	100.0	%	100.0	%



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
FAIR VALUE
Subordinated debt	42.8	%	54.4	%
Senior debt	27.0	%	18.7	%
Preferred equity	14.9	%	15.1	%
Common equity	10.5	%	7.6	%
Convertible bonds	1.9	%	2.0	%
Structured Products	1.6	%	1.4	%
Equity warrants	1.3	%	0.8	%
	100.0	%	100.0	%

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

We use the Global Industry Classification Standard for classifying the industry groupings of our portfolio companies. The following table shows the portfolio composition by industry grouping at cost and at fair value as a percentage of total investments as of 31 December 2012 and 31 December 2011:



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
COST
Food Products	11.7	%	11.2	%
Commercial Services & Supplies	9.9	%	9.8	%
Household Durables	8.1	%	7.9	%
Household Products	7.5	%	7.3	%
Software	6.1	%	5.7	%
Machinery	6.0	%	8.9	%
Textiles, Apparel & Luxury Goods	6.0	%	6.4	%
Specialty Retail	4.9	%	4.7	%
Electronic Equipment, Instruments & Components	4.8	%	3.4	%
Health Care Equipment & Supplies	4.7	%	6.3	%
Building Products	3.6	%	3.6	%
Air Freight & Logistics	3.6	%	4.0	%
Auto Components	3.1	%	3.2	%
Pharmaceuticals	3.0	%	2.5	%
Marine	3.0	%	3.2	%
Oil, Gas & Consumable Fuels	2.8	%	2.8	%
Diversified Financial Services	2.4	%	2.4	%
Chemicals	2.2	%	3.0	%
Health Care Providers & Services	2.0	%	1.9	%
Energy Equipment & Services	1.7	%	—	%
Hotels, Restaurants & Leisure	1.2	%	1.0	%
Media	1.1	%	0.8	%
Food & Staples Retailing	0.6	%	—	%
	100.0	%	100.0	%

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
FAIR VALUE
Household Products	15.1	%	13.8	%
Food Products	12.8	%	11.2	%
Software	7.9	%	7.8	%
Electronic Equipment, Instruments & Components	7.6	%	6.0	%
Machinery	7.2	%	11.3	%
Textiles, Apparel & Luxury Goods	6.9	%	6.7	%
Commercial Services & Supplies	5.7	%	5.3	%
Building Products	5.5	%	5.0	%
Pharmaceuticals	4.6	%	4.1	%
Specialty Retail	4.0	%	4.4	%
Oil, Gas & Consumable Fuels	3.8	%	3.2	%
Diversified Financial Services	3.1	%	2.1	%
Household Durables	3.0	%	2.2	%
Energy Equipment & Services	2.7	%	—	%
Health Care Providers & Services	2.6	%	2.4	%
Auto Components	2.2	%	2.3	%
Hotels, Restaurants & Leisure	1.2	%	1.2	%
Media	1.5	%	0.7	%
Chemicals	1.0	%	4.5	%
Food & Staples Retailing	0.9	%	—	%
Air Freight & Logistics	0.5	%	3.0	%
Health Care Equipment & Supplies	0.2	%	2.8	%
Marine	—	%	—	%
	100.0	%	100.0	%

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

The following table shows the portfolio composition by geographic location at cost and at fair value as a percentage of total investments, excluding Structured Products as of 31 December 2012 and 31 December 2011. The geographic composition is determined by the country of incorporation of the company issuing the security.



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
COST
France	41.6	%	44.4	%
United Kingdom	37.9	%	34.9	%
Germany	7.5	%	7.9	%
Luxembourg	4.7	%	4.7	%
Sweden	2.9	%	2.6	%
Norway	2.6	%	2.6	%
Grand Cayman	0.8	%	0.8	%
Belgium	0.5	%	—	%
Spain	0.5	%	0.5	%
Czech Republic	0.3	%	0.3	%
USA	0.3	%	0.9	%
Poland	0.3	%	0.3	%
Netherlands	0.1	%	0.1	%
	100.0	%	100.0	%



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
FAIR VALUE
United Kingdom	42.7	%	36.3	%
France	34.7	%	39.0	%
Germany	10.1	%	12.1	%
Luxembourg	5.2	%	5.4	%
Norway	3.9	%	4.2	%
Sweden	1.3	%	0.8	%
Belgium	0.8	%	—	%
Spain	0.5	%	0.6	%
USA	0.5	%	1.4	%
Netherlands	0.3	%	0.2	%
Czech Republic	—	%	—	%
Grand Cayman	—	%	—	%
Poland	—	%	—	%
	100.0	%	100.0	%

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

Note 4. Derivatives

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

We have entered into foreign exchange swap agreements where we generally pay a floating rate based on EURIBOR and receive a floating rate based on the appropriate index of the non-euro currency. The fair value of our foreign exchange derivative agreements are identified as separate items on our Consolidated Balance Sheets. There are no credit risk-related contingent features contained in any of our derivative transactions.

We record the accrual of periodic interest settlements of interest rate swap agreements in net unrealised appreciation (depreciation) of investments and subsequently record the cash payments as a net realised gain (loss) on investments on the interest settlement date, offset by a reversal of unrealised appreciation or depreciation. The cash payments are classified under investing activities in our Consolidated Statements of Cash Flows. Cash payments received or paid for the termination of an interest rate swap agreement are recorded as a realised gain or loss upon termination in our Consolidated Statements of Operations and are classified under investing activities in our Consolidated Statements of Cash Flows.

During the year ended 31 December 2012, we recorded €7,079 of net unrealised appreciation (2011: €599 of net unrealised depreciation; 2010: €2,400 of net unrealised appreciation), from derivative agreements in the financial statement line item net unrealised appreciation (depreciation) of investments in our Consolidated Statements of Operations.

During the year ended 31 December 2012, we recorded a net realised loss of €6,597 (2011: €3,492 of net realised gain; 2010: €435 of net realised loss), in the financial statement line item net realised losses on investments in our Consolidated Statements of Operations. During the year ended 31 December 2012, cash termination payments and receipts totalling €4,093 (2011: €143; 2010: nil) and €231 (2011: €841; 2010: nil) respectively, were made and received to settle terminated derivative agreements, which are recorded as a net realised loss in the financial statement line item net realised losses on investments in our Consolidated Statements of Operations.

Note 5. Debt

Our debt obligations, including accrued interest and unused commitment fees recorded at cost, consisted of the following:



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
2011-1 Loan B.V. Securitisation, €288,000 (maturing 2024)	€	249,824	€	270,765
Unsecured senior notes, Series 2006-I, €52,000 (maturing 2022)	52,255		52,589
Unsecured senior notes, Series 2007-I, $37,500 (maturing 2022)	28,596		29,538
Unsecured senior notes, Series 2007-II, $37,500 (maturing 2022)	28,596		29,509
Unsecured revolving credit facility, $150,000 commitment (maturing June 2015)	82,575		56,616
Total	€	441,846	€	439,017

The weighted average debt balance for the year ended 31 December 2012 was €450,519 (2011: €441,954). The weighted average interest rate on all of our borrowings, including amortisation of deferred financing costs, for the year ended 31 December 2012 was 5.3% (2011: 6.0%; 2010: 7.7%). All covenants were complied with as of 31 December 2012.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

As of 31 December 2012, the aggregate fair value of the above borrowings was €366,490 (2011: €385,814). The fair values of our debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions and are measured using Level 2 inputs. It assumes that the liability is transferred to a market participant at the measurement date and that the non-performance risk relating to that liability is the same before and after the transfer. Non performance risk refers to the risk that the obligation will not be fulfilled and affects the value at which the liability is transferred. The fair value of our debt obligations is estimated based upon market interest rates for entities with similar credit risk, adjusted for non-performance risk, if any, based on qualitative and/or quantitative evaluation of our credit risk.

Future Debt Maturities

The expected maturities of our debt obligations as of 31 December 2012 were as follows.



(unaudited)
2013	€	1,074
2014	—
2015	82,575
2016	—
2017	—
Thereafter	358,197
Total	€	441,846

2011-1 Loan B.V. Securitisation

In June 2011, European Capital completed an €864,190 asset securitisation. In connection with the transaction ECAS 2011-1 Loan B.V., an entity consolidated by European Capital Limited, issued €288,000 Senior Secured Floating Rate Notes, €415,000 of Class B Notes and €161,190 Subordinated Notes. The Senior Secured Floating Rate Notes were sold to institutional investors at a discount of 1% of par and is shown on the Consolidated Balance Sheets net of the unamortised original issue discount. European Capital retained the Class B Notes and the Subordinated Notes. The notes are collateralised by the assets of ECAS 2011-1 Loan B.V. that had a fair value as of 31 December 2012 of €641,758 (2011: €637,643).

The Senior Secured Floating Rate Notes have a floating rate of EURIBOR plus a margin of 3.20%, payable semi-annually. The notes are admitted to the Daily Official List of the Irish Stock Exchange.

The notes contain customary default provisions and mature in June 2024, unless redeemed or repaid prior to such date. As of 31 December 2012 European Capital was in compliance with all covenants for these notes.

Principal proceeds received on the underlying collateral may be reinvested during the reinvestment period provided that the reinvestment is in assets that are in compliance with certain criteria and takes place before the third quarterly payment date following the date of the principal repayment. The reinvestment period is for two years after the date of the securitisation, with the final reinvestment to be completed prior to December 2013. If reinvestment has not taken place then the principal proceeds are first used to pay down the senior class notes. During the year ended 31 December 2012, ECAS 2011-1 Loan B.V. repaid €36,715 (2011: nil) of the senior class notes.

If a collateralised asset becomes a defaulted obligation, and its market value is less than 80%, and the underlying borrower is subject to insolvency proceedings and is not currently paying interest and principal as required, we are required to deposit into a reserve account interest receipts equal to the principal amount of the defaulted collateral before payment may be made to the Subordinated Notes retained by European Capital. As of 31 December 2012 there were €115,290 and €11,497 (2011: nil and nil) of collateralised assets at cost and fair value respectively, which were defaulted obligations.

Unsecured Senior Notes

In December 2006, European Capital S.A. SICAR entered into a note purchase agreement to issue €52,000 of senior unsecured fifteen-year notes to accredited investors in a private placement offering (Series 2006-1). The unsecured notes had a fixed interest rate of 6.80% until January 2012 and thereafter have a floating rate of EURIBOR plus 2.75%

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

until the maturity of the notes in January 2022.

In January 2007, European Capital S.A. SICAR entered into a note purchase agreement to issue $37,500 of senior unsecured notes due July 2022 to accredited investors in a private placement offering (Series 2007-I). The unsecured notes had a fixed interest rate of 8.02% until July 2012 and thereafter have a floating rate of LIBOR plus 2.75% until the maturity of the notes in July 2022.

In March 2007, European Capital S.A. SICAR entered into a note purchase agreement to issue $37,500 of senior unsecured notes due July 2022 to accredited investors in a private placement offering (Series 2007-II). The unsecured notes had a fixed interest rate of 7.62% until July 2012 and thereafter have a floating rate of LIBOR plus 2.75% until the maturity of the notes in July 2022.

The above unsecured senior notes contain covenants that, among other things, require that European Capital maintain a minimum consolidated tangible net worth of €225 million, plus 50% of any equity issued by European Capital Limited after the issuance of the applicable notes, which equals €483,834 as of 31 December 2012 for each class of notes, require the interest charge cover meet a minimum threshold depending on the ratio of earnings before interest and tax (“EBIT”) to interest expense (currently a minimum of 1.25 to 1) and a maximum debt to equity ratio of 4:1. The notes also contain cross-default provisions to debt of European Capital of $15 million or more. As of 31 December 2012 European Capital was in compliance with all covenants for these notes.

As part of these note purchase agreements, European Capital Limited guarantees to the note holders the payment in full, when due, of all payment obligations. The guarantee will remain in force until the termination of the note purchase agreements and the payment in full of amounts owing to the note holders under the agreements.

Unsecured Revolving Credit Facility

In February 2008, European Capital S.A. SICAR entered into an unsecured revolving credit facility with American Capital (“Facility A”), with a total commitment of $400,000 with an original maturity in February 2011. From 1 January 2010 until the maturity of the facility interest is charged at a floating rate of US LIBOR plus a margin of 7.00% payable in kind. An unused commitment fee of 0.20% is also charged. In March 2011, Facility A was amended, which changed the total facility amount to $150,000 and extended the maturity to 31 December 2013. In July 2011, Facility A was amended to decrease the total facility amount to $100,000. In May 2012, Facility A was amended to remove the possibility to use the Facility by way of letter of credit. In November 2012, Facility A was amended to extend the maturity to 30 June 2015. In December 2012, Facility A was amended to increase the total facility amount to $150,000. All covenants were complied with as of 31 December 2012.

Secured Multicurrency Term Loan

In February 2006, ECAS S.à r.l entered into a secured multicurrency revolving credit facility with a total commitment of €400,000. In August 2006, the secured multicurrency revolving credit facility was amended to add new lenders and to increase the available commitment to €900,000. The facility was further amended in June 2008 to remove a lender and reduce the available commitment to €580,000. The facility was further amended in December 2009 to convert the revolving credit facility into a single amortising term facility, remove the ability to drawdown additional funds and amend certain representations, covenants and events of default. This facility was collateralised by the assets of ECAS S.à r.l. Interest on the borrowings under this facility was paid quarterly and was charged at an appropriate inter-bank rate depending on the currency in which the borrowing was made and a margin of 2.50%. In addition, there was a programme fee that accrued quarterly and was paid on the date on which all advances outstanding have been repaid in full. The programme fee was based on the level of advances outstanding, excluding any accrued programme fee at the start of each quarter, as follows: 10.0% if the aggregate advances outstanding were equal to or greater than €300,000; 7.5% if the aggregate advances outstanding were less than €300,000 and equal to or greater than €200,000; and 5.0% if the aggregate advances outstanding were less than €200,000.

On 29 June 2011, ECAS S.à r.l repaid €79,221 to repay in full this facility, having made other repayments totalling €101,299 (2010: €165,684) during 2011. ECAS S.à r.l terminated the facility and no longer has any obligations under this facility.

2007-1 Loan B.V. Securitisation

In February 2008, European Capital completed an €492,189 asset securitisation. In connection with the transaction ECAS 2007-1 Loan B.V., an entity consolidated by European Capital Limited, issued €267,000 of secured senior notes

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

to institutional investors, and European Capital retained €225,189 of the subordinated secured notes. These notes were collateralised by the assets of ECAS 2007-1 Loan B.V. The secured senior notes had a floating rate of the bank's cost of funds plus a margin of 1.05%, which amount would have increased to 1.50% and 2.00% after three years and five years after the date of the securitisation, respectively. The secured notes were admitted to the Daily Official List of the Irish Stock Exchange.

On 29 June 2011, ECAS 2007-1 Loan B.V. repaid €129,859 to repay in full this facility, having made other repayments totalling €4,316 during 2011. ECAS 2007-1 Loan B.V. terminated the facility and no longer has any obligations under this facility. ECAS 2007-1 Loan B.V. was liquidated on 19 June 2012.

Note 6. Other liabilites



	31 December 2012		31 December 2011
	(unaudited)		(unaudited)
Redeemable Preferred Shares (see Note 7.)	€	36,393	€	32,864
Trades settlements outstanding	13,472		—
Other	602		4,289
Total	€	50,467	€	37,153

Note 7. Redeemable Preferred Shares

European Capital has issued redeemable preferred shares to employees of the Investment Manager under a long term incentive plan. Each of these shares is further sub divided into sub-classes of shares. Each sub-class of share has specific redemption dates that range from one to ten years from the date of original issuance. The redemption values of the shares, if any, are based on a predetermined formula on the original issue date equal to a specified portion of the aggregate realised liquidity proceeds of specifically referenced investments of European Capital in excess of certain hurdle rates.

The holders of the shares have no rights to participate or receive notice of any general meeting of European Capital and the shares are generally not transferable. The shares have no rights to receive any dividends, and on the winding up European Capital, holders of the shares only receive the amounts originally paid for their shares.

During the year ended 31 December 2012, European Capital issued 300 redeemable preferred shares (2011: nil; 2010: 2,361) each of no par value for a cash consideration of €3 (2011: nil; 2010: €24). During the year ended 31 December 2012, European Capital redeemed 237 redeemable preferred shares (2011: 236 shares; 2010: nil) for a cash redemption value of €308 (2011: nil; 2010: nil).

The weighted average fair value of the redeemable shares was calculated as at the purchase date using the investment value of the shares; which was the present value of the shares based on the underlying investments within European Capital with discounts applied to the redeemable shares for equity risk, liquidity risk, credit risk, minority interests, lack of marketability, a forfeiture rate and the total offset by the payments made by purchaser for the shares. The fair value of the shares issued in 2010 was €1.45 per share and was greater than the price received for them and is recorded as a distribution of capital to the holders of those shares totalling €3,407 during the year ended 31 December 2010.

The table below represents the movements in the number of shares issued and redeemed during the years ended 31 December 2012 and 2011:



(unaudited)	Class A		Class B		Class C		Class D	Class E	Class F	Total
As of 31 December 2010	688		689		984		—	—	—	2,361
Shares Redeemed	(69	)	(69	)	(98	)	—	—	—	(236	)
As of 31 December 2011	619		620		886		—	—	—	2,125
Shares Issued	—		—		—		100	100	100	300
Shares Redeemed	(69	)	(69	)	(99	)	—	—	—	(237	)
As of 31 December 2012	550		551		787		100	100	100	2,188

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

Note 8. Shareholder's Equity

Our ordinary share activity for the years ended 31 December 2012, 2011 and 2010 was as follows:



	Year ended 31 December
	2012	2011	2010
	(unaudited)	(unaudited)	(audited)
Outstanding at beginning of period	159,443	159,443	431,896
Purchase of shares	—	—	(272,453	)
Outstanding at the end of the period	159,443	159,443	159,443

On 10 November 2010, European Capital repurchased 272,453 ordinary shares from American Capital for a nil consideration. These shares were subsequently cancelled.

Movement in Shareholders' Equity



(unaudited)	Share Capital		Undistributed Net Realised Earnings		Unrealised Net Realised Foreign Currency Depreciation			Net Unrealised Appreciation (Depreciation) of Investments			Total Shareholders' Equity
Balance as of 31 December 2011	€	224,475	€	1,078,718	€	(110,079	)	€	(566,378	)	€	626,736
Increase in net assets resulting from operations	—		19,650		8,989			49,425			78,064
Balance as of 31 December 2012	€	224,475	€	1,098,368	€	(101,090	)	€	(516,953	)	€	704,800

Note 9. Operating Income

We derive the majority of our operating income by investing in senior and mezzanine debt and equity of middle market companies with attractive current yields and/or potential for equity appreciation and realised gains. We also derive operating income from investing in Structured Products. Operating income consisted of the following:



	Year ended 31 December
	2012		2011		2010
	(unaudited)		(unaudited)		(audited)
Interest income on debt investments	€	43,588	€	87,316	€	103,602
Dividend income on portfolio investments	22,956		15,631		10,232
Interest income on Structured Products	2,007		2,120		4,342
Interest income on bank deposits	676		657		281
Fee and other income	723		915		1,385
Total	€	69,950	€	106,639	€	119,842

Note 10. Management Fee and Reimbursed Expenses

European Capital and the Investment Manager entered into an Investment Management Agreement dated 17 August 2007 under which the Investment Manager will provide management and other services to European Capital. Under the terms of the Investment Management Agreement, the Investment Manager is paid (i) a management fee of 2% per annum of the weighted average monthly value of European Capital's investments at fair value, (ii) an incentive fee equal to 100% per annum of the net earnings (before incentive fee) in excess of a return of 8% but less than a return of 10% and 20% of the net earnings thereafter; the return is calculated on a last twelve month basis and (iii) certain expenses incurred by the Investment Manager on European Capital's behalf, which are not to exceed a cap of 0.25% per annum of the weighted average monthly value of European Capital's investments. In addition, under the terms of the Investment Management Agreement, all of the transaction fees from portfolio companies will accrue to the Investment Manager.

The agreement was amended to change the management fee to 1.5% per annum of the weighted average monthly value of European Capital's investments with effect from 1 July 2009 to 31 December 2010. The management fee from 1 January 2011 reverted to 2.0%. The agreement was amended so that during 2010, 2011 and 2012, the incentive fee due to the Investment Manager was waived.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

The Investment Management Agreement will continue indefinitely but may be terminated by giving not less than twenty-four months' written notice and such a notice is effective only if the holders of a simple majority of the issued ordinary shares, excluding any such shares held by American Capital, have agreed by vote at a general meeting. In such circumstances, we will remain obliged to pay the management fees and incentive fees which would have been payable in respect of the twenty four month notice period. The Investment Manager is also entitled to terminate the Investment Management Agreement in certain circumstances.

The fees charged by the Investment Manager for the year ended 31 December 2012 were €22,695 (2011: €22,666; 2010: €17,313). The amount outstanding shown as due to European Capital Financial Services (Guernsey) Limited as of 31 December 2012 was €2,123 (2011: €1,439).

Note 11. Loans to Investment Manager Employees

European Capital made loans to employees of the Investment Manager, in the form of non-recourse notes to purchase the common stock of American Capital from December 2005 to February 2007. The loans are denominated in US dollars, bear interest at the Applicable Federal Rate at the date of grant, and are repayable after nine years. Any dividends received on the American Capital common stock by the borrower are required to settle interest on the loans and any excess will be distributed to the employee. If an employee leaves the Investment Manager during the vesting period, any unvested American Capital common stock will be sold with the proceeds of the sale used to repay any outstanding amounts on the loan. In 2010, the employees waived their right to exercise the written put option and the shares associated with this arrangement can be sold by European Capital and used to repay the loans.

Following the employees waiving the right to exercise the put option, the fair value of these loans is determined by reducing the principal of the loans to the fair value of the shares of American Capital associated with this arrangement. The amount outstanding on these loans as of 31 December 2012 was €5,990 (2011: €5,854). As of 31 December 2012, the fair value of the shares of American Capital based on the closing market quote was €2,136 (2011: €1,221), which is recorded in other assets on the Consolidated Balance Sheets. The revaluation of the shares at the balance sheet date has resulted in appreciation of €692 (2011: depreciation €372; 2010: depreciation €45), which is included in net unrealised appreciation (depreciation) of investments in the Consolidated Statements of Operations. The interest earned on these loans for the year ended 31 December 2012 was €259 (2011: €234; 2010: €235).

Note 12. Income Taxes

The income tax provision for the year ended 31 December 2012 was €50 (2011: €88; 2010: €146). The income tax provision was comprised of €40 (2011: €77; 2010: €135) of corporate income taxes incurred in Luxembourg, €2 (2011: €3; 2010: €7) of corporate income taxes incurred in France, and €8 (2011: €8; 2010: €4) of corporate income tax incurred in The Netherlands. There was no deferred tax provision in the year ended 31 December 2012 (2011: nil; 2010: nil).

Note 13. Related Parties

The Investment Manager is an indirect wholly-owned affiliate of American Capital which owns 100% of the ordinary shares of European Capital Limited as of 31 December 2012. The Investment Manager for the year ended 31 December 2012 charged European Capital €22,695 (2011: €22,666; 2010: €17,313) for management fees. The amount outstanding shown as due to European Capital Financial Services (Guernsey) Limited as of 31 December 2012 was €2,123 (2011: €1,439).

During the year ended 31 December 2012, European Capital accrued interest and unused commitment fees shown as Interest of €4,881 (2011: €2,962; 2010: €1,968) under the unsecured revolving credit facilities with American Capital. As of 31 December 2012, the outstanding balance was €82,575 ($109,148) (2011: €56,616 ($73,321)). In March 2011, the unsecured revolving credit facility with American Capital was amended to change the total facility amount to $150,000 and extend the maturity to 31 December 2013. In July 2011, the unsecured revolving credit facility with American Capital was amended to decrease the total facility amount to $100,000. In November 2012, Facility A was amended to extend the maturity to 30 June 2015. In December 2012, Facility A was amended to increase the total facility amount to $150,000.

European Capital has made loans to certain employees of the Investment Manager. The amount outstanding on these loans as of 31 December 2012 was €5,990 (2011: €5,854) as shown in Note 11. The interest earned on these loans for the year ended 31 December 2012 was €259 (2011: €234) as shown in Note 11.

EUROPEAN CAPITAL LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(in thousands, except per share data)

During the year ended 31 December 2011 European Capital completed an €864,190 asset securitisation. In connection with the transaction ECAS 2011-1 Loan B.V., an entity consolidated by European Capital Limited, issued €288,000 Senior Secured Floating Rate Notes, €415,000 of Class B Notes and €161,190 Subordinated Notes. European Capital retained the Class B Notes and the Subordinated Notes. Investments were transferred from existing affiliated companies, namely European Capital S.A. SICAR, ECAS S.à r.l., ECAS II S.à r.l. and ECAS 2007-1 Loan B.V., to ECAS 2011-1 Loan B.V. In consideration for the transfer of assets to ECAS 2011-1 Loan B.V. the other affiliates received a combination of cash, Class B Notes and Subordinated Notes, using this to pay down external debt or inter company debt.

In March 2012, an aggregate of 237 Class A, Class B and Class C redeemable preferred shares (2011: 236), which were issued as part of a long term incentive plan were redeemed from employees of the Investment Manager at €308 (2011: nil). In December 2012, European Capital issued 300 shares to the employees of the Investment Manager for a consideration of €3. These shares were issued as part of a long term incentive plan and are redeemable by European Capital based on the aggregate returns on investments made after 1 January 2012. See Note 7.

Note 14. Commitments and Contingencies

In the normal course of business, we make commitments under loan and financing agreements to fund portfolio companies and undrawn credit facilities. These commitments are primarily composed of working capital credit facilities, acquisition credit facilities and subscription agreements. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and availability under borrowing base thresholds. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio.

Note 15. Subsequent Events

Management has evaluated subsequent events through 28 March 2013, the date the financial statements were available to be issued, and no subsequent events were identified which required accrual or disclosure in these financial statements.

AMERICAN CAPITAL, LTD - FORM 10-K/A - EX-99.1 - EXHIBIT 99.1 - April 1, 2013

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