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Filed pursuant to Rule 497
Registration No. 333-134077

PROSPECTUS SUPPLEMENT
(To Prospectus dated June 23, 2006)

2,730,000 Shares

LOGO

Common Stock


               Ares Capital Corporation is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the Investment Company Act of 1940. We were founded in April 2004 and completed our initial public offering on October 8, 2004. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments, in private middle market companies.

               We are managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, an independent Los Angeles based firm that currently manages investment funds that have approximately $11.7 billion of committed capital. Ares Technical Administration LLC provides the administrative services necessary for us to operate.

               Our common stock is quoted on The NASDAQ Global Select Market under the symbol "ARCC." On December 13, 2006, the last reported sales price of our common stock on The NASDAQ Global Select Market was $18.69 per share.

               Investing in our common stock involves risks that are described in the "Risk Factors" section beginning on page 15 of the accompanying prospectus.

               This prospectus supplement and the accompanying prospectus concisely provide important information you should know before investing in our common stock. Please read this prospectus supplement and the accompanying prospectus before you invest and keep both for future reference. Our Internet address is
http://www.arescapitalcorporation.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The SEC also maintains a website at http://www.sec.gov that contains such information.


 
  Per Share
  Total
Public offering price   $18.50     $50,505,000
Underwriting discount (sales load)   $.19     $518,700
Proceeds, before expenses, to Ares Capital Corporation(1)   $18.31     $49,986,300
(1)
Before deducting expenses payable by us related to this offering, estimated at $286,725.

               The underwriter may also purchase up to an additional 409,500 shares from us at the public offering price, less the underwriting discounts, within 30 days from the date of this prospectus supplement to cover overallotments. If the underwriter exercises this option in full, the total public offering price will be $58,080,750, the total underwriting discount (sales load) paid by us will be $596,505, and the total proceeds, before expenses, will be $57,484,245.

               Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement and the accompanying prospectus are truthful or complete. Any representation to the contrary is a criminal offense.

               The shares will be ready for delivery on or about December 19, 2006.


Merrill Lynch & Co.


The date of this prospectus supplement is December 13, 2006.


              You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement and the accompanying prospectus is accurate only as of the date on the front cover of this prospectus supplement or such prospectus, as applicable. Our business, financial condition, results of operations and prospects may have changed since that date.


Prospectus Supplement
TABLE OF CONTENTS

 
  Page
Forward-Looking Statements   S-1
The Company   S-2
Fees and Expenses   S-5
Recent Developments   S-8
Selected Financial and Other Data   S-9
Use of Proceeds   S-12
Price Range of Common Stock   S-13
Management's Discussion and Analysis of Financial Condition and Results of Operations   S-14
Capitalization   S-24
Underwriting   S-25
Legal Matters   S-27
Financial Statements   S-28


Prospectus
TABLE OF CONTENTS

 
  Page
Prospectus Summary   1
The Company   1
Offerings   8
Fees and Expenses   10
Selected Financial and Other Data   13
Risk Factors   15
Forward-Looking Statements   32
Use of Proceeds   33
Price Range of Common Stock and Distributions   34
Management's Discussion and Analysis of Financial Condition and Results of Operations   36
Senior Securities   51
Business   52
Portfolio Companies   64
Management   69
Certain Relationships   87
Control Persons and Principal Stockholders   88
Determination of Net Asset Value   90
Dividend Reinvestment Plan   91
Material U.S. Federal Income Tax Considerations   92
Description of our Stock   100
Regulation   107
Custodian, Transfer and Dividend Paying Agent and Registrar   114
Brokerage Allocation and Other Practices   114
Plan of Distribution   115
Legal Matters   116
Independent Registered Public Accountants   116
Available Information   116
Financial Statements   F-1

i



FORWARD-LOOKING STATEMENTS

              Some of the statements in this prospectus supplement and the accompanying prospectus constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus involve risks and uncertainties, including statements as to:

              We use words such as "anticipates," "believes," "expects," "intends" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in the accompanying prospectus and elsewhere in this prospectus supplement or the accompanying prospectus.

              We have based the forward-looking statements included in this prospectus supplement and the accompanying prospectus on information available to us on the respective dates of this prospectus supplement and the accompanying prospectus, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward- looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

              You should understand that under Section 27A(b)(2)(B) of the Securities Act of 1933 (the "Securities Act") and Section 21E(b)(2)(B) of the Exchange Act, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with this offering.

S-1



THE COMPANY

              This summary highlights some of the information contained elsewhere in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under "Risk Factors" and the other information included in this prospectus supplement and the accompanying prospectus. Except where the context suggests otherwise, the terms "we," "us," "our," "the Company" and "Ares Capital" refer to Ares Capital Corporation and its subsidiaries; "Ares Capital Management," "investment adviser" or "Investment Adviser" refers to Ares Capital Management LLC; "Ares Administration" refers to Ares Technical Administration LLC; and "Ares" refers to Ares Partners Management Company LLC and its affiliated companies, including Ares Management LLC.


Ares Capital

              Ares Capital is a specialty finance company that is a closed-end, non-diversified management investment company, regulated as a business development company, or a "BDC," under the Investment Company Act of 1940, or the "1940 Act." We were founded in April 2004, completed our initial public offering on October 8, 2004 and completed three additional equity offerings in March 2005, October 2005 and July 2006. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. We primarily invest in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive.

              We primarily invest in first and second lien senior loans and long-term mezzanine debt. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt is subordinated to senior loans and is generally unsecured. In some cases, we may also receive warrants or options in connection with our debt instruments. Our investments have generally ranged between $10 million and $50 million each, although the investment sizes may be more or less than the targeted range and are expected to grow with our capital availability. We also, to a lesser extent, make equity investments in private middle market companies. These investments have generally been less than $10 million each but may grow with our capital availability and are usually made in conjunction with loans we make to these companies. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In this prospectus supplement, we generally use the term "middle market" to refer to companies with annual EBITDA between $5 million and $50 million. EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization.

              The first and second lien senior loans generally have stated terms of three to ten years and the mezzanine debt investments generally have stated terms of up to ten years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The debt that we invest in typically is not initially rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's or lower than "BBB-" by Standard & Poor's). We may invest without limit in debt of any rating, including securities that have not been rated by any nationally recognized statistical rating organization.

              We believe that our investment adviser, Ares Capital Management, is able to leverage Ares' current investment platform, resources and existing relationships with financial sponsors, financial institutions, hedge funds and other investment firms to provide us with attractive investments. In addition to deal flow, the Ares investment platform assists our investment adviser in analyzing, structuring and monitoring investments. Ares' senior principals have worked together for many years

S-2



and have substantial experience in investing in senior loans, high yield bonds, mezzanine debt and private equity. The Company has access to the Ares staff of approximately 66 investment professionals and to the 50 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance and investor relations.

              While our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity securities of private companies, we also may invest up to 30% of the portfolio in opportunistic investments. Such investments may include investments in high-yield bonds, debt and equity securities in collateralized debt obligation vehicles and distressed debt or equity securities of public companies. We expect that these public companies generally will have debt that is non-investment grade. As part of this 30% of the portfolio, we may also invest in debt of middle market companies located outside of the United States, which investments are not anticipated to be in excess of 10% of the portfolio at the time such investments are made.


About Ares

              Ares is an independent firm with approximately $11.7 billion of total committed capital and over 150 employees. Ares was founded in 1997 by a group of highly experienced investment professionals.

              Ares specializes in originating and managing assets in both the leveraged finance and private equity markets. Ares' leveraged finance activities include the acquisition and management of senior loans, high yield bonds, mezzanine and special situation investments. Ares' private equity activities focus on providing flexible, junior capital to middle market companies. Ares has the ability to invest across a capital structure, from senior secured floating rate debt to common equity.

              Ares is comprised of the following groups:


              Ares' senior principals have been working together as a group for many years and have an average of over 20 years of experience in leveraged finance, private equity, distressed debt, investment banking and capital markets. They are backed by a large team of highly-disciplined professionals. Ares' rigorous investment approach is based upon an intensive, independent financial analysis, with a focus on preservation of capital, diversification and active portfolio management. These fundamentals underlie Ares' investment strategy and have resulted in large pension funds, banks, insurance companies, endowments and high net worth individuals investing in Ares funds.

S-3



Ares Capital Management

              Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of 19 investment professionals, including our President, Michael J. Arougheti, which team is augmented by Ares' additional investment professionals, primarily its 30 member Capital Markets Group. Ares Capital Management's investment committee has 5 members, including Mr. Arougheti and 4 founding members of Ares. In addition, Ares Capital Management leverages off of Ares' entire investment platform and benefits from the Ares investment professionals' significant capital markets, trading and research expertise developed through Ares industry analysts. Ares funds have made investments in over 1,000 companies in over 30 different industries and currently hold over 450 investments in over 30 different industries.


Our Corporate Information

              Our administrative offices are located at 1999 Avenue of the Stars, Suite 1900, Los Angeles, California, 90067, telephone number (310) 201-4200, and our executive offices are located at 280 Park Avenue, 22nd Floor, Building East, New York, New York 10017, telephone number (212) 750-7300.

S-4



FEES AND EXPENSES

              The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by "you," "us" or "Ares Capital," or that "we" will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Ares Capital.

Stockholder transaction expenses (as a percentage of offering price):      
Sales load paid by us   1.03% (1)
Offering expenses borne by us   0.57% (2)
Dividend reinvestment plan expenses   None (3)
   
 
Total stockholder transaction expenses paid by us   1.60%  
   
 

Estimated annual expenses (as a percentage of consolidated net assets attributable to common stock)(4):

 

 

 
Management fees   2.13% (5)
Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee net investment income, subject to certain limitations)   2.30% (6)
Interest payments on borrowed funds   1.93% (7)
Other expenses   0.72% (8)
   
 
Total annual expenses (estimated)   7.08% (9)
   
 

(1)
The underwriting discount or commissions with respect to the shares sold in this offering, which is a one-time fee, is the only sales load paid in connection with this offering.

(2)
Amount reflects estimated offering expenses of approximately $286,725 and based on the 2,730,000 shares offered in this offering.

(3)
The expenses of the dividend reinvestment plan are included in "other expenses."

(4)
"Consolidated net assets attributable to common stock" equals net asset value at September 30, 2006 plus the anticipated net proceeds from this offering.

(5)
Our management fee is 1.5% of our total assets other than cash and cash equivalents (which includes assets purchased with borrowed amounts). For the purposes of this table, we have assumed that we maintain no cash or cash equivalents. The 2.13% reflected on the table is calculated on our net assets (rather than our total assets). See "Management—Investment Advisory and Management Agreement" in the accompanying prospectus.

(6)
This item represents an estimate of our incentive fees based on annualizing actual amounts earned on our pre-incentive fee net income for the nine months ended September 30, 2006 and assumes that incentive fees earned at the end of the 2006 calendar year will be based on the actual realized capital gains as of September 30, 2006, computed net of realized capital losses and unrealized capital depreciation. It also assumes that this fee will remain constant although it is based on our performance and will not be paid unless we achieve certain goals. In addition, we may realize additional capital gains or losses, or suffer additional unrealized capital depreciation in the fourth quarter that could result in an increase or decrease of the capital gains portion of the incentive fee payable to our investment adviser.

The incentive fee consists of two parts:
The first part, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment

S-5


(7)
"Interest payments on borrowed funds" represents an estimate of our annualized interest expenses based on actual interest and credit facility expense incurred and amortization of debt issuance cost for the nine months ended September 30, 2006. During the nine months ended September 30, 2006, the average borrowings were $211.9 million and cash paid for interest expense was $5.9 million. We had outstanding borrowings of $366 million at September 30, 2006. The estimate is based on our assumption that our borrowings and interest costs after an offering will remain similar to those prior to such offering. The amount of leverage that we employ at any particular time will depend on, among other things, our investment adviser's and our board of directors' assessment of market and other factors at the time of any proposed borrowing. See "Risk Factors—We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing with us" in the accompanying prospectus.

(8)
Includes our overhead expenses, including payments under the administration agreement based on our allocable portion of overhead and other expenses incurred by Ares Administration in performing its obligations under the administration agreement. Such expenses are based on annualized other expenses for the nine months ended September 30, 2006. See "Management—Administration Agreement" in the accompanying prospectus. The holders of shares of our common stock (and not the holders of our debt securities or preferred stock, if any) indirectly bear the cost associated with our annual expenses.

(9)
"Total annual expenses" as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the "Total annual expenses" percentage be calculated as a percentage of net assets, rather than the total assets, including assets that have been funded with borrowed monies. If the "Total annual expenses" percentage were calculated instead as a percentage of consolidated total assets, our "Total annual expenses" would be 4.98% of consolidated total assets.

S-6



Example

              The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage, that none of our assets are cash or cash equivalents, and that our annual operating expenses would remain at the levels set forth in the table above.

 
  1 year
  3 years
  5 years
  10 years
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return(1)   $ 64   $ 161   $ 209   $ 464

(1)
The above illustration assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation. The expenses you would pay, based on a $1,000 investment and assuming a 5% annual return resulting entirely from net realized capital gains (and therefore subject to the capital gain incentive fee), and otherwise making the same assumptions in the example above, would be: 1 year, $74; 3 years, $189; 5 years, $304; and 10 years, $590. However, cash payment of the capital incentive fee would be deferred if during the most recent four full calendar quarter period ending on or prior to the date the payment set forth in the example is to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less indebtedness) was less than 8.0% of our net assets at the beginning of such period (as adjusted for any share issuances or repurchases).

              The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the investment advisory and management agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan who have not otherwise elected to receive cash will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See "Dividend Reinvestment Plan" in the accompanying prospectus for additional information regarding our dividend reinvestment plan.

              This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

S-7



RECENT DEVELOPMENTS

Investment Activity

              As of September 30, 2006, the year to date net realized capital gains on our investments were approximately $26 million, for which we currently estimate we will owe taxes of approximately $4.4 million. Gross originations during the quarter ended September 30, 2006 were $273.7 million. During the same quarter, we realized certain investments, bringing net investments for the quarter to $154.5 million. In addition, during the quarter ended September 30, 2006, we made commitments in excess of our final investments and syndicated a portion of these commitments to third parties. As a result of this activity, during the same quarter, we generated in excess of $1.1 million of structuring fee income.

              As of December 11, 2006, in addition to the $145.7 million of investments that we have made since September 30, 2006, we have outstanding commitments to fund an aggregate of approximately $195 million of investments. We expect to syndicate a portion of these commitments to third parties. In addition, we have a pipeline of approximately $250 million. The consummation of any of the investments in this backlog and pipeline depends upon, among other things, one or more of the following: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment, the execution and delivery of satisfactory documentation and the receipt of any necessary consents. We cannot assure you that we will make any of these investments.


Dividends

              On November 7, 2006, our board of directors declared a quarterly dividend of $0.40 per share and an additional dividend of $0.10 per share, payable on December 29, 2006 to stockholders of record as of the close of business on December 15, 2006. The shares sold in this offering will not be entitled to receive either the $0.40 quarterly dividend or the $0.10 additional dividend, which dividends are payable on December 29, 2006.

S-8



SELECTED FINANCIAL AND OTHER DATA

              The following selected financial and other data for the period from June 23, 2004 (inception) through December 31, 2004 and the year ended December 31, 2005, are derived from our consolidated financial statements that have been audited by KPMG LLP, an independent registered public accounting firm whose report thereon is included within the accompanying prospectus. The selected financial and other data for the nine months ended September 30, 2006 and 2005 and other quarterly financial information is derived from our unaudited financial statements, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results at and for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The data should be read in conjunction with our unaudited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this prospectus supplement and our audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the accompanying prospectus.

S-9




ARES CAPITAL CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
Nine Months Ended September 30, 2006 and 2005
Year Ended December 31, 2005 and
Period June 23, 2004 (inception) Through December 31, 2004

 
  Nine Months
Ended
September 30, 2006

  Nine Months
Ended
September 30, 2005

  Year Ended
December 31, 2005

  For the Period
June 23, 2004
(inception)
Through
December 31, 2004

 
Total Investment Income   $ 82,512,850   $ 26,960,196   $ 41,850,477   $ 4,380,848  
Net Realized and Unrealized Gain on Investments     10,364,410     10,445,811     14,727,276     475,393  
Total Expenses     (39,272,954 )   (11,417,954 )   (14,726,677 )   (1,665,753 )
   
 
 
 
 
Net Increase in Stockholders' Equity Resulting from Operations   $ 48,676,835   $ 25,988,053   $ 41,851,076   $ 3,190,488  
   
 
 
 
 
Per Share Data:                          
  Net Increase in Stockholder's Equity Resulting from Operations:                          
    Basic:   $ 1.19   $ 1.33   $ 1.78   $ 0.29  
    Diluted:   $ 1.19   $ 1.33   $ 1.78   $ 0.29  
  Cash Dividend Declared:   $ 1.14   $ 0.96   $ 1.30   $ 0.30  

Total Assets

 

$

1,122,556,065

 

$

444,927,588

 

$

613,645,144

 

$

220,455,614

 
Total Debt   $ 366,000,000   $ 82,000,000   $ 18,000,000   $ 55,500,000  
Total Stockholders' Equity   $ 739,268,870   $ 353,109,493   $ 569,612,199   $ 159,708,305  

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 
  Number of Portfolio Companies at Period End     56     30     38     20  
  Principal Amount of Investments Purchased(1)   $ 738,828,000   $ 333,160,000   $ 504,299,000   $ 234,102,000  
  Principal Amount of Investments Sold and Repayments(2)   $ 280,838,000   $ 93,672,000   $ 108,415,000   $ 52,272,000  
  Total Return Based on Market Value(3)     15.49 %   (11.27 )%   (10.60 )%   31.53 %
  Total Return Based on Net Asset Value(4)     7.89 %   8.97 %   12.04 %   (1.80 )%
  Weighted Average Yield of Income Producing Equity Securities and Debt(5):     12.27 %   11.28 %   11.25 %   12.36 %

(1)
The information presented for the period June 23, 2004 (inception) through December 31, 2004 includes $140.8 million of the assets purchased from Royal Bank of Canada and excludes $9.7 million of publicly traded fixed income securities.

(2)
The information presented for the period June 23, 2004 (inception) through December 31, 2004 excludes $9.7 million of publicly traded fixed income securities.

(3)
Total return based on market value for the nine months ended September 30, 2006 equals the increase of the ending market value at September 30, 2006 or $17.42 per share over the ending market value at December 31, 2005 of $16.07, plus the declared dividend of $0.40 per share for holders of record on September 15, 2006, the declared dividend of $0.38 per share for holders of record on June 15, 2006 and the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the market value at December 31, 2005. Total return based on market value for the nine months ended September 30, 2005 equals the decrease of the ending market value at September 30, 2005 or $16.28 per share over the ending market value at December 31, 2004 of $19.43, plus the declared dividend of $0.34 per share for holders of record on September 16, 2005, the

S-10


(4)
Total return based on net asset value for the nine months ended September 30, 2006 equals the change in net asset value during the period plus the declared dividend of $0.40 per share for holders of record on September 15, 2006, the declared dividend of $0.38 per share for holders of record on June 15, 2006 and the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the beginning net asset value during the period. The calculation was adjusted for shares issued in connection with the dividend reinvestment plan and the issuance of common stock in connection with an add-on offering. Total return based on net asset value for the nine months ended September 30, 2005 equals the change in net asset value during the period plus the declared dividend of $0.34 per share for holders of record on September 16, 2005, the declared dividend of $0.32 per share for holders of record on June 30, 2005 and the declared dividend of $0.30 per share for holders of record on March 7, 2005, divided by the beginning net asset value during the period. The calculation was adjusted for shares issued in connection with the dividend reinvestment plan, the issuance of common stock in connection with an add-on offering and the reimbursement of underwriting costs paid by the Investment Adviser. Total return based on net asset value for the year ended December 31, 2005 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.30 per share for the year ended December 31, 2005, divided by the beginning net asset value. Total return based on net asset value for the period June 23, 2004 (inception) through December 31, 2004 equals the change in net asset value during the period plus the declared dividend of $0.30 per share (includes return of capital of $0.01 per share) for holders of record on December 27, 2004, divided by the beginning net asset value. Total return based on net asset value is not annualized. The Company's performance changes over time and currently may be different than that shown. Past performance is no guarantee of future results.

(5)
Weighted average yield on income producing equity securities and debt is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount on accruing debt divided by (b) total income producing equity securities and debt at fair value.


SELECTED QUARTERLY DATA (Unaudited)

 
  2006
  2005
  2004
 
  Q3
  Q2
  Q1
  Q4
  Q3
  Q2
  Q1
  Q4(1)
Total investment income   $ 31,831,794   $ 30,489,751   $ 20,191,305   $ 14,890,281   $ 11,607,989   $ 9,601,615   $ 5,750,592   $ 4,380,848
Net investment income before net realized and unrealized gain on investments and incentive compensation   $ 21,792,136   $ 16,233,294   $ 14,614,419   $ 11,071,081   $ 8,887,631   $ 7,567,053   $ 3,800,113   $ 3,009,749
Incentive compensation   $ 4,464,141   $ 6,940,399   $ 2,922,884   $ (510,478 ) $ 2,643,353   $ 1,798,919   $ 270,284   $ 95,471
Net investment income before net realized and unrealized gain on investments   $ 17,327,995   $ 9,292,895   $ 11,691,535   $ 11,581,559   $ 6,244,278   $ 5,768,134   $ 3,529,829   $ 2,914,278
Net realized and unrealized gain on investments   $ 813,127   $ 7,399,785   $ 2,151,498   $ 4,281,465   $ 3,637,612   $ 1,834,122   $ 4,974,077   $ 475,393
Net increase in stockholders' equity resulting from operations   $ 18,141,122   $ 16,692,680   $ 13,843,033   $ 15,863,024   $ 9,881,890   $ 7,602,256   $ 8,503,906   $ 3,389,671
Basic and diluted earnings per common share   $ 0.39   $ 0.44   $ 0.36   $ 0.45   $ 0.42   $ 0.33   $ 0.69   $ 0.34
Net asset value per share as of the end of the quarter   $ 15.06   $ 15.10   $ 15.03   $ 15.03   $ 15.08   $ 14.97   $ 14.96   $ 14.43

(1)
The Company was initially funded on June 23, 2004 (inception) but had no significant operations until the fourth quarter of 2004. The sole activity for the second and third quarters of 2004 was the incurrence of $199,183 in organizational expenses.

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USE OF PROCEEDS

              We estimate that the net proceeds we will receive from the sale of 2,730,000 shares of our common stock in this offering will be approximately $49.7 million (or approximately $57.2 million if the underwriter fully exercises its overallotment option), in each case assuming a public offering price of $18.50 per share, after deducting the underwriting discount of approximately $0.5 million (or approximately $0.6 million if the underwriter fully exercises its overallotment option) payable by us and estimated offering expenses of approximately $0.3 million payable by us.

              We expect to use approximately all of the net proceeds of this offering to repay outstanding indebtedness under our Revolving Credit Facility. We expect such repayment will occur within 5 business days after the closing of this offering. The interest charged on the indebtedness incurred under the Revolving Credit Facility is based on LIBOR (one, two, three or six months) plus 1.00%, generally. As of December 11, 2006, the one, two, three and six month LIBOR were 5.35%, 5.35%, 5.36% and 5.36%, respectively. The Revolving Credit Facility expires on December 28, 2010. We intend to use any remaining net proceeds for general corporate purposes.

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PRICE RANGE OF COMMON STOCK

              Our common stock is quoted on The NASDAQ Global Select Market under the symbol "ARCC." We completed our initial public offering in October 2004 at the price of $15.00 per share. Prior to such date there was no public market for our common stock. Our common stock continues to trade in excess of net asset value. There can be no assurance, however, that our shares will continue to trade at a premium to our net asset value.

              The following table sets forth the range of high and low closing prices of our common stock as reported on The NASDAQ Global Select Market and the dividends declared by us for each fiscal quarter since our initial public offering. The stock quotations are interdealer quotations and do not include markups, markdowns or commissions and may not necessarily represent actual transactions.

 
   
  Price Range
  Premium/
Discount of High
Sales Price to
NAV

  Premium/
Discount of Low
Sales Price to
NAV

   
 
 
   
  Cash Dividend
Per Share(2)

 
 
  NAV(1)
  High
  Low
 
Fiscal 2004                                  
  Fourth quarter   $ 14.43   $ 19.75   $ 15.00   136.9 % 104.1 % $ 0.30  

Fiscal 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  First quarter   $ 14.96   $ 18.74   $ 15.57   125.3 % 104.0 % $ 0.30  
  Second quarter   $ 14.97   $ 18.14   $ 15.96   121.2 % 106.6 % $ 0.32  
  Third quarter   $ 15.08   $ 19.25   $ 16.18   127.7 % 107.3 % $ 0.34  
  Fourth quarter   $ 15.03   $ 16.73   $ 15.08   111.3 % 100.3 % $ 0.34  

Fiscal 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  First quarter   $ 15.03   $ 17.97   $ 16.23   119.6 % 108.0 % $ 0.36  
  Second quarter   $ 15.10   $ 17.50   $ 16.36   115.9 % 108.3 % $ 0.38  
  Third quarter   $ 15.06   $ 17.51   $ 15.67   116.3 % 104.1 % $ 0.40  
  Fourth quarter (through December 13, 2006)   $ *   $ 19.31   $ 17.39   *   *   $ 0.50 (3)

(1)
Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low closing sales prices. The net asset values shown are based on outstanding shares at the end of each period.

(2)
Represents the dividend declared in the specified quarter.

(3)
Includes an additional cash dividend of $0.10 per share.

*
Net asset value has not yet been calculated for this period.

              On December 13, 2006, the last reported sales price of our common stock on The NASDAQ Global Select Market was $18.69 per share.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

              The information contained in this section should be read in conjunction with the Selected Financial and Other Data and our financial statements and notes thereto appearing elsewhere in this prospectus supplement.


OVERVIEW

              We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the 1940 Act. We were founded on April 16, 2004, were initially funded on June 23, 2004 and on October 8, 2004 completed our initial public offering (the "IPO").

              Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and long-term mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments in private U.S. middle market companies.

              We are externally managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, an independent Los Angeles based firm that manages investment funds. Ares Technical Administration LLC, an affiliate of Ares Management LLC, provides the administrative services necessary for us to operate.

              As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.

              We have elected to be treated as a regulated investment company, or a RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. Pursuant to these elections, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders.


PORTFOLIO AND INVESTMENT ACTIVITY

              For the three months ended September 30, 2006, we issued 13 new commitments in an aggregate amount of $273.7 million ($204.0 million to new portfolio companies and $69.7 million to existing portfolio companies) where the average commitment amount was approximately $21.1 million and the weighted average commitment terms were approximately 73 months, compared to six new commitments in an aggregate amount of $180.1 million ($166.6 million to new portfolio companies and $13.5 million to existing portfolio companies) where the average commitment amount was approximately $30.0 million and the weighted average commitment terms were approximately 67 months for the three months ended September 30, 2005. During the three months ended September 30, 2006, we funded $260.1 million of such commitments ($196.6 million to new portfolio companies and $63.5 million to existing portfolio companies) compared to $166.1 million of commitments ($152.6 million to new portfolio companies and $13.5 million to existing portfolio companies) for the three months ended September 30, 2005. Also during the three months ended September 30, 2006, we had $119.2 million in exits and repayments of commitments resulting in net commitments of $154.5 million for the period. For the three months ended September 30, 2005, we had $45.2 million in exits and repayments of commitments resulting in net commitments of $120.9 million for the period. We have remaining contractual obligations for $13.6 million with respect to commitments funded as of September 30, 2006. The weighted average yield of new income producing equity securities and debt funded in connection with investments purchased during the three months

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ended September 30, 2006 and September 30, 2005 was approximately 11.81% and 10.55%, respectively (computed as (a) annual stated interest rate yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt divided by (b) total income producing equity securities and debt at fair value).

              For the nine months ended September 30, 2006, we issued 42 new commitments in an aggregate amount of $745.6 million ($591.6 million to new portfolio companies and $154.0 million to existing portfolio companies) where the average commitment amount was approximately $17.8 million and the weighted average commitment terms were approximately 68 months, compared to 20 new commitments in an aggregate amount of $352.3 million ($329.6 million to new portfolio companies and $22.7 million to existing portfolio companies) where the average commitment amount was approximately $17.6 million and the weighted average commitment terms were approximately 76 months for the nine months ended September 30, 2005. During the nine months ended September 30, 2006, we funded $698.2 million of such commitments ($543.2 million to new portfolio companies and $155.0 million to existing portfolio companies) compared to $333.2 million of commitments ($310.5 million to new portfolio companies and $22.7 million to existing portfolio companies) for the nine months ended September 30, 2005. Also during the nine months ended September 30, 2006, we had $256.7 million in exits and repayments of commitments resulting in net commitments of $488.9 million for the period. For the nine months ended September 30, 2005, we had $91.9 million in exits and repayments of commitments resulting in net commitments of $260.4 million for the period. The weighted average yield of new income producing equity securities and debt funded in connection with investments purchased during the nine months ended September 30, 2006 and September 30, 2005 was approximately 12.04% and 10.29%, respectively (computed as (a) annual stated interest rate yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt divided by (b) total income producing equity securities and debt at fair value).

              For the three months ended September 30, 2006, the Company purchased (A) $192.0 million aggregate principal amount of senior term debt, (B) $76.1 million aggregate principal amount of senior subordinated debt and (C) $20.2 million of investments in equity securities. For the three months ended September 30, 2005, the Company purchased (1) $78.8 million aggregate principal amount of senior term debt, (2) $32.5 million aggregate principal amount of senior subordinated debt, and (3) $54.8 million of investments in equity securities.

              For the nine months ended September 30, 2006, the Company purchased (A) $495.8 million aggregate principal amount of senior term debt, (B) $179.7 million aggregate principal amount of senior subordinated debt and (C) $63.3 million of investments in equity securities. For the nine months ended September 30, 2005, the Company purchased (1) $196.9 million aggregate principal amount of senior term debt, (2) $58.0 million aggregate principal amount of senior subordinated debt, (3) $60.3 million of investments in equity securities, and (4) $18.0 million aggregate principal amount of collateralized debt obligations and senior notes.

              During the three months ended September 30, 2006, (A) $83.0 million aggregate principal amount of senior term debt and (B) $15.1 million aggregate principal amount of senior subordinated debt was redeemed. Additionally, (i) $19.0 million aggregate principal amount of senior term debt, (ii) $17.0 million aggregate principal amount of senior subordinated debt and (iii) $590,000 of investments in equity securities were sold. As of September 30, 2006, the Company held investments in 56 portfolio companies as compared to 38 portfolio companies as of December 31, 2005. During the three months ended September 30, 2005, (1) $1.1 million aggregate principal amount of senior term debt and (2) $19.9 million aggregate principal amount of senior subordinated debt was redeemed. Additionally, (a) $14.0 million aggregate principal amount of senior notes, (b) $10.0 million aggregate principal amount of senior term debt and (c) $200,000 of investments in equity securities were sold.

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              During the nine months ended September 30, 2006, (A) $132.2 million aggregate principal amount of senior term debt, (B) $33.0 million aggregate principal amount of senior subordinated debt and (C) $9.0 million collateralized debt obligations were redeemed. Additionally, (i) $25.1 million aggregate principal amount of senior term debt, (ii) $17.0 million aggregate principal amount of senior subordinated debt and (iii) $64.0 million of investments in equity securities were sold. During the nine months ended September 30, 2005, (1) $35.7 million aggregate principal amount of senior term debt and (2) $27.2 million aggregate principal amount of senior subordinated debt was redeemed. Additionally, (a) $14.0 million aggregate principal amount of senior notes, (b) $13.0 million aggregate principal amount of senior term debt and (c) $3.5 million of investments in equity securities were sold.

              The Investment Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, we grade all loans on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the borrower's business, the collateral coverage of the loans and other factors considered relevant. Under this system, loans with a grade of 4 involve the least amount of risk in our portfolio. The borrower is performing above expectations and the trends and risk factors are generally favorable. Loans graded 3 involve a level of risk that is similar to the risk at the time of origination. The borrower is performing as expected and the risk factors are neutral to favorable. All new loans are initially graded 3. Loans graded 2 involve a borrower performing below expectations and indicates that the loan's risk has increased materially since origination. The borrower is generally out of compliance with debt covenants, however, loan payments are generally not more than 120 days past due. For loans graded 2, we increase procedures to monitor the borrower. A loan grade of 1 indicates that the borrower is performing materially below expectations and that the loan risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans graded 1 are not anticipated to be repaid in full. We believe that as of September 30, 2006, the weighted average investment grade of the debt in our portfolio was 3.0. The weighted average investment grade of the debt in our portfolio as of December 31, 2005 was 3.1. Following is a distribution of the grades of our portfolio companies as of September 30, 2006 and December 31, 2005:

 
  September 30, 2006
  December 31, 2005
 
  Fair Value
  Number of Companies
  Fair Value
  Number of Companies
Grade 1   $ 1,000,000   1   $  
Grade 2     33,595,521   2     29,789,133   2
Grade 3     943,842,629   49     463,428,666   32
Grade 4     54,549,138   4     92,750,576   4
   
 
 
 
    $ 1,032,987,288   56   $ 585,968,375   38
   
 
 
 

              As of September 30, 2006, the weighted average yield of the debt and income producing equity securities in our portfolio was approximately 12.27% (computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt, divided by (b) total income producing equity securities and debt at fair value).    As of September 30, 2006, the weighted average yield on our entire portfolio was 11.36%. The weighted average yield on our senior term debt, senior subordinated debt and income producing equity securities was 11.55%, 14.06% and 10.54%, respectively. Of the senior term debt, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 11.32% and 11.91%, respectively.

              As of December 31, 2005, the weighted average yield of the debt and income producing equity securities in our portfolio was approximately 11.25% (computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on

S-16



accruing debt, divided by (b) total income producing equity securities and debt at fair value).    As of December 31, 2005, the weighted average yield on our entire portfolio was 10.88%. The weighted average yield on our senior term debt, senior subordinated debt and income producing equity securities was 10.56%, 14.71% and 8.82%, respectively. Of the senior term debt, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 9.38% and 11.49%, respectively.


RESULTS OF OPERATIONS

For the three and nine months ended September 30, 2006 and September 30, 2005

              Operating results for the three and nine months ended September 30, 2006 and September 30, 2005 are as follows:

 
  For the Three Months
Ended September 30,

  For the Nine Months
Ended September 30,

 
  2006
  2005
  2006
  2005
Total Investment Income   $ 31,831,794   $ 11,607,989   $ 82,512,850   $ 26,960,196
Total Expenses     14,756,843     5,363,711     39,272,954     11,417,954
   
 
 
 
Net Investment Income Before Income Taxes     17,074,951     6,244,278     43,239,896     15,542,242

Income Tax Expense, Including Excise Tax

 

 

(253,044

)

 


 

 

4,927,471

 

 

   
 
 
 
  Net Investment Income     17,327,995     6,244,278     38,312,425     15,542,242

Net Realized Gain

 

 

1,611,935

 

 

3,188,703

 

 

26,102,809

 

 

10,343,115
Net Unrealized Gain     (798,808 )   448,909     (15,738,399 )   102,696
   
 
 
 
Net Increase in Stockholders' Equity Resulting From Operations   $ 18,141,122   $ 9,881,890   $ 48,676,835   $ 25,988,053
   
 
 
 


Investment Income

              For the three months ended September 30, 2006, total investment income increased $20.2 million, or 174%, over the three months ended September 30, 2005. For the three months ended September 30, 2006, total investment income consisted of $26.5 million in interest income from investments, $121,000 in dividend income, $4.1 million in capital structuring service fees, $179,000 in other income and $939,000 in interest income from cash and cash equivalents. Interest income from investments increased $17.0 million, or 177%, to $26.5 million for the three months ended September 30, 2006 from $9.6 million for the comparable period in 2005. The increase in interest income from investments was primarily due to the increase in the size of the portfolio. The average investments, at fair value, for the quarter increased from $361.4 million for the three months ended September 30, 2005 to $926.8 million in the comparable period in 2006. Capital structuring service fees increased $2.4 million, or 146%, to $4.1 million for the three months ended September 30, 2006 from $1.7 million for the comparable period in 2005. The increase in capital structuring service fees was primarily due to the increased number of originations. The number of commitments increased from six during the three months ended September 30, 2005 to 13 during the comparable period in 2006.

              For the nine months ended September 30, 2006, total investment income increased $55.6 million, or 206%, over the nine months ended September 30, 2005. For the nine months ended September 30, 2006, total investment income consisted of $67.5 million in interest income from investments, $11.7 million in capital structuring service fees, $633,000 in other income and $1.4 million in interest income from cash and cash equivalents. Interest income from investments increased $46.0 million, or 214%, to $67.5 million for the nine months ended September 30, 2006 from $21.5 million for the comparable period in 2005. The increase in interest income from investments was primarily due to the increase in the size of the portfolio. The average investments, at fair value, for the

S-17



period increased from $273.7 million in the nine months ended September 30, 2005 to $794.2 million in the comparable period in 2006. Capital structuring service fees increased $8.2 million, or 238%, to $11.7 million for the nine months ended September 30, 2006 from $3.5 million for the comparable period in 2005. The increase in capital structuring service fees was primarily due to the increased number of originations. The number of commitments increased from 20 during the nine months ended September 30, 2005 to 42 during the comparable period in 2006.


Expenses

              For the three months ended September 30, 2006, total expenses increased $9.4 million, or 175%, over the three months ended September 30, 2005. Base management fees increased $2.3 million, or 165%, to $3.7 million for the three months ended September 30, 2006 from $1.4 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $2.6 million, or 145%, to $4.4 million for the three months ended September 30, 2006 from $1.8 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Incentive fees related to realized gains decreased $760,000, or 88%, to $106,000 for the three months ended September 30, 2006 from $866,000 for the comparable period in 2005, primarily due to lower net realized gains and higher gross unrealized depreciation recognized during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005. Net realized gains decreased from $3.2 million during the three months ended September 30, 2005 to $1.6 million during the three months ended September 30, 2006. Gross unrealized depreciation increased from $120,000 during the three months ended September 30, 2005 to $2.3 million during the three months ended September 30, 2006. Interest expense and credit facility fees increased $4.1 million, or 1,318%, to $4.4 million for the three months ended September 30, 2006 from $310,000 for the comparable period in 2005, primarily due to the significant increase in the borrowings outstanding. The average outstanding borrowings during the three months ended September 30, 2005 was $7.9 million compared to average outstanding borrowings of $291.1 million in the comparable period in 2006. Amortization of debt issuance costs increased $413,000, or 487%, to $498,000 for the three months ended September 30, 2006 from $85,000 for the comparable period in 2005, primarily due to the additional debt issuance costs capitalized during the end of 2005 as a result of entering into a senior secured revolving credit facility ("the Revolving Credit Facility") and increasing the borrowing capacity of our revolving credit facility ("the CP Funding Facility") entered into through our wholly owned subsidiary, Ares Capital CP Funding LLC, and also the additional debt issuance costs capitalized during the three months ended September 30, 2006 related to the Debt Securitization (as defined below).

              For the nine months ended September 30, 2006, total expenses increased $27.9 million, or 244%, over the nine months ended September 30, 2005. Base management fees increased $6.1 million, or 189%, to $9.3 million for the nine months ended September 30, 2006 from $3.2 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $8.7 million, or 329%, to $11.4 million for the nine months ended September 30, 2006 from $2.6 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Incentive fees related to realized gains increased $898,000, or 44%, to $3.0 million for the nine months ended September 30, 2006 from $2.1 million for the comparable period in 2005, primarily due to higher net realized gains recognized during the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. Interest expense and credit facility fees increased $9.3 million, or 1,247%, to $10.1 million for the nine months ended September 30, 2006 from $749,000 for the comparable period in 2005, primarily due to the significant increase in the borrowings outstanding. The average outstanding borrowings during the nine months ended September 30, 2005 were $21.6 million compared to average outstanding borrowings of $211.9 million in the comparable period in 2006. Amortization of debt issuance costs increased $1.1 million, or 509%, to $1.3 million for

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the nine months ended September 30, 2006 from $216,000 for the comparable period in 2005, primarily due to the additional debt issuance costs capitalized during the end of 2005 as a result of entering into the Revolving Credit Facility and increasing the borrowing capacity of the CP Funding Facility, and also the additional debt issuance costs capitalized during the three months ended September 30, 2006 related to the Debt Securitization.


Income Tax Expense, Including Excise Tax

              The Company has qualified and elected and intends to continue to qualify and elect for the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as amended, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from Federal income taxes.

              Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and nine months ended September 30, 2006, a benefit or provision of approximately $(253,000) and $571,000, respectively, was recorded for Federal excise tax.

              Our wholly owned subsidiaries ARCC Cervantes Corporation ("ACC") and ARCC Cervantes LLC ("ACLLC") are subject to Federal and state income taxes. For the three months ended September 30, 2006, we recorded no tax provision for these subsidiaries. For the nine months ended September 30, 2006, we recorded a tax provision of approximately $4.4 million for these subsidiaries.


Net Unrealized Gain/Loss on Investments

              For the three months ended September 30, 2006, the Company's investments had a decrease in net unrealized gain/loss of $798,000 which was comprised of $1.8 million in unrealized appreciation, $2.3 million in unrealized depreciation and $373,000 relating to the reversal of prior period unrealized net depreciation. The most significant changes in net unrealized depreciation were unrealized depreciation of $2.3 million for the investment in Berkline/Benchcraft Holdings LLC ("Berkline"), offset by the unrealized appreciation in Universal Trailer Corporation ("Universal") of $1.5 million.

              For the three months ended September 30, 2005, the Company's investments had an increase in net unrealized gain/loss of $449,000 which was comprised of $100,000 in unrealized appreciation, $120,000 in unrealized depreciation and $469,000 relating to the reversal of prior period unrealized depreciation. The reversal of the prior period unrealized depreciation was primarily due to the reversal of the depreciation of $1.2 million for the investment in Esselte, Inc. ("Esselte") offset by the reversal of the appreciation of $739,000 for the investment in Mechanical Dynamics and Analysis, Inc. ("MDA"), which were both realized during the period.

              For the nine months ended September 30, 2006, the Company's investments had a decrease in net unrealized gain/loss of $15.7 million, which was comprised of $6.8 million in unrealized appreciation, $8.4 million in unrealized depreciation and $14.2 million relating to the reversal of prior period unrealized appreciation/depreciation. The reversal of the prior period unrealized appreciation was primarily related to the reversal of the appreciation of $13.3 million for the investment in CICQ, LP ("CICQ"), which was realized during the period. The most significant changes in unrealized appreciation for the period were the unrealized appreciation of $4.0 million for CICQ, $1.5 million for Universal and $1.0 million for Varel Holdings, Inc. The most significant changes in unrealized depreciation for the period were unrealized depreciation of $6.0 million for Berkline and $2.4 million for Making Memories Wholesale, Inc.

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              For the nine months ended September 30, 2005, the Company's investments had an increase in net unrealized appreciation of $103,000, which was comprised of $5.7 million in unrealized appreciation, $1.3 million in unrealized depreciation and $4.3 million relating to the reversal of prior period appreciation. The most significant changes in unrealized appreciation and depreciation were unrealized appreciation of $4.8 million for Reef Holdings, Inc. ("Reef"), unrealized appreciation of $739,000 for MDA and unrealized depreciation of $934,000 for Esselte. The reversal of the prior period appreciation was primarily due to the reversal of the appreciation of $4.8 million for the investment in Reef.


Net Realized Gains/Losses

              During the three months ended September 30, 2006, the Company had $136.5 million of sales and repayments resulting in $1.6 million of net realized gains. Net realized gains were comprised of $1.6 million of gross realized gains and no gross realized losses. The most significant realized gains during the three months ended September 30, 2006 were as a result of the repayments of the investments in OnCURE Medical Corp. ("OnCURE"), Singer Sewing Company ("Singer"), WCA Waste Systems, Inc. and Extensity of $452,000, $443,000, $250,000 and $200,000, respectively. During the three months ended September 30, 2005, the Company had $48.4 million of sales and repayments resulting in $3.2 million of net realized gains. Net realized gains were comprised of $3.3 million of gross realized gains and $78,000 of gross realized losses. The most significant realized gains during the period were as a result of the sales of the investments in Esselte and MDA of $2.4 million and $654,000, respectively.

              During the nine months ended September 30, 2006, the Company had $306.9 million of sales and repayments resulting in $26.1 million of net realized gains. Net realized gains were comprised of $26.1 million of gross realized gains and $50,000 of gross realized losses. The most significant realized gains during the period were as a result of the sales of the investments in CICQ and United Site Services, Inc. of $18.6 million and $4.7 million, respectively, and the repayments of the investments in MINCS-Glace Bay, Ltd., OnCURE and Singer of $483,000, $452,000 and $443,000, respectively. During the nine months ended September 30, 2005, the Company had $104.1 million of sales and repayments resulting in $10.3 million of net realized gains. Net realized gains were comprised of $10.5 million of gross realized gains and $144,000 of gross realized losses. The most significant realized gains during the period were as a result of the sales of the investments in Reef, Billing Concepts, Inc., Esselte and MDA of $4.8 million, $1.9 million, $2.4 million and $654,000, respectively.


Net Increase in Stockholders' Equity Resulting From Operations

              Net increase in stockholders' equity resulting from operations for the three and nine months ended September 30, 2006 was approximately $18.1 million and $48.7 million, respectively. Based on the weighted average shares outstanding during the three and nine months ended September 30, 2006, our net increase in stockholders' equity resulting from operations per common share was $0.39 and $1.19, respectively.

              Net increase in stockholders' equity resulting from operations for the three and nine months ended September 30, 2005 was approximately $9.9 million and $26.0 million, respectively. Based on the weighted average shares outstanding during the three and nine months ended September 30, 2005, our net increase in stockholders' equity resulting from operations per common share was $0.42 and $1.33, respectively.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

              The Company's liquidity and capital resources were generated primarily from the remaining net proceeds of its initial public offering and subsequent add-on public offerings, the Debt Securitization (as defined below), advances from the CP Funding Facility and the Revolving Credit Facility, as well as

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cash flows from operations. We received approximately $156.4 million in proceeds net of underwriting and offering costs (net of $2.5 million in underwriting costs originally paid by the Investment Adviser and subsequently reimbursed by the Company in 2006) from our October 8, 2004 initial public offering, approximately $183.9 million in proceeds net of underwriting and offering costs from our March 23, 2005 add-on public offering, $213.5 million in proceeds net of underwriting and offering costs from our October 18, 2005 add-on public offering and $162.0 million in proceeds net of underwriting and offering costs from our July 18, 2006 add-on public offering. As of September 30, 2006, total market capitalization for the Company was $855.2 million compared to $609.2 million as of December 31, 2005.

              On July 7, 2006, through our newly formed, wholly owned Delaware subsidiary, ARCC CLO 2006 LLC ("ARCC CLO"), we completed a $400.0 million debt securitization (the "Debt Securitization") where approximately $314.0 million principal amount of asset-backed notes (including $50.0 million revolving notes that were not drawn down as of September 30, 2006) (the "CLO Notes") were issued to third parties and secured by a pool of middle market loans that have been purchased or originated by the Company. We retained approximately $86.0 million of certain BBB and non-rated securities in the debt securitization. The blended pricing of the CLO Notes, excluding fees, is approximately 3-month LIBOR plus 34 basis points. The Debt Securitization is an on-balance-sheet financing for the Company. As of September 30, 2006, there is $264.0 million in outstanding notes. The CLO Notes mature on December 20, 2019.

              A portion of the proceeds from our public offerings and the Debt Securitization were used to repay outstanding indebtedness under the CP Funding Facility and the Revolving Credit Facility. The remaining unused portion of the proceeds from our public offerings was used to fund investments in portfolio companies in accordance with our investment objectives and strategies.

              The weighted average interest rate and weighted average maturity of all our outstanding borrowings as of September 30, 2006 were 6.44% and 10.4 years, respectively. As of September 30, 2006 and December 31, 2005, the fair value of investments and cash and cash equivalents, and the outstanding borrowings under the Debt Securitization, CP Funding Facility and the Revolving Credit Facility were as follows:

 
  September 30, 2006
  December 31, 2005
Cash and cash equivalents   $ 67,610,129   $ 16,613,334
Senior term debt     659,218,764     338,467,061
Senior notes     10,000,000     10,000,000
Senior subordinated debt     278,590,942     130,042,698
Collateralized debt obligations     7,343,166     17,386,561
Equity securities     77,834,416     90,072,055
   
 
Total   $ 1,100,597,417   $ 602,581,709
   
 
Outstanding borrowings   $ 366,000,000   $ 18,000,000
   
 

The available amount for borrowing under the CP Funding Facility is $350.0 million (see Note 7 to the consolidated financial statements for more detail of the CP Funding Facility arrangement). As of September 30, 2006, there was $15.0 million outstanding under the CP Funding Facility. The CP Funding Facility expires on October 31, 2007 unless extended prior to such date with the consent of the lenders. The available amount for borrowing under the Revolving Credit Facility is $250 million (see Note 7 to the consolidated financial statements for more detail of the Revolving Credit Facility arrangement). As of September 30, 2006, there was $87.0 million outstanding under the Revolving Credit Facility. The Revolving Credit Facility expires on December 28, 2010.

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              For the nine months ending September 30, 2006, average total assets was $856.3 million. The ratio of total debt outstanding to stockholders' equity as of September 30, 2006 was 0.50:1.00 compared to 0.03:1.00 as of December 31, 2005.


OFF BALANCE SHEET ARRANGEMENTS

              As of September 30, 2006, the Company had committed to make a total of approximately $90.6 million of investments in various revolving senior secured loans. As of September 30, 2006, $50.2 million was unfunded. Included within the $90.6 million commitment in revolving secured loans is a commitment to issue up to $3.8 million in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. As of September 30, 2006, the Company had $2.7 million in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability. Of these letters of credit, $2.2 million expire on September 30, 2007 and $500,000 expire on July 31, 2007. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company's option until the revolving line of credit, under which the letters of credit were issued, matures on September 30, 2011.

              As of September 30, 2006, the Company was subject to a subscription agreement to fund up to $10.0 million of equity commitments in a private equity investment partnership. As of September 30, 2006, $202,000 was funded to this partnership.

              As of December 31, 2005, the Company had committed to make a total of approximately $43.0 million of investments in various revolving senior secured loans. As of December 31, 2005, $28.8 million was unfunded. Included within the $43.0 million commitment in revolving secured loans is a commitment to issue up to $3.2 million in standby letters of credit through a financial intermediary on behalf of a portfolio company. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio company was to default on its related payment obligations. As of December 31, 2005, the Company had $2.2 million in standby letters of credit issued and outstanding on behalf of the portfolio company, of which no amounts were recorded as a liability.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

              We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio.


Interest Rate Risk

              As of September 30, 2006, approximately 38% of the investments at fair value in our portfolio were at fixed rates while approximately 54% were at variable rates. In addition, the Debt Securitization, the CP Funding Facility and the Revolving Credit Facility all feature variable rates.

              To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our September 30, 2006 balance sheet and assuming no changes in our investment and borrowing structure. Under this analysis, a 100 basis point increase in the various base rates would result in an increase in interest income of approximately $6,704,465 and an increase in interest expense of $3,660,000 over the next 12 months. A 100 basis point decrease in the various base rates would result in a decrease in interest income of approximately $6,704,465 and a decrease in interest expense of $3,660,000 over the next 12 months.

              On January 7, 2005, we entered into a costless collar agreement in order to manage the exposure to changing interest rates related to the Company's fixed rate investments. The costless collar agreement was for a notional amount of $20 million, has a cap of 6.5%, a floor of 2.72% and matures in 2008. The costless collar agreement allows us to receive an interest payment when the 3-month LIBOR exceeds 6.5% and obligates us to pay an interest payment when the 3-month LIBOR is less

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than 2.72%. The costless collar resets quarterly based on the 3-month LIBOR. As of September 30, 2006, the 3-month LIBOR was 5.37%. As of September 30, 2006, these derivatives had no fair value.

              While hedging activities may mitigate our exposure to adverse fluctuations in interest rates, certain hedging transactions that we may enter into in the future, such as interest rate swap agreements, may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio investments.


Portfolio Valuation

              Investments for which market quotations are readily available are valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. In addition, the board of directors currently receives input from independent valuation firms that have been engaged at the direction of the board to value each portfolio security at least once during a trailing 12 month period. The valuation process is conducted at the end of each fiscal quarter, with approximately a quarter of our portfolio companies subject to valuation by the independent valuation firm each quarter. The types of factors that the board may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.

              When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our private equity valuation. Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments, and the differences could be material.

              In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.

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CAPITALIZATION

              The following table sets forth (1) our actual capitalization at September 30, 2006 and (2) our capitalization as adjusted to reflect the effects of the sale of our common stock in this offering (assuming no exercise of the underwriter's overallotment option) at the public offering price of $18.50 per share, after deducting the underwriting discount and offering expenses payable by us. You should read this table together with "Use of Proceeds" and our balance sheet included elsewhere in this prospectus supplement.

 
  As of September 30, 2006
 
 
  Actual
  As Adjusted(2)
 
Cash and cash equivalents   $ 67,610,129   $ 69,124,155  
   
 
 

Debt

 

 

 

 

 

 

 
Debt   $ 366,000,000     317,000,000 (1)

Stockholders' Equity

 

 

 

 

 

 

 
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 49,091,195 and 51,869,357 common shares issued and outstanding, respectively   $ 49,092   $ 51,869  
Capital in excess of par value     727,920,560     778,431,809  
Accumulated net realized gain on sale of investments     22,421,107     22,421,107  
Net unrealized (depreciation) appreciation on investments     (11,121,889 )   (11,121,889 )
   
 
 
Total stockholders' equity   $ 739,268,870   $ 789,782,896  
   
 
 
Total capitalization   $ 1,105,268,870   $ 1,106,782,896  
   
 
 

(1)
Proceeds from the sale of our common stock in this offering will be used to pay down outstanding indebtedness under the Revolving Credit Facility.

(2)
Includes the effect of our transfer agent notifying us on December 13, 2006 that the total number of outstanding shares on September 30, 2006 was 49,139,357 shares instead of the 49,091,195 shares previously reported to us as outstanding by the tranfer agent. The difference in shares resulted from the issuance of additional shares under our Dividend Reinvestment Plan on September 29, 2006, resulting in a reimbursement of $814,452 that the Company had previously advanced to the transfer agent to pay such dividends in cash.

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UNDERWRITING

              We intend to offer the shares through Merrill Lynch, Pierce, Fenner & Smith Incorporated. Subject to the terms and conditions described in a purchase agreement among us and the underwriter, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase from us, 2,730,000 shares of our common stock.

              The underwriter has agreed that it must purchase all of the shares sold under the purchase agreement if it purchases any of them. However, the underwriter is not required to take or pay for the shares covered by the underwriter's overallotment option described below.

              We have agreed to indemnify the underwriter against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriter may be required to make in respect of those liabilities.

              The underwriter is offering the shares, subject to prior sale, when, as and if issued to and accepted by it, subject to approval of legal matters by its counsel, including the validity of the shares, and other conditions contained in the purchase agreement, such as the receipt by the underwriter of officer's certificates and legal opinions. The underwriter reserves the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.


Commissions and Discounts

              The underwriter has advised us that it proposes initially to offer the shares to the public at the public offering price on the cover page of this prospectus supplement and to dealers at that price less a concession not in excess of $.19 per share. After the public offering, the public offering price may be changed.

              The following table shows the per share and total underwriting discount we will pay to the underwriter assuming both no exercise and full exercise of the underwriter's overallotment option to purchase up to an additional 409,500 shares, based upon the public offering price set forth on the cover page of this prospectus supplement.

 
  No exercise
  Full exercise
Per share   $.19   $.19
Total   $518,700   $596,505

              The maximum commission or discount to be received by any member of the National Association of Securities Dealers, Inc. ("NASD") in connection with this and any other offering of securities registered by the Company pursuant to Rule 415 will not exceed 8%.

              We estimate that the total expenses of the offering payable by us, not including the underwriting discount, will be approximately $286,725.


Overallotment Option

              We have granted an option to the underwriter to purchase up to 409,500 additional shares at the public offering price less the underwriting discount. The underwriter may exercise this option for 30 days from the date of this prospectus supplement solely to cover any overallotments.


No Sales of Similar Securities

              We have agreed, with exceptions, not to sell or transfer any common stock for 30 days after the date of this prospectus supplement without first obtaining the consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.

              Our executive officers and directors and Ares Capital Management have agreed, with exceptions, not to sell or transfer any common stock for 90 days after the date of this prospectus

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supplement without first obtaining the written consent of the underwriter. Specifically, we and these other individuals and entities have agreed not to directly or indirectly:

              This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.


Quotation on The NASDAQ Global Select Market

              Our common stock is quoted on The NASDAQ Global Select Market under the symbol "ARCC."


Price Stabilization and Short Positions

              Until the distribution of the shares is completed, SEC rules may limit the underwriter from bidding for and purchasing our common stock. However, the underwriter may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

              If the underwriter creates a short position in the common stock in connection with the offering, i.e., if it sells more shares than are listed on the cover of this prospectus supplement, the underwriter may reduce that short position by purchasing shares in the open market. The underwriter may also elect to reduce any short position by exercising all or part of the overallotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases.

              Neither we nor the underwriter makes any representation or prediction or magnitude of any effect that the transaction described above may have the price of the common stock. In addition, neither we nor the underwriter makes any representation that the underwriter will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.


Electronic Delivery

              The underwriter may make prospectuses available in electronic (PDF) format. A prospectus in electronic (PDF) format may be made available on a web site maintained by the underwriter, and the underwriter may distribute such prospectuses electronically. The underwriter intends to allocate a limited number of shares for sale to its online brokerage customers.


Other Relationships

              The underwriter and its affiliates have provided in the past to Ares and may provide from time to time in the future in the ordinary course of their business certain commercial banking, financial advisory, investment banking or other services to Ares, Ares Capital or our portfolio companies for which it has received or will be entitled to receive separate fees. In particular, the underwriter or its

S-26



affiliates may execute transactions with Ares Capital or on behalf of Ares Capital, Ares or any of our portfolio companies. In addition, the underwriter or its affiliates may act as arrangers, underwriters or placement agents for companies whose securities are sold to or whose loans are syndicated to Ares, Ares Capital or Ares Capital Management.

              Affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated are limited partners of Ares Corporate Opportunities Fund, L.P.

              The underwriter or its affiliates may also trade in our securities, securities of our portfolio companies or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to Ares, Ares Capital, Ares Capital Management or any of the portfolio companies.

              We may purchase securities of third parties from the underwriter or its affiliates after the offering. However, we have not entered into any agreement or arrangement regarding the acquisition of any such securities, and we may not purchase any such securities. We would only purchase any such securities if—among other things—we identified securities that satisfied our investment needs and completed our due diligence review of such securities.

              After the date of this prospectus supplement, the underwriter and its affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the underwriter and its affiliates in the ordinary course of their business and not in connection with the offering of the common stock. In addition, after the offering period for the sale of our common stock, the underwriter or its affiliates may develop analyses or opinions related to Ares, Ares Capital or our portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding Ares Capital to our stockholders.

              Merrill Lynch, Pierce, Fenner & Smith Incorporated was an underwriter of our October 2004 initial public offering and our March 2005, October 2005 and July 2006 common stock offerings, for which it received customary fees. Merrill Lynch Capital Corporation is a syndication agent and lender under the Revolving Credit Facility.

              Affiliates of the underwriter will receive part of the proceeds of the offering by reason of the repayment of amounts outstanding under the Revolving Credit Facility. Because more than 10% of the net proceeds of the offering may be paid to members or affiliates of members of the NASD participating in the offering, the offering will be conducted in accordance with NASD Conduct Rule 2710(h).

              The principal business address of the underwriter is 4 World Financial Center, New York, New York 10080.


LEGAL MATTERS

              Certain legal matters regarding the securities offered by this prospectus supplement will be passed upon for Ares Capital by Proskauer Rose LLP, New York, New York, Sutherland Asbill & Brennan LLP, Washington, D.C., and Venable LLP, Baltimore, Maryland. Proskauer Rose LLP has from time to time represented the underwriter, Ares and Ares Capital Management on unrelated matters. Certain legal matters in connection with the offering will be passed upon for the underwriter by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.

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ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
  As of
 
  September 30, 2006
  December 31, 2005
 
  (unaudited)

   
ASSETS            
 
Investments at fair value (amortized cost of $1,044,109,177 and $581,351,865, respectively):

 

 

 

 

 

 
    Non-control/Non-affiliate investments   $ 859,503,669   $ 515,184,991
    Affiliate investments     173,483,619     70,783,384
   
 
    Total investments at fair value     1,032,987,288     585,968,375
  Cash and cash equivalents     67,610,129     16,613,334
  Receivable for open trades     1,676,990     1,581,752
  Interest receivable     10,931,480     5,828,098
  Other assets     9,350,178     3,653,585
   
 
  Total assets   $ 1,122,556,065   $ 613,645,144
   
 

LIABILITIES

 

 

 

 

 

 
 
Debt

 

$

366,000,000

 

$

18,000,000
  Reimbursed underwriting costs payable to the Investment Adviser         2,475,000
  Dividend payable         12,889,225
  Payable for open trades         5,500,000
  Accounts payable and accrued expenses     2,234,296     1,222,678
  Management and incentive fees payable     10,981,600     3,478,034
  Interest and facility fees payable     4,071,299     313,930
  Interest payable to the Investment Adviser         154,078
   
 
  Total liabilities     383,287,195     44,032,945
   
 
  Commitments and contingencies (Note 6)            

STOCKHOLDERS' EQUITY

 

 

 

 

 

 
 
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 49,091,195 and 37,909,484 common shares issued and outstanding, respectively

 

 

49,092

 

 

37,910
  Capital in excess of par value     727,920,560     559,192,554
  Accumulated net realized gain on sale of investments     22,421,107     5,765,225
  Net unrealized (depreciation) appreciation on investments     (11,121,889 )   4,616,510
   
 
  Total stockholders' equity     739,268,870     569,612,199
   
 
  Total liabilities and stockholders' equity   $ 1,122,556,065   $ 613,645,144
   
 
NET ASSETS PER SHARE   $ 15.06   $ 15.03
   
 

See accompanying notes to consolidated financial statements.

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ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of September 30, 2006 (unaudited)

Company(1)
  Industry
  Investment
  Interest(15)
  Initial Acquisition
Date

  Amortized Cost
  Fair Value
  Fair Value Per Unit
  Percentage of Net Assets
 
Healthcare—Services                                
American Renal Associates, Inc.   Dialysis provider   Senior secured loan ($3,049,180 par due 12/2010)   9.57% (Libor+ 4.00%/S)   12/14/05   $ 3,049,180   $ 3,049,180   $ 1.00 (3)    
        Senior secured loan ($196,721 par due 12/2010)   10.75% (Base Rate + 2.50%/D)   12/14/05     196,721     196,721     1.00 (3)    
        Senior secured loan ($5,836,066 par due 12/2011)   10.07% (Libor + 4.50%/S)   12/14/05     5,836,066     5,836,066     1.00 (3)    
        Senior secured loan ($36,066 par due 12/2011)   11.25% (Base Rate + 3.00%/D)   12/14/05     36,066     36,066     1.00 (3)    
        Senior secured loan ($393,741 par due 12/2011)   12.57% (Libor + 7.00%/Q)   12/14/05     393,741     393,741     1.00      
        Senior secured loan ($261,997 par due 12/2011)   12.57 (Libor + 7.00%/Q)   12/14/05     261,997     261,997     1.00 (3)    
        Senior secured loan ($3,937,406 par due 12/2011)   14.25% (Base Rate + 6.00%/D)   12/14/05     3,937,406     3,937,406     1.00      
        Senior secured loan ($2,619,971 par due 12/2011)   14.25% (Base Rate + 6.00%/D)   12/14/05     2,619,971     2,619,971     1.00 (3)    
Capella Healthcare, Inc.   Acute care hospital   Junior secured loan ($19,000,000 par due 11/2013)   11.37% (Libor +6.00%/Q)   12/1/05     19,000,000     19,000,000     1.00      
    operator   Junior secured loan ($12,000,000 par due 11/2013)   11.37% (Libor + 6.00%/Q)   12/1/05     12,000,000     12,000,000     1.00 (3)    
DSI Renal, Inc.   Dialysis provider   Senior subordinated note ($60,637,680 par due 4/2014)   12.00% Cash, 2.00% PIK   4/4/06     60,637,680     60,637,680     1.00 (4)    
        Senior subordinated note ($5,025,000 par due 4/2014)   12.00% Cash, 2.00% PIK   4/4/06     5,025,000     5,025,000     1.00 (4)(3)    
        Senior secured loan ($3,200,000 par due 3/2013)   8.50% (Libor + 3.00%/Q)   4/4/06     3,200,000     3,200,000     1.00      
        Senior secured loan ($960,000 par due 3/2013)   8.44% (Libor + 3.00%/Q)   4/4/06     960,000     960,000     1.00      
        Senior secured loan ($1,600,000 par due 3/2013)   8.38% (Libor + 3.00%/M)   4/4/06     1,600,000     1,600,000     1.00      
        Senior secured loan ($1,440,000 par due 3/2013)   10.75% (Base Rate + 2.50%/D)   4/4/06     1,440,000     1,440,000     1.00      
OnCURE Medical Corp.   Radiation oncology care   Senior subordinated note ($23,230,012 par due 8/2012)   11.00% cash, 1.50% PIK   8/16/06     23,230,012     23,230,012     1.00 (4)    
    provider   Senior secured loan ($3,489,063 par due 8/2011)   8.94% (Libor + 3.50%/S)   8/23/06     3,489,063     3,489,063     1.00      
        Senior secured loan ($10,938 par due 8/2011)   8.94% (Libor + 3.50%/Q)   8/23/06     10,938     10,938     1.00      
        Common stock (857,143 shares)       8/16/06     3,000,000     3,000,000     3.50 (5)    
PHNS, Inc.   Information technology and business process outsourcing   Senior subordinated loan ($16,000,000 par due 11/2011)   13.50% cash, 2.50% PIK   10/29/04     15,804,452     16,320,000     1.02 (4)    
Triad Laboratory Alliance, LLC   Laboratory services   Senior subordinated note ($14,762,865 par due 12/2012)   12.00% cash, 1.75% PIK   12/21/05     14,762,865     14,762,865     1.00 (4)    
        Senior secured loan ($6,947,500 par due 12/2011)   8.62% (Libor + 3.25%/Q)   12/21/05     6,947,500     6,947,500     1.00      
        Senior secured loan ($2,977,500 par due 12/2011)   8.62% (Libor + 3.25%/Q)   12/21/05     2,977,500     2,977,500     1.00 (3)    
                   
 
           
                      190,416,158     190,931,706         25.83 %
                   
 
           
Printing, Publishing and Broadcasting                                
Canon Communications   Print publications   Junior secured loan ($7,525,000 par due 11/2011)   12.37% (Libor + 6.75%/S)   5/25/05     7,525,000     7,525,000     1.00      
LLC   services   Junior secured loan ($4,250,000 par due 11/2011)   12.37% (Libor + 6.75%/S)   5/25/05     4,250,000     4,250,000     1.00 (2)    
        Junior secured loan ($12,000,000 par due 11/2011)   12.37% (Libor + 6.75%/S)   5/25/05     12,000,000     12,000,000     1.00 (3)    

S-29


Daily Candy, Inc.(11)   Internet publication   Senior secured loan ($19,200,000 par due 5/2009)   10.62% (Libor + 5.00%/S)   5/25/06     19,494,406     19,200,000     0.98      
    provider   Senior secured loan ($4,800,000 par due 5/2009)   10.62% (Libor + 5.00%/S)   5/25/06     4,873,601     4,800,000     0.98 (3)    
        Senior secured loan ($700,000 par due 5/2009)   10.37% (Libor + 5.00%/Q)   5/25/06     700,000     700,000     1.00      
        Senior secured loan ($175,000 par due 5/2009)   10.37% (Libor + 5.00%/Q)   5/25/06     175,000     175,000     1.00 (3)    
        Common stock (1,250,000 shares)       5/25/06     2,375,000     2,375,000     1.90 (5)    
        Warrants to purchase (1,381,578 shares)       5/25/06     2,624,998     2,624,998     1.90 (5)    
National Print Group, Inc.   Printing management   Senior secured revolving loan ($1,338,451 par due 3/2012)   10.75% (Base Rate + 2.50%/D)   3/2/06     1,338,451     1,338,451     1.00      
    services   Senior secured loan ($11,047,826 par due 3/2012)   8.87% (Libor + 3.50%/Q)   3/2/06     11,047,826     11,047,826     1.00 (3)    
        Senior secured loan ($182,609 par due 3/2012)   10.75% (Base Rate + 2.50%/D)   3/2/06     182,609     182,609     1.00 (3)    
        Senior secured loan ($2,319,367 par due 3/2012)   12.32% (Libor + 7.00%/S)   3/2/06     2,319,368     2,319,368     1.00      
        Senior secured loan ($419,763 par due 8/2012)   12.32% (Libor + 7.00%/S)   3/2/06     419,763     419,763     1.00 (3)    
        Senior secured loan ($1,932,806 par due 8/2012)   12.49% (Libor + 7.00%/Q)   3/2/06     1,932,806     1,932,806     1.00      
        Senior secured loan ($349,802 par due 8/2012)   12.49% (Libor + 7.00%/Q)   3/2/06     349,802     349,802     1.00 (3)    
        Preferred stock (9,344 shares)       3/2/06     2,000,000     2,000,000     214.04 (5)    
The Teaching
Company, LLC
  Education publications   Senior secured revolving loan ($1,000,000 par due 9/2011)   12.25% (Base Rate + 4.00%/D)   9/28/06     1,000,000     1,000,000     1.00      
and The Teaching Company   provider   Senior secured loan ($6,250,000 par due 9/2012)   12.25% (Base Rate + 4.00%/D)   9/28/06     6,250,000     6,250,000     1.00      
Holdings, Inc.       Senior secured loan ($28,000,000 par due 9/2012)   10.50%(16)   9/28/06     28,000,000     28,000,000     1.00      
        Senior secured loan ($12,000,000 par due 9/2012)   10.50%(16)   9/28/06     12,000,000     12,000,000     1.00 (3)    
        Preferred stock (29,969 shares)       9/28/06     2,996,921     2,996,921     100.00 (5)    
        Common stock (3,079 shares)       9/28/06     3,079     3,079     1.00 (5)    
                   
 
           
                      123,858,630     123,490,623         16.70 %
                   
 
           
Manufacturing                                
Arrow Group Industries, Inc.   Residential and outdoor shed manufacturer   Senior secured loan ($6,000,000 par due 4/2010)   10.37% (Libor + 5.00%/Q)   3/28/05     6,038,785     6,000,000     1.00 (3)    
Emerald
Performance
  Polymers and performance   Senior secured loan ($10,473,684 par due 5/2011)   9.58% (Libor + 4.25%/M)   5/16/06     10,473,684     10,473,684     1.00      
Materials, LLC   materials manufacturer   Senior secured loan ($5,263,158 par due 5/2011)   11.33% (Libor + 6.00%/M)   5/16/06     5,263,158     5,263,158     1.00      
        Senior secured loan ($4,210,526 par due 5/2011)   13.00%   5/16/06     4,210,526     4,210,526     1.00      
Qualitor, Inc.   Automotive aftermarket   Senior secured loan ($1,965,000 par due 12/2011)   9.62% (Libor +4.25%/Q)   12/29/04     1,965,000     1,965,000     1.00 (3)    
    components supplier   Junior secured loan ($5,000,000 par due 6/2012)   12.62% (Libor + 7.25%/Q)   12/29/04     5,000,000     5,000,000     1.00 (3)    
Professional Paint, Inc.   Paint manufacturer   Junior secured loan ($16,500,000 par due 5/2013)   11.38% (Libor + 5.75%/S)   5/25/06     16,500,000     16,500,000     1.00      
Reflexite Corporation(10)   Developer and manufacturer of   Senior subordinated loan ($10,537,043 par due 12/2011)   11.00% cash, 3.00% PIK   12/30/04     10,537,043     10,537,043     1.00 (2)(4)    
    high visibility reflective products   Common Stock (1,729,627 shares)       3/28/06     25,682,891     25,682,891     14.85 (5)    
Universal Trailer   Livestock and   Common stock (50,000 shares)       10/8/04     6,424,645     4,154,665     83.09 (5)    
Corporation(6)   specialty trailer manufacturer   Warrants to purchase 22,208 shares       10/8/04     1,505,776     1,845,336     83.09 (5)    
Varel Holdings, Inc.   Drill bit manufacturer   Senior secured loan ($8,578,759 par due 12/2010)   9.49% (Libor + 4.00%/Q)   5/18/05     8,578,759     8,578,759     1.00 (3)    

S-30


        Senior secured loan ($3,333,333 par due 12/2011)   13.33% (Libor + 8.00%/M)   5/18/05     3,333,333     3,333,333     1.00 (3)    
        Senior secured revolving loan ($500,000 par due 10/2010)   10.50% (Base Rate + 2.25%/D)   5/18/05     500,000     500,000     1.00      
        Preferred stock (33,884 shares)       5/18/05     1,109,363     1,109,363     32.74 (5)    
        Common stock (30,451 shares)       5/18/05     3,045     1,011,569     33.22 (5)    
                   
 
           
                      107,126,008     106,165,327         14.36 %
                   
 
           
Services—Other                                
Diversified
Collection
  Collections services   Senior secured loan ($5,242,026 par due 2/2011)   9.57% (Libor +4.25%/M)   2/2/05     5,242,026     5,242,026     1.00 (3)    
Services, Inc.       Senior secured loan ($1,742,026 par due 8/2011)   11.37% (Libor + 6.00%/M)   2/2/05     1,742,026     1,742,026     1.00 (2)    
        Senior secured loan ($6,757,974 par due 8/2011)   11.37% (Libor + 6.00%/M)   2/2/05     6,757,974     6,757,974     1.00 (3)    
        Preferred stock (14,927 shares)       5/18/06     169,123     169,123     11.33 (5)    
        Common stock (114,004 shares)       2/2/05     295,270     295,270     2.59 (5)    
Event Rentals, Inc.   Party rental services   Senior secured loan ($2,277,902 par due 11/2011)   10.77% (Libor+ 5.25%/S)   11/17/05     2,277,902     2,277,902     1.00 (3)    
        Senior secured loan ($5,005,581 par due 11/2011)   10.69% (Libor + 5.25%/S)   11/17/05     5,005,581     5,005,581     1.00 (3)    
        Senior secured loan ($1,244,489 par due 11/2011)   10.74% (Libor + 5.25%/S)   11/17/05     1,244,489     1,244,489     1.00      
        Senior secured loan ($2,466,518 par due 11/2011)   10.74% (Libor + 5.25%/S)   11/17/05     2,466,518     2,466,518     1.00 (3)    
        Senior secured loan ($15,354 par due 11/2011)   12.50% (Base Rate + 4.25%/D)   11/17/05     15,354     15,354     1.00      
        Senior secured loan ($5,952 par due 11/2011)   12.50% (Base Rate + 4.25%/D)   11/17/05     5,952     5,952     1.00 (3)    
        Senior secured loan ($5,742,560 par due 11/2011)   10.77% (Libor + 5.25%/S)   11/17/05     5,742,560     5,742,560     1.00      
        Senior secured loan ($2,226,190 par due 11/2011)   10.77% (Libor + 5.25%/S)   11/17/05     2,226,190     2,226,190     1.00 (3)    
GCA Services Group, Inc.   Custodial services   Senior subordinated loan ($33,486,024 par due 1/2010)   12.00% cash, 3.00% PIK   7/25/05     33,486,024     33,486,024     1.00 (4)    
NPA Acquisition, LLC   Powersport vehicle auction   Senior secured loan ($5,000,000 par due 8/2012)   8.64% (Libor +3.25%/Q)   8/23/06     5,000,000     5,000,000     1.00      
    operator   Junior secured loan ($14,000,000 par due 2/2013)   12.12% (Libor + 6.75%/Q)   8/23/06     14,000,000     14,000,000     1.00      
        Common stock (1,709 shares)       8/23/06     1,000,000     1,000,000     585.14 (5)    
                   
 
           
                      86,676,989     86,676,989         11.72 %
                   
 
           
Retail                                
Savers, Inc and SAI Acquisition   For-profit thrift retailer   Senior subordinated note ($28,077,778 par due 8/2014)   10.00% cash, 2.00% PIK   8/8/06     28,077,778     28,077,778     1.00 (4)    
Corporation       Common stock (1,170,182 shares)       8/8/06     4,500,000     4,500,000     3.85 (5)    
Things Remembered, Inc. and TRM   Personalized gifts retailer   Senior secured revolving loan ($357,143 par due 9/2012)   12.00% (Base Rate + 3.75%/D)(17)   9/28/06     357,143     357,143     1.00      
Holdings Corporation       Senior secured loan ($4,800,000 par due 9/2012)   12.00% (Base Rate + 3.75%/D)   9/28/06     4,800,000     4,800,000     1.00 (3)    
        Senior secured loan ($28,000,000 par due 9/2013)   13.25% (Base Rate + 5.00%/D)   9/28/06     28,000,000     28,000,000     1.00      
        Senior secured loan ($7,200,000 par due 9/2013)   13.25% (Base Rate + 5.00%/D)   9/28/06     7,200,000     7,200,000     1.00 (3)    
        Preferred stock (80 shares)       9/28/06     1,800,000     1,800,000     22,500.00 (5)    
        Common stock (800 shares)       9/28/06     200,000     200,000     250.00 (5)    
                   
 
           
                      74,934,921     74,934,921         10.14 %
                   
 
           
Containers—Packaging                                
Captive Plastics, Inc.   Plastics container   Junior secured loan ($4,000,000 par due 2/2012)   12.76% (Libor + 7.25%/Q)   12/19/05     4,000,000     4,000,000     1.00      
    manufacturer   Junior secured loan ($12,000,000 par due 2/2012)   12.76% (Libor + 7.25%/Q)   12/19/05     12,000,000     12,000,000     1.00 (3)    

S-31


Industrial Container Services, LLC(8)   Industrial container   Senior secured loan ($96,250 par due 9/2011)   13.25% (Base Rate + 5.00%/D)   9/30/05     96,250     96,250     1.00      
    manufacturer, reconditioner   Senior secured loan ($30,227 par due 9/2011)   13.25% (Base Rate + 5.00%/D)   9/30/05     30,227     30,227     1.00 (3)    
    and servicer   Senior secured loan ($11,939,547 par due 9/2011)   11.94% (Libor + 6.50%/S)   9/30/05     11,939,547     11,939,547     1.00 (3)    
        Senior secured loan ($16,450,281 par due 9/2011)   11.94% (Libor + 6.50%/S)   6/21/06     16,450,281     16,450,281     1.00      
        Senior secured revolving loan ($25,000 par due 9/2011)   11.89% (Libor + 6.50%/Q)   9/30/05     25,000     25,000     1.00      
        Senior secured revolving loan ($9,950,000 par due 9/2011)   11.94% (Libor + 6.50.%/S)   9/30/05     9,950,000     9,950,000     1.00      
        Senior secured revolving loan ($4,130,435 par due 9/2011)   10.02% (Libor + 4.50%/Q)   9/30/05     4,130,435     4,130,435     1.00      
        Senior secured revolving loan ($826,087 par due 9/2011)   9.82% (Libor + 4.50%/D)   9/30/05     826,087     826,087     1.00      
        Senior secured revolving loan ($826,087 par due 9/2011)   9.83% (Libor + 4.50%/D)   9/30/05     826,087     826,087     1.00      
        Senior secured revolving loan ($1,156,522 par due 9/2011)   11.25% (Base Rate + 3.00%/D)   9/30/05     1,156,522     1,156,522     1.00      
        Common stock (1,800,000 shares)       9/29/05     1,800,000     1,800,000     1.00 (5)    
LabelCorp Holdings, Inc.   Consumer product labels manufacturer   Senior subordinated notes ($9,250,088 par due 9/2012)   12.00% cash, 3.00% PIK   3/16/06     9,250,088     9,250,088     1.00 (4)    
                   
 
           
                      72,480,524     72,480,524         9.80 %
                   
 
           
Consumer Products—Non-Durable                                
Making Memories Wholesale, Inc.(7)   Scrapbooking branded   Senior secured loan ($7,916,667 par due 3/2011)   9.875% (Libor + 4.50%/Q)   5/5/05     7,916,667     7,916,667     1.00 (3)    
    products manufacturer   Senior subordinated loan ($10,152,435 par due 5/2012)   12.50% cash, 2.00% PIK   5/5/05     10,152,435     10,152,435     1.00 (4)    
        Preferred stock (3,500 shares)       5/5/05     3,758,800     1,320,000     351.25 (4)    
Shoes for Crews, LLC   Safety footwear and slip-related   Senior secured loan ($1,370,173 par due 7/2010)   8.87% (Libor +3.25%/S)   10/8/04     1,378,236     1,378,236     1.00 (3)    
    mats   Senior secured revolving loan ($3,333,333 par due 7/2010)   10.25% (Base Rate + 2.00%/D)   6/16/06     3,333,333     3,333,333     1.00      
Tumi Holdings, Inc.   Branded
luggage
  Senior secured loan ($2,500,000 par due 12/2012)   8.11% (Libor + 2.75%/Q)   5/24/05     2,500,000     2,500,000     1.00 (3)    
    designer, marketer and   Senior secured loan ($5,000,000 par due 12/2013)   8.62% (Libor + 3.25%/Q)   3/14/05     5,000,000     5,000,000     1.00 (3)    
    distributor   Senior subordinated loan ($13,510,171 par due 12/2014)   16.37% (Libor + 6.00% cash, 5.00% PIK/Q)   3/14/05     13,510,171     13,510,171     1.00 (2)(4)    
UCG Paper Crafts, Inc.   Scrapbooking materials   Senior secured loan ($1,990,000 par due 2/2013)   8.58% (Libor +3.25%/M)   2/23/06     1,990,000     1,990,000     1.00 (3)    
    manufacturer   Junior secured loan ($2,960,063 par due 2/2013)   12.83% (Libor + 7.50%/M)   2/23/06     2,960,063     2,960,063     1.00      
        Junior secured loan ($9,974,937 par due 2/2013)   12.83% (Libor + 7.50%/M)   2/23/06     9,974,937     9,974,937     1.00 (3)    
                   
 
           
                      62,474,642     60,035,842         8.12 %
                   
 
           
Education                                
Equinox
SMU partners
  Medical school operator   Senior secured revolving loan ($1,550,000 par due 12/2010)   13.25% (Base Rate + 5.00%/Q)   1/26/06     1,550,000     1,550,000     1.00      
LLC and SMU
Acquisition
      Senior secured revolving loan ($2,032,342 par due 12/2010)   11.06% (Libor + 6.00%/S)   1/26/06     2,032,342     2,032,342     1.00      
Corp.(9)(13)       Senior secured loan ($10,162,500 par due 12/2010)   11.39% (Libor + 6.00%/Q)   1/26/06     10,162,500     10,162,500     1.00 (3)    
        Senior secured loan ($1,500,000 par due 12/2010)   11.39% (Libor + 6.00%/Q)   1/26/06     1,500,000     1,500,000     1.00      
        Senior secured loan ($1,500,000 par due 12/2010)   11.39% (Libor + 6.00%/Q)   1/26/06     1,500,000     1,500,000     1.00 (3)    
        Limited liability company membership interest (17.39% interest)       1/25/06     4,000,000     4,000,000       (5)    

S-32


Lakeland Finance, LLC   Private school operator   Senior secured note ($33,000,000 par due 12/2012)   11.50%   12/13/05     33,000,000     33,000,000     1.00      
                   
 
           
                      53,744,842     53,744,842         7.27 %
                   
 
           
Business Services                                
Investor Group Services, LLC   Financial services   Senior secured loan ($1,500,000 par due 6/2011)   12.00%   6/22/06     1,500,000     1,500,000     1.00 (3)    
        Senior secured loan ($500,000 par due 6/2011)   11.04% (Libor + 5.50%/S)   6/22/06     500,000     500,000     1.00      
        Senior secured loan ($150,000 par due 6/2011)   12.75% (Base Rate + 4.50%/D)   6/22/06     150,000     150,000     1.00      
        Limited liability company membership interest (10.00% interest)       6/22/06               (5)    
Miller Heiman, Inc.   Sales consulting services   Senior secured loan ($3,173,113 par due 6/2010)   8.83% (Libor + 3.50%/M)   6/20/05     3,173,113     3,173,113     1.00 (3)    
        Senior secured loan ($4,027,788 par due 6/2012)   9.37% (Libor + 4.00%/Q)   6/20/05     4,027,788     4,027,788     1.00 (3)    
MR Processing Holding Corp.   Bankruptcy and foreclosure   Senior subordinated note ($20,202,733 par due 2/2013)   12.00% Cash, 2.00% PIK   3/23/06     20,202,733     20,202,733     1.00 (4)    
    processing services   Senior secured loan ($1,990,000 par due 2/2012)   9.02% (Libor + 3.50%/S)   3/28/06     1,990,000     1,990,000     1.00      
        Preferred stock (30,000 shares)       4/11/06     3,000,000     3,000,000     100.00 (5)    
Primis Marketing Group, Inc. and   Database marketing   Senior secured loan ($10,024,306 par due 2/2013)   11.00% Cash, 2.50% PIK   8/24/06     10,024,306     10,024,306     1.00 (4)    
Primis Holdings,   services   Preferred stock (4,000 shares)       8/24/06     3,600,000     3,600,000     9.00 (5)    
LLC(12)       Common stock (4,000,000 shares)       8/24/06     400,000     400,000     0.10 (5)    
                   
 
           
                      48,567,940     48,567,940         6.57 %
                   
 
           
Restaurants                                
ADF Capital, Inc. & ADF Restaurant   Restaurant owner and   Senior secured revolving loan ($1,700,000 par due 6/2013)   13.75% (Base Rate + 5.50%/D)   6/1/06     1,700,000     1,700,000     1.00      
Group, LLC   operator   Senior secured loan ($5,970,000 par due 6/2013)   13.75% (Base Rate + 5.50%/D)   6/1/06     5,970,000     5,970,000     1.00      
        Senior secured loan ($11,940,000 par due 6/2013)   13.75% (Base Rate + 5.50%/D)   6/1/06     11,940,000     11,940,000     1.00 (3)    
        Warrants to purchase 0.882353 units       6/1/06     2,410,000     2,410,000       (5)    
Encanto Restaurants, Inc.(13)   Restaurant owner and operator   Junior secured loan ($25,104,514 par due 8/2013)   7.50% Cash, 3.50% PIK   8/16/06     25,104,514     25,104,514     1.00 (4)    
                   
 
           
                      47,124,514     47,124,514         6.37 %
                   
 
           
Environmental Services                                
Mactec, Inc.   Engineering and environmental   Common stock (186 shares)       11/3/04             0.00 (5)    
Wastequip, Inc.   Waste management   Junior secured loan ($15,000,000 par due 7/2012)   10.82% (Libor + 5.50%/M)   8/4/05     15,000,000     15,000,000     1.00      
    equipment manufacturer   Junior secured loan ($12,000,000 par due 7/2012)   10.82% (Libor + 5.50%/M)   8/4/05     12,000,000     12,000,000     1.00 (3)    
                   
 
           
                      27,000,000     27,000,000         3.65 %
                   
 
           
Aerospace & Defense                                
ILC Industries, Inc.   Industrial products   Junior secured loan ($12,000,000 par due 8/2012)   11.50%   6/27/06     12,000,000     12,000,000     1.00 (3)    
    provider   Junior secured loan ($3,000,000 par due 8/2012)   11.50%   6/27/06     3,000,000     3,000,000     1.00      
Thermal Solutions LLC and TSI   Thermal management   Senior secured loan ($3,233,750 par due 3/2012)   9.52% (Libor + 4.00%/Q)   3/28/05     3,233,750     3,233,750     1.00 (3)    
Group, Inc.   and electronics packaging   Senior secured loan ($1,657,895 par due 3/2011)   9.02% (Libor + 3.50%/Q)   3/28/05     1,657,895     1,657,895     1.00 (3)    
    manufacturer   Senior subordinated notes ($3,105,314 par due 9/2012)   11.50% cash, 2.75% PIK   3/28/05     3,114,692     3,105,314     1.00 (2)(4)    
        Senior subordinated notes ($2,532,920 par due 3/2013)   11.50% cash, 2.50% PIK   3/21/06     2,532,920     2,532,920     1.00 (2)(4)    

S-33


        Preferred stock (53,900 shares)       3/28/05     539,000     539,000     10.00 (5)    
        Common stock (1,100,000 shares)       3/28/05     11,000     11,000     0.01 (5)    
                   
 
           
                      26,089,257     26,079,879         3.53 %
                   
 
           
Broadcasting and Cable                                
Patriot Media & Communications CNJ, LLC   Cable services   Junior secured loan ($5,000,000 par due 10/2013)   10.50% (Libor +5.00%/S)   10/6/05     5,000,000     5,000,000     1.00 (3)    
Pappas Telecasting Incorporated   Television broadcasting   Senior secured loan ($12,106,413 par due 2/2010)   14.29% (Libor + 4.00% cash, 5.00% PIK/Q)   3/1/06     12,106,413     12,106,413     1.00 (4)(3)    
        Senior secured loan ($8,413,094 par due 2/2010)   14.29% (Libor + 4.00% cash, 5.00% PIK/Q)   3/1/06     8,413,094     8,413,094     1.00 (4)    
        Senior secured loan ($51,612 par due 2/2010)   14.25% (Libor + 4.00% cash, 5.00% PIK/Q)   3/1/06     51,612     51,612     1.00 (4)(3)    
        Senior secured loan ($35,867 par due 2/2010)   14.25% (Libor + 4.00% cash, 5.00% PIK/Q)   3/1/06     35,867     35,867     1.00 (4)    
                   
 
           
                      25,606,986     25,606,986         3.46 %
                   
 
           
Computers and Electronics                                
RedPrairie Corporation   Software manufacturer   Junior secured loan ($12,000,000 par due 5/2010)   11.90% (Libor + 6.50%/Q)   2/21/06     12,000,000     12,000,000     1.00 (3)    
X-rite, Incorporated   Artwork software manufacturer   Junior secured loan ($10,000,000 par due 7/2013)   10.39% (Libor + 5.00%/Q)   7/6/06     10,000,000     10,000,000     1.00      
                   
 
           
                      22,000,000     22,000,000         2.98 %
                   
 
           
Consumer Products—Durable                                
AWTP, LLC   Water treatment services   Junior secured loan ($1,600,000 par due 12/2012)   12.87% (Libor + 7.50%/Q)   12/21/05     1,600,000     1,600,000     1.00      
        Junior secured loan ($12,000,000 par due 12/2012)   12.87% (Libor + 7.50%/Q)   12/21/05     12,000,000     12,000,000     1.00 (3)    
Berkline/Benchcraft Holdings LLC   Furniture manufacturer   Junior secured loan ($5,000,000 par due 5/2012)   15.51% (Libor + 10.00%/Q)   11/3/04     5,000,000     1,000,000     0.20 (2)    
    and distributor   Preferred stock (2,536 shares)       10/8/04     1,046,343         0.00 (5)    
        Warrants to purchase (483,020 shares)       10/8/04     2,752,559         0.00 (5)    
                   
 
           
                      22,398,902     14,600,000         1.97 %
                   
 
           
Cargo Transport                                
The Kenan Advantage Group,   Fuel transportation   Senior subordinated notes ($9,117,466 par due 12/2013)   9.50% cash, 3.50% PIK   12/15/05     9,117,466     9,117,466     1.00 (4)    
Inc.   provider   Senior secured loan ($2,144,490 par due 12/2011)   8.37% (Libor + 3.00%/Q)   12/15/05     2,144,490     2,144,490     1.00 (3)    
        Senior secured loan ($336,765 par due 12/2011)   8.37% (Libor + 3.00%/Q)   12/15/05     336,765     336,765     1.00 (3)    
        Preferred stock (10,984 shares)       12/15/05     1,098,400     1,098,400     100.00 (5)    
        Common stock (30,575 shares)       12/15/05     30,575     30,575     1.00 (5)    
                   
 
           
                      12,727,696     12,727,696         1.72 %
                   
 
           
Beverage, Food and Tobacco                                
Farley's & Sathers
Candy Company, Inc.
  Branded candy manufacturer   Junior secured loan ($10,000,000 par due 3/2011)   11.62%(Libor + 6.00%/S)   3/23/06     10,000,000     10,000,000     1.00 (3)    
Charter Baking Company, Inc.   Baked goods manufacturer   Preferred stock (6,258 shares)       8/28/06     2,500,000     2,500,000     399.49 (5)    
                   
 
           
                      12,500,000     12,500,000         1.69 %
                   
 
           

S-34


Farming and Agriculture                                
The GSI Group, Inc.   Agricultural equipment   Senior notes ($10,000,000 par due 5/2013)   12.00%   5/11/05     10,000,000     10,000,000     1.00      
    manufacturer   Common stock (7,500 shares)       5/12/05     750,000     750,000     100.00 (5)    
                   
 
           
                      10,750,000     10,750,000         1.45 %
                   
 
           
Housing—Building Materials                                
HB&G Building Products   Synthetic and wood product   Senior subordinated loan ($8,619,107 par due 3/2011)   13.00% cash, 2.00% PIK   10/8/04     8,612,509     8,619,107     1.00 (2)(4)    
    manufacturer   Common stock (2,743 shares)       10/8/04     752,888     752,888     274.48 (5)    
        Warrants to purchase (4,464 shares)       10/8/04     652,503     652,503     146.17 (5)    
                   
 
           
                      10,017,900     10,024,498         1.36 %
                   
 
           
Financial                                
Foxe Basin CLO 2003, Ltd.(13)   Collateralized debt obligation   Preference shares (3,000 shares)       10/8/04     2,621,092     2,621,092     873.70 (14)    
Hudson Straits CLO 2004, Ltd.(13)   Collateralized debt obligation   Preference shares (5,750 shares)       10/8/04     4,790,341     4,722,074     821.23 (14)    
Partnership Capital Growth Fund I, L.P.   Investment partnership   Limited partnership interest (25% interest)             201,835     201,835       (5)(14)    
                   
 
           
                      7,613,268     7,545,001         1.02 %
                   
 
           
Total                   $ 1,044,109,177   $ 1,032,987,288            
                   
 
           

(1)
We do not "Control" any of our portfolio companies, as defined in the Investment Company Act of 1940. In general, under the 1940 Act, we would "Control" a portfolio company if we owned 25% or more of its voting securities. All of our portfolio company investments are subject to legal restriction on sales which as of September 30, 2006 represented 140% of the Company's net assets.

(2)
Pledged as collateral for the CP Funding Facility and, unless otherwise noted, all other investments are pledged as collateral for the Revolving Credit Facility (see Note 7 to the consolidated financial statements).

(3)
Pledged as collateral for the ARCC CLO and unless otherwise noted, all other investments are pledged as collateral for the Revolving Credit Facility (see Note 7 to the consolidated financial statements).

(4)
Has a payment-in-kind interest feature (see Note 2 to the consolidated financial statements).

(5)
Non-income producing at September 30, 2006.

(6)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the nine months ended September 30, 2006, for this portfolio company there were total purchases of $5,000,000, redemptions of $7,528,880 (cost), sales of $6,054,725 (cost), interest income of $176,732, other income of $3,125, net realized gains of $47,283 and net unrealized gains of $1,497,706.

(7)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the nine months ended September 30, 2006, for this portfolio company there were total redemptions of $1,227,083 (cost), interest income of $1,725,019, other income of $83,150 and net unrealized losses of $2,438,800.

(8)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the nine months ended September 30, 2006, for this portfolio company there were total purchases of $22,928,652, redemptions of $10,572,968 (cost), interest income of $3,244,410, capital structuring service fees of $350,000 and other income of $89,767.

(9)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the nine months ended September 30, 2006, for this portfolio company there were total purchases of $35,082,342, redemptions of $14,337,500 (cost), interest income of $1,510,932, capital structuring service fees of $583,810 and other income of $14,543.

(10)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the nine months ended September 30, 2006, there were total purchases of $25,682,89, interest income of $1,085,997 and dividend income of $121,074.

(11)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the nine months ended September 30, 2006, there were total purchases of $30,000,000, redemptions of $125,000 (cost), interest income of $973,888 and capital structuring service fees of $250,000.

(12)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the nine months ended September 30, 2006, there were total purchases of $14,000,000,interest income of $131,250 and capital structuring service fees of $200,000.

(13)
Non-U.S. company or principal place of business outside the U.S.

(14)
Non-registered investment company.

(15)
A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either Libor or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower's option, which reset semi-annually (S), quarterly (Q), bi-monthly (B) monthly (M) or daily (D). For each such loan, we have provided the current interest rate in effect at September 30, 2006.

S-35


(16)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.50% on $24,166,667 aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

(17)
In addition to the interest earned based on the stated interest rate of this security, we are entitled to receive an additional interest amount of 2.25% on $2,142,858 aggregate principal amount of the portfolio company's senior term debt previously syndicated by us.

See accompanying notes to consolidated financial statements.

S-36



ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2005

Company(1)
  Industry
  Investment
  Interest(10)
  Initial Acquisition
Date

  Amortized Cost
  Fair Value
  Fair Value Per Unit
  Percentage of Net Assets
 
Healthcare—Services                                
American Renal Associates, Inc.   Dialysis provider   Senior secured loan ($3,426,230 par due 12/2010)   8.68% (Libor+ 4.00%/Q)   12/14/05   $ 3,426,230   $ 3,426,230   $ 1.00      
        Senior secured loan ($180,328 par due 12/2010)   8.50% (Libor+ 4.00%/Q)   12/14/05     180,328     180,328     1.00      
        Senior secured loan ($5,886,885 par due 12/2011)   9.18% (Libor + 4.50%/Q)   12/14/05     5,886,885     5,886,885     1.00      
        Senior secured loan ($14,754 par due 12/2011)   9.00% (Libor+ 4.50%/Q)   12/14/05     14,754     14,754     1.00      
        Senior secured loan ($7,213,115 par due 12/2011)   11.68% (Libor + 7.00%/Q)   12/14/05     7,213,115     7,213,115     1.00      
Capella Healthcare, Inc.   Acute care hospital operator   Junior secured loan ($29,000,000 par due 11/2013)   10.45% (Libor +6.00%/Q)   12/1/05     29,000,000     29,000,000     1.00      
PHNS, Inc.   Information technology and business process outsourcing   Senior subordinated loan ($16,000,000 par due 11/2011)   13.50% cash, 2.5% PIK   10/29/04     15,785,661     16,000,000     1.00 (3)    
Triad Laboratory Alliance, LLC   Laboratory services   Senior subordinated loan ($9,714,888 par due 12/2012)   12.00% cash, 1.75% PIK   12/21/05     9,714,888     9,714,888     1.00 (3)    
        Senior secured loan ($3,000,000 par due 12/2011)   7.78% (Libor + 3.25%/Q)   12/21/05     3,000,000     3,000,000     1.00      
                   
 
           
                      74,221,861     74,436,200         13.07 %
                   
 
           
Containers—Packaging                                
Captive Plastics, Inc.   Plastics container manufacturer   Junior secured loan ($16,000,000 par due 2/2012)   11.62% (Libor +7.25%/M)   12/19/05     16,000,000     16,000,000     1.00      
Industrial Container Services, LLC(7)   Industrial container   Senior secured loan ($26,728,663 par due 9/2011)   11.00% (Libor + 6.50%/Q)   9/30/05     26,728,663     26,728,663     1.00      
    manufacturer, reconditioner   Senior secured loan ($4,643,479 par due 9/2011)   8.88% (Libor + 4.50%/M)   9/30/05     4,643,479     4,643,479     1.00      
    and servicer   Senior secured revolving loan ($1,160,870 par due 9/2011)   10.25% (Base Rate + 3.00%/Q)   9/30/05     1,160,870     1,160,870     1.00      
        Senior secured revolving loan ($541,739 par due 9/2011)   10.25% (Base Rate + 3.00%/Q)   9/30/05     541,739     541,739     1.00      
        Common stock (1,800,000 shares)       9/29/05     1,800,000     1,800,000     1.00 (4)    
York Label Holdings, Inc.   Consumer product labels   Senior subordinated loan ($10,368,791 par due 2/2010)   10.00% cash, 4.00% PIK   11/3/04     10,362,901     10,368,791     1.00 (2)(3)    
    manufacturer   Preferred stock (650 shares)   10.00%   11/3/04     3,742,445     3,742,445     5,757.61 (3)    
        Warrants to purchase 156,000 shares       11/3/04     5,320,409     5,320,408     34.11 (4)    
                   
 
           
                      70,300,506     70,306,395         12.34 %
                   
 
           
Environmental Services                                
Mactec, Inc.   Engineering and environmental consulting services   Common stock (186 shares)       11/3/04             0.00 (4)    

S-37


United Site Services, Inc.   Portable restroom and   Senior secured loan ($5,061,957 par due 8/2011)   7.37% (Libor +3.00%/M)   9/14/05     5,061,957     5,061,957     1.00      
    site services   Senior secured loan ($3,043,478 par due 8/2011)   7.41% (Libor + 3.00%/Q)   9/14/05     3,043,478     3,043,478     1.00      
        Senior secured loan ($1,869,565 par due 8/2011)   7.28% (Libor + 3.00%/Q)   9/14/05     1,869,565     1,869,565     1.00      
        Junior secured loan ($13,461,538 par due 6/2010)   12.44% (Libor + 8.00%/Q)   12/1/04     13,419,063     13,461,538     1.00 (2)    
        Common stock (216,795 shares)       10/8/04     1,353,851     1,353,851     6.24 (4)    
Wastequip, Inc.   Waste management equipment manufacturer   Junior secured loan ($15,000,000 par due 7/2012)   10.53% (Libor +6.00%/Q)   8/4/05     15,000,000     15,000,000     1.00      
WCA Waste Systems, Inc.   Waste management services   Junior secured loan ($25,000,000 par due 10/2011)   10.53% (Libor + 6.00%/Q)   4/25/05     25,000,000     25,000,000     1.00 (2)    
                   
 
           
                      64,747,914     64,790,389         11.37 %
                   
 
           
Restaurants                                
CICQ, LP   Restaurant franchisor, owner and operator   Limited partnership interest (26.5% interest)       8/15/05     53,000,000     62,284,540            
                   
 
           
                      53,000,000     62,284,540         10.93 %
                   
 
           
Services—Other                                
Diversified Collection   Collections services   Senior secured loan ($6,300,000 par due 2/2011)   8.38% (Libor +4.00%/M)   2/2/05     6,300,000     6,300,000     1.00 (2)    
Services, Inc.       Senior secured loan ($8,500,000 par due 8/2011)   10.00% (Libor + 6.00%/Q)   2/2/05     8,500,000     8,500,000     1.00 (2)    
        Preferred stock (114,004 shares)   2/2/05   295,270     295,270     2.59(4 )          
Event Rentals, Inc.   Party rental services   Senior secured loan ($2,676,136 par due 11/2011)   9.91% (Libor+ 5.25%/S)   11/17/05     2,676,136     2,676,136     1.00      
        Senior secured loan ($2,897,727 par due 11/2011)   9.92% (Libor + 5.25%Q)   11/17/05     2,897,727     2,897,727     1.00      
        Senior secured loan ($170,455 par due 11/2011)   11.50% (Base Rate + 4.25%/D)   11/17/05     170,455     170,455     1.00      
        Senior secured loan ($8,011,363 par due 11/2011)   9.91% (Libor + 5.25%/S)   11/17/05     8,011,363     8,011,363     1.00      
GCA Services, Inc.   Custodial services   Senior subordinated loan ($32,743,750 par due 1/2010)   12.00% cash, 3.00% PIK   7/25/05     32,743,750     32,743,750     1.00 (3)    
                   
 
           
                      61,594,701     61,594,701         10.81 %
                   
 
           
Manufacturing                                
Arrow Group Industries, Inc.   Residential and outdoor shed   Senior secured loan ($6,000,000 par due 4/2010)   9.53% (Libor + 5.00%/Q)   3/28/05     6,040,153     6,000,000     1.00      
    manufacturer   Senior secured loan ($6,000,000 par due 10/2010)   14.03% (Libor + 9.50%/Q)   3/28/05     6,000,000     6,000,000     1.00      
Qualitor, Inc.   Automotive aftermarket   Senior secured loan ($827,059 par due 12/2011)   8.27% (Libor +4.00%/Q)   12/29/04     827,059     827,059     1.00 (2)    
    components supplier   Senior secured loan ($1,152,941 par due 12/2011)   8.53% (Libor + 4.00%/Q)   12/29/04     1,152,941     1,152,941   $ 1.00 (2)    
        Junior secured loan ($5,000,000 par due 6/2012)   11.53% (Libor + 7.00%/Q)   12/29/04     5,000,000     5,000,000   $ 1.00 (2)    
Reflexite Corporation   Developer and manufacturer of high visibility reflective products   Senior subordinated loan ($10,304,329 par due 12/2011)   11.00% cash, 3.00% PIK   12/30/04     10,304,329     10,304,329   $ 1.00 (2)(3)    
Universal Trailer Corporation(5)   Livestock and specialty trailer   Senior secured loan ($1,048,960 par due 3/2007)   8.39% (Libor + 4.00%/M)   10/8/04     1,054,725     1,054,725   $ 1.01      
    manufacturer   Senior subordinated loan ($7,500,000 par due 9/2008)   13.50%   10/8/04     7,522,762     7,528,881   $ 1.00      
        Common stock (50,000 shares)       10/8/04     6,424,645     3,113,351   $ 62.27 (4)    
        Warrants to purchase 22,208 shares       10/8/04     1,505,776     1,382,826   $ 62.27 (4)    

S-38


Varel Holdings, Inc.   Drill bit manufacturer   Senior secured loan ($6,643,750 par due 12/2010)   8.58% (Libor + 4.00%/S)   5/18/05     6,643,750     6,643,750   $ 1.00 (2)    
        Senior secured loan ($2,333,333 par due 12/2010)   8.47% (Libor + 4.00%/Q)   5/18/05     2,333,333     2,333,333   $ 1.00 (2)    
        Senior secured loan ($3,333,333 par due 12/2011)   12.48% (Libor + 8.00%/Q)   5/18/05     3,333,333     3,333,333   $ 1.00 (2)    
        Preferred stock (30,451 shares)       5/18/05     1,046,568     1,046,568   $ 34.37 (3)    
        Common stock (30,451 shares)       5/18/05     3,045     3,045   $ 0.10 (4)    
                   
 
           
                      59,192,419     55,724,141         9.78 %
                   
 
           
Consumer Products—Non-Durable                                
Making Memories Wholesale, Inc.(6)   Scrapbooking branded   Senior secured loan ($9,143,750 par due 3/2011)   8.50% (Libor + 4.00%/Q)   5/5/05     9,143,750     9,143,750   $ 1.00 (2)    
    products manufacturer   Senior subordinated loan ($10,000,000 par due 5/2012)   12.00% cash, 2.50% PIK   5/5/05     10,000,000     10,000,000   $ 1.00 (3)    
        Preferred stock (3,500 shares)       5/5/05     3,685,100     3,685,100   $ 1,052.89 (3)    
Shoes for Crews, LLC   Safety footwear and slip-related   Senior secured loan ($1,478,167 par due 7/2010)   9.00% (Base Rate + 1.75%/D)   10/8/04     1,486,865     1,486,865   $ 1.01 (2)    
    mats manufacturer   Senior secured loan ($47,247 par due 7/2010)   7.78% (Libor + 3.25%/Q)   10/8/04     47,525     47,525   $ 1.01 (2)    
Tumi Holdings, Inc.   Branded luggage   Senior secured loan ($2,500,000 par due 12/2012)   7.28% (Libor + 2.75%/Q)   5/24/05     2,500,000     2,500,000   $ 1.00 (2)    
    designer, marketer and   Senior secured loan ($5,000,000 par due 12/2013)   7.78% (Libor + 3.25%/Q)   3/14/05     5,000,000     5,000,000   $ 1.00 (2)    
    distributor   Senior subordinated loan ($13,008,799 par due 12/2014)   15.53% (Libor + 6.00% cash, 5.00% PIK/Q)   3/14/05     13,008,799     13,008,799   $ 1.00 (2)(3)    
                   
 
           
                      44,872,039     44,872,039         7.88 %
                   
 
           
Education                                
Lakeland Finance, LLC   Private school operator   Senior secured note ($33,000,000 par due 12/2012)   11.50%   12/13/05     33,000,000     33,000,000   $ 1.00      
                   
 
           
                      33,000,000     33,000,000         5.79 %
                   
 
           
Consumer Products—
Durable
                               
AWTP, LLC   Water treatment services   Junior secured loan ($13,600,000 par due 12/2012)   13.50% (Base Rate + 6.25%/Q)   12/21/05     13,600,000     13,600,000   $ 1.00      
Berkline/Benchcraft Holdings LLC   Furniture manufacturer   Junior secured loan ($5,000,000 par due 5/2012)   14.05% (Libor + 10.00%/Q)   11/3/04     5,000,000     4,500,000   $ 0.90 (2)    
    and distributor   Preferred stock (2,536 shares)       10/8/04     1,046,343     677,643   $ 267.21 (4)    
        Warrants to purchase 483,020 shares       10/8/04     2,752,559     1,782,640   $ 3.69 (4)    
                   
 
           
                      22,398,902     20,560,283         3.61 %
                   
 
           
Financial                                
Foxe Basin CLO 2003, Ltd.   Collateralized debt obligation   Preference shares (3,000 shares)       10/8/04     2,743,440     2,743,440   $ 914.48 (8)(9)    
Hudson Straits CLO 2004, Ltd.   Collateralized debt obligation   Preference shares (5,750 shares)       10/8/04     5,217,331     5,143,121   $ 894.46 (8)(9)    
MINCS-Glace Bay, Ltd.   Collateralized debt obligation   Secured notes ($9,500,000 par due 7/2014)   7.79% (Libor + 3.60%/Q)   10/8/04     9,019,819     9,500,000   $ 1.00 (8)(9)    
                   
 
           
                      16,980,590     17,386,561         3.05 %
                   
 
           
Printing, Publishing and Broadcasting                                
Canon Communications LLC   Print publications services   Junior secured loan ($16,250,000 par due 11/2011)   12.03% (Libor + 7.50%/Q)   5/25/05     16,250,000     16,250,000   $ 1.00 (2)    
                   
 
           
                      16,250,000     16,250,000         2.85 %
                   
 
           
Aerospace & Defense                                
ILC Industries, Inc.   Industrial products provider   Junior secured loan ($6,500,000 par due 8/2012)   10.28% (Libor + 5.75%/Q)   8/30/05     6,529,232     6,500,000   $ 1.00      

S-39


Thermal Solutions LLC   Thermal management   Senior secured loan ($5,973,529 par due 3/2011)   9.71% (Libor + 5.25%/Q)   3/28/05     5,973,529     5,973,529   $ 1.00 (2)    
    and electronics packaging   Senior subordinated loan ($3,062,766 par due 3/2012)   11.50% cash, 2.75% PIK   3/28/05     3,067,225     3,062,766   $ 1.00 (2)(3)    
    manufacturer   Preferred stock (29,400 shares)       3/28/05     294,000     294,000   $ 10.00 (4)    
        Common stock (600,000 shares)       3/28/05     6,000     6,000   $ 0.01 (4)    
                   
 
           
                      15,869,986     15,836,295         2.78 %
                   
 
           
Cargo Transport                                
Kenan Advantage Group, Inc.   Fuel transportation   Senior subordinated loan ($8,870,968 par due 12/2013)   13.00%   12/15/05     8,870,968     8,870,968   $ 1.00      
    provider   Senior secured loan ($2,500,000 par due 12/2011)   7.50% (Libor + 3.00%/Q)   12/15/05     2,500,000     2,500,000   $ 1.00      
        Preferred stock (10,984 shares)       12/15/05     1,098,400     1,098,400   $ 100.00 (4)    
        Common stock (30,575 shares)       12/15/05     30,575     30,575   $ 1.00 (4)    
                   
 
           
                      12,499,943     12,499,943         2.19 %
                   
 
           
Farming and Agriculture                                
The GSI Group, Inc.   Agricultural equipment   Senior notes ($10,000,000 par due 5/2013)   12.00%   5/11/05     10,000,000     10,000,000   $ 1.00      
    manufacturer   Common stock (7,500 shares)       5/12/05     750,000     750,000   $ 100.00 (4)    
                   
 
           
                      10,750,000     10,750,000         1.89 %
                   
 
           
Housing—Building Materials                                
HB&G Building Products   Synthetic and wood product   Senior subordinated loan ($8,439,529 par due 3/2011)   13.00% cash, 4.00% PIK   10/8/04     8,435,645     8,439,529   $ 1.00 (2)(3)    
    manufacturer   Common stock (2,743 shares)       10/8/04     752,888     752,888   $ 274.48 (4)    
        Warrants to purchase 4,464 shares       10/8/04     652,503     652,503   $ 146.17 (4)    
                   
 
           
                      9,841,036     9,844,920         1.73 %
                   
 
           
Business Services                                
Miller Heiman, Inc.   Sales consulting services   Senior secured loan ($4,521,687 par due 6/2010)   8.14% (Libor + 3.75%/M)   6/20/05     4,521,687     4,521,687   $ 1.00 (2)    
        Senior secured loan ($4,058,379 par due 6/2012)   8.78% (Libor + 4.25%/Q)   6/20/05     4,058,379     4,058,379   $ 1.00 (2)    
                   
 
           
                      8,580,066     8,580,066         1.51 %
                   
 
           
Cable Television                                
Patriot Media & Communications CNJ, LLC   Cable services   Junior secured loan ($5,000,000 par due 10/2013)   9.50% (Libor + 5.00%/Q)   10/6/05     5,000,000     5,000,000   $ 1.00      
                   
 
           
                      5,000,000     5,000,000         0.88 %
                   
 
           
Healthcare—Medical Products                                
Aircast, Inc.   Manufacturer of orthopedic   Senior secured loan ($1,251,902 par due 12/2010)   7.20% (Libor + 2.75%/Q)   12/2/04     1,251,902     1,251,902   $ 1.00 (2)    
    braces, supports and vascular systems   Junior secured loan ($1,000,000 par due 6/2011)   11.45% (Libor + 7.00%/Q)   12/2/04     1,000,000     1,000,000   $ 1.00 (2)    
                   
 
           
                      2,251,902     2,251,902         0.40 %
                   
 
           
Total                   $ 581,351,865   $ 585,968,375            
                   
 
           

(1)
We do not "Control" any of our portfolio companies, as defined in the Investment Company Act of 1940. In general, under the 1940 Act, we would "Control" a portfolio company if we owned 25% or more of its voting securities. All of our portfolio company investments are subject to legal restriction on sales which as of December 31, 2005 represented 103% of the Company's net assets.

(2)
Pledged as collateral for the CP Funding Facility and, unless otherwise noted, all other investments are pledged as collateral for the Revolving Credit Facility (see Note 7 to the consolidated financial statements).

(3)
Has a payment-in-kind interest feature (see Note 2 to the consolidated financial statements).

(4)
Non-income producing at December 31, 2005.

S-40


(5)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the year ended December 31, 2005, for this portfolio company there were total purchases of $2,000,000, redemptions of $2,919,939 (cost), interest income of $1,147,137, other income of $143,667, net realized losses of $4,278 and net unrealized losses of $3,429,198.

(6)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the year ended December 31, 2005, for this portfolio company there were total purchases of $26,000,000, sales of $3,000,000 (cost), redemptions of $237,500 (cost), interest income of $1,514,431, capital structuring services fees of $862,500 and other income of $2,068.

(7)
As defined in the 1940 Act, we are an "Affiliate" of this portfolio company because we own more than 5% of the portfolio company's outstanding voting securities. For the year ended December 31, 2005, for this portfolio company there were total purchases of $54,647,808, total sales of $19,000,000 (cost), redemptions of $706,069 (cost), interest income of $943,631, capital structuring services fees of $1,058,750 and other income of $44,426.

(8)
Non-U.S. company or principal place of business outside the U.S.

(9)
Non-registered investment company.

(10)
A majority of the variable rate loans to our portfolio companies bear interest at a rate that may be determined by reference to either Libor or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), at the borrower's option, which reset semi-annually (S), quarterly (Q), monthly (M) or daily (D). For each such loan, we have provided the current interest rate in effect at December 31, 2005.

See accompanying notes to consolidated financial statements.

S-41



ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

 
  For the Three
Months Ended
September 30,
2006

  For the Three
Months Ended
September 30,
2005

  For the Nine
Months Ended
September 30,
2006

  For the Nine
Months Ended
September 30,
2005

 
 
  (unaudited)

  (unaudited)

  (unaudited)

  (unaudited)

 
INVESTMENT INCOME:                          
  From non-control/non-affiliate investments:                          
    Interest from investments   $ 22,894,133   $ 8,700,840   $ 58,682,492   $ 19,648,671  
    Interest from cash & cash equivalents     938,670     282,092     1,369,847     877,860  
    Dividend income             1,170,000     744,818  
    Capital structuring service fees     3,888,145     759,615     10,304,843     1,694,698  
    Other income     154,962     91,637     441,972     213,797  
   
 
 
 
 
      Total investment income from non-control/non-affiliate investments     27,875,910     9,834,184     71,969,154     23,179,844  
    From affiliate investments:                          
    Interest from investments     3,611,098     853,666     8,848,228     1,865,130  
    Dividend income     121,074         121,074      
    Capital structuring service fees     200,000     901,250     1,383,810     1,763,750  
    Other income     23,712     18,889     190,584     151,472  
   
 
 
 
 
      Total investment income from affiliate investments     3,955,884     1,773,805     10,543,696     3,780,352  
   
 
 
 
 
  Total investment income     31,831,794     11,607,989     82,512,850     26,960,196  
   
 
 
 
 
EXPENSES:                          
  Base management fees     3,660,997     1,380,863     9,311,853     3,222,709  
  Incentive management fees     4,464,141     2,643,353     14,327,424     4,712,556  
  Administrative     201,763     195,360     567,787     684,747  
  Professional fees     618,059     368,146     1,766,147     853,940  
  Directors fees     52,750     74,995     189,919     232,803  
  Insurance     205,670     151,019     592,202     438,232  
  Interest and credit facility fees     4,403,465     310,463     10,087,681     748,732  
  Interest to the Investment Adviser         32,167     25,879     115,706  
  Amortization of debt issuance costs     498,182     84,855     1,317,329     216,281  
  Depreciation     99,595         148,896      
  Other     552,221     122,490     937,837     192,248  
   
 
 
 
 
    Total expenses     14,756,843     5,363,711     39,272,954     11,417,954  
   
 
 
 
 
NET INVESTMENT INCOME BEFORE INCOME TAXES     17,074,951     6,244,278     43,239,896     15,542,242  
Income tax expense, including excise tax     (253,044 )       4,927,471      
   
 
 
 
 
NET INVESTMENT INCOME     17,327,995     6,244,278     38,312,425     15,542,242  
   
 
 
 
 
REALIZED AND UNREALIZED NET GAINS ON INVESTMENTS:                          
  Net realized gains (losses):                          
    Net realized gains from non-control/non-affiliate investment transactions     1,611,935     3,189,827     26,055,526     10,346,269  
    Net realized gains (losses) from affiliate investment transactions         (1,124 )   47,283     (3,154 )
   
 
 
 
 
      Net realized gains from investment transactions     1,611,935     3,188,703     26,102,809     10,343,115  
Net unrealized gains (losses):                          
  Investment transactions from non-control/non-affiliate investments     (2,302,632 )   447,617     (14,797,305 )   103,824  
  Investment transactions from affiliate investments     1,503,824     1,292     (941,094 )   (1,128 )
   
 
 
 
 
    Net unrealized gains (losses) from investment transactions     (798,808 )   448,909     (15,738,399 )   102,696  
   
 
 
 
 
    Net realized and unrealized gains on investments     813,127     3,637,612     10,364,410     10,445,811  
NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS   $ 18,141,122   $ 9,881,890   $ 48,676,835   $ 25,988,053  
   
 
 
 
 
BASIC AND DILUTED EARNINGS PER COMMON SHARE (see Note 4)   $ 0.39   $ 0.42   $ 1.19   $ 1.33  
   
 
 
 
 
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING (see Note 4)     46,880,245     23,323,314     41,018,821     19,583,970  
   
 
 
 
 

See accompanying notes to consolidated financial statements.

S-42



ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2006

 
   
   
   
  Distributions
in Excess of
Net
Investment
income

   
   
   
 
 
  Common Stock
   
  Accumulated Net
Realized Gain
on Sale of
Investments

   
   
 
 
  Capital in
Excess of Par
Value

  Net Unrealized
Appreciation of
Investments

  Total
Stockholders'
Equity

 
 
  Shares
  Amount
 
Balance at January 1, 2006   37,909,484   $ 37,910   $ 559,192,554   $   $ 5,765,225   $ 4,616,510   $ 569,612,199  
  Issuance of common stock from add-on offering (net of offering and underwriting costs)   10,781,250     10,781     161,991,734                       162,002,515  
  Shares issued in connection with dividend reinvestment plan   400,461     401     6,736,272                       6,736,673  
  Net increase in stockholders' equity resulting from operations               38,312,425     26,102,809     (15,738,399 )   48,676,835  
  Dividend declared ($1.14 per share)               (38,312,425 )   (9,446,927 )       (47,759,352 )
   
 
 
 
 
 
 
 
Balance at September 30, 2006   49,091,195   $ 49,092   $ 727,920,560   $   $ 22,421,107   $ (11,121,889 ) $ 739,268,870  
   
 
 
 
 
 
 
 

See accompanying notes to consolidated financial statements.

S-43



ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2005 (unaudited)

 
   
   
   
  Distributions
Less Than (in
Excess of) Net
Investment
income

   
   
   
 
 
  Common Stock
   
  Accumulated
Net Realized
Gain on Sale
of Investments

  Net Unrealized
Appreciation
(Depreciation)
of Investments

   
 
 
  Capital in
Excess of Par
Value

  Total
Stockholders'
Equity

 
 
  Shares
  Amount
 
Balance at January 1, 2005   11,066,767   $ 11,067   $ 159,602,706   $ (136,415 ) $   $ 230,947   $ 159,708,305  
  Issuance of common stock from add-on offering (net of offering and underwriting costs)   12,075,000     12,075     183,859,340                       183,871,415  
  Reimbursement of underwriting costs paid by the Investment Adviser (see Note 9)               (2,475,000 )                     (2,475,000 )
  Shares issued in connection with dividend reinvestment plan   267,717     268     4,691,101                       4,691,369  
  Net increase in stockholders' equity resulting from operations                     15,542,242     10,343,115     102,696     25,988,053  
  Dividend declared ($0.96 per share)                     (15,405,827 )   (3,268,822 )         (18,674,649 )
   
 
 
 
 
 
 
 
Balance at September 30, 2005   23,409,484   $ 23,410   $ 345,678,147   $   $ 7,074,293   $ 333,643   $ 353,109,493  
   
 
 
 
 
 
 
 

See accompanying notes to consolidated financial statements.

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ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

 
  For the Nine
Months Ended
September 30, 2006

  For the Nine
Months ended
September 30, 2005

 
 
  (unaudited)

  (unaudited)

 
OPERATING ACTIVITIES:              
  Net increase in stockholders' equity resulting from operations   $ 48,676,835   $ 25,988,053  
  Adjustments to reconcile net increase in stockholders' equity resulting from operations:              
    Net realized gain on investment transactions     (26,102,809 )   (10,343,115 )
    Net unrealized (gain) loss on investment transactions     15,738,399     (102,696 )
    Net accretion of discount on securities     (395,114 )   (78,621 )
    Increase in accrued payment-in-kind dividends and interest     (4,373,346 )   (2,243,980 )
    Amortization of debt issuance costs     1,317,329     216,281  
    Depreciation     148,896      
    Proceeds from sale and redemption of investments     306,852,077     112,704,621  
    Purchases of investments     (744,333,358 )   (333,160,023 )
    Changes in operating assets and liabilities:              
      Interest receivable     (5,103,382 )   (2,297,712 )
      Other assets     (7,162,818 )   (563,934 )
      Accounts payable and accrued expenses     1,011,618     138,362  
      Management and incentive fees payable     7,503,566     4,947,461  
      Interest and facility fees payable     3,757,369     214,287  
      Interest payable to the Investment Adviser     (154,078 )   115,706  
   
 
 
        Net cash used in operating activities     (402,618,816 )   (204,465,310 )
   
 
 
FINANCING ACTIVITIES:              
  Net proceeds from issuance of common stock     162,002,515     183,871,415  
  Borrowings on debt     740,200,000     26,500,000  
  Repayments on debt     (392,200,000 )    
  Underwriting costs paid to the Investment Adviser     (2,475,000 )    
  Dividends paid in cash     (53,911,904 )   (17,303,310 )
   
 
 
        Net cash provided by financing activities     453,615,611     193,068,105  
   
 
 
CHANGE IN CASH AND CASH EQUIVALENTS     50,996,795     (11,397,205 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD     16,613,334     26,806,160  
   
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 67,610,129   $ 15,408,955  
   
 
 
Supplemental Information:              
  Interest paid during the period   $ 5,933,911   $ 385,265  
  Taxes paid during the period   $ 3,260,589   $  
  Dividends declared during the period   $ 47,759,352   $ 18,674,649  

See accompanying notes to consolidated financial statements.

S-45



ARES CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2006 (unaudited)


1.    ORGANIZATION

              Ares Capital Corporation (the "Company" or "ARCC" or "we") is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the Investment Company Act of 1940 ("1940 Act"). We were incorporated on April 16, 2004 and were initially funded on June 23, 2004. On October 8, 2004, we completed our initial public offering (the "IPO"). On the same date, we commenced substantial investment operations.

              The Company has qualified and has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986 (the "Code"), as amended. The Company expects to continue to qualify and to elect to be treated for tax purposes as a RIC. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments in private middle market companies.

              We are externally managed by Ares Capital Management LLC (the "Investment Adviser"), an affiliate of Ares Management LLC ("Ares Management"), an independent investment management firm that manages investment funds. Ares Technical Administration LLC ("Ares Administration"), an affiliate of Ares Management, provides the administrative services necessary for us to operate.

              Interim financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim period, have been included. The current period's results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2006.


2.    SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

              The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States, and include the accounts of the Company and its wholly owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated.

Cash and Cash Equivalents

              Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value.

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Concentration of Credit Risk

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

Investments

              Investment transactions are recorded on the trade date. Realized gains or losses are computed using the specific identification method. Investments for which market quotations are readily available are valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. In addition, the board of directors currently receives input from independent valuation firms that have been engaged at the direction of the board to value each portfolio security at least once during a trailing 12 month period. The valuation process is conducted at the end of each fiscal quarter, with approximately a quarter of our portfolio companies without market quotation subject to valuation by the independent valuation firm each quarter. The types of factors that the board may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.

              When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our private equity valuation. Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments, and the differences could be material.

              With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:

Interest Income Recognition

              Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. If any cash is received after it is determined that interest is no longer collectible, we will treat the cash as payment on the principal balance until the entire principal balance has been repaid, before any interest

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income is recognized. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on bonds.

Payment in Kind Interest

              The Company has loans in its portfolio that contain a payment-in-kind ("PIK") provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company's status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. For the three and nine months ended September 30, 2006, the Company recorded $1,817,565 and $4,373,346, respectively, in PIK income. For the three and nine months ended September 30, 2005, the Company recorded $783,249 and $2,243,980, respectively, in PIK income.

Capital Structuring Service Fees

              The Company's Investment Adviser seeks to provide assistance to the portfolio companies in connection with the Company's investments and in return the Company may receive fees for capital structuring services. These fees are normally paid at the closing of the investments, are generally non-recurring and are recognized as revenue when earned upon closing of the investment. The services that the Company's Investment Adviser provides vary by investment, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice, which concludes upon closing of the loan. The Company's Investment Adviser may also take a seat on the board of directors of a portfolio company, or observe the meetings of the board of directors without taking a formal seat. Any services of the above nature subsequent to the closing would generally generate a separate fee payable to the Company. In certain instances where the Company is invited to participate as a co-lender in a transaction and in the event that the Company does not provide significant services in connection with the investment, a portion of loan fees paid to the Company in such situations will be deferred and amortized over the estimated life of the loan.

Foreign Currency Translation

              The Company's books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:


              Although the net assets and the fair values are presented at the foreign exchange rates at the end of the day, the Company does not isolate the portion of the results of the operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair value of investments. Such fluctuations are included with the net realized and unrealized gains or losses from investments. Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. Government securities. These risks include but are not limited to revaluation of currencies and future adverse political and economic developments which could cause investments in their markets to be less liquid and prices more volatile than those of comparable U.S. companies.

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Offering Expenses

              The Company's offering costs were charged against the proceeds from the Add-on Offering (as defined in Note 10) when received. For the three and nine months ended September 30, 2006, the Company incurred approximately $687,000 of such costs. For the nine months ended September 30, 2005, the Company incurred approximately $635,000 of such costs.

Debt Issuance Costs

              Debt issuance costs are being amortized over the life of the related credit facility or debt obligation using the straight line method which approximates the interest method.

Federal Income Taxes

              The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from Federal income taxes. In order to qualify as a RIC, among other factors, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year.

              Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and nine months ended September 30, 2006, the Company recorded a benefit or provision of approximately $(253,000) and $571,000, respectively, for Federal excise tax. As of September 30, 2006, the entire $571,000 was unpaid and included in accounts payable on the accompanying consolidated balance sheet.

              Our wholly owned subsidiaries ARCC Cervantes Corporation ("ACC") and ARCC Cervantes LLC ("ACLLC") are subject to Federal and state income taxes. For the three months ended September 30, 2006 we recorded no provision for these subsidiaries. For the nine months ended September 30, 2006, we recorded a tax provision of approximately $4,354,000 for these subsidiaries.

Dividends

              Dividends and distributions to common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for re-investment.

              We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends.

Use of Estimates in the Preparation of Financial Statements

              The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of actual and contingent assets and liabilities at the date of the financial statements

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and the reported amounts of income or loss and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of investments.

Fair Value of Financial Instruments

              The carrying value of the Company's financial instruments approximate fair value. The carrying value of interest and open trade receivables, accounts payable and accrued expenses, as well as the credit facility payable approximate fair value due to their short maturity.


3.    AGREEMENTS

              The Company has entered into an investment advisory agreement (the "Advisory Agreement") with the Investment Adviser under which the Investment Adviser, subject to the overall supervision of our board of directors, provides investment advisory services to ARCC. For providing these services, the Investment Adviser receives a fee from us, consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.5% of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds). The base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed calendar quarters.

              The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the administration agreement, and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature such as market discount, debt instruments with payment-in-kind interest, preferred stock with payment-in-kind dividends and zero coupon securities, accrued income that we have not yet received in cash. The Investment Adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on the obligation that resulted in the accrual of such income.

              Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a fixed "hurdle rate" of 2.00% per quarter.

              We pay the Investment Adviser an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:

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              These calculations are adjusted for any share issuances or repurchases during the quarter.

              The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the calendar year ending on December 31, 2004, and equals 20% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation for such year.

              We defer cash payment of any incentive fee otherwise earned by the Investment Adviser if during the most recent four full calendar quarter periods ending on or prior to the date such payment is to be made the sum of (a) the aggregate distributions to the stockholders and (b) the change in net assets (defined as total assets less indebtedness) is less than 8.0% of our net assets at the beginning of such period. These calculations are appropriately pro rated during the first three calendar quarters following October 8, 2004 and are adjusted for any share issuances or repurchases.

              For the three and nine months ended September 30, 2006, we incurred $3,660,997 and $9,311,853, respectively, in base management fees and $4,358,427 and $11,365,248, respectively, in incentive management fees related to pre-incentive fee net investment income. For the three and nine months ended September 30, 2006, we incurred $105,714 and $2,962,176 in incentive management fees related to realized capital gains. As of September 30, 2006, $10,981,600 was unpaid and included in management and incentive fees payable in the accompanying consolidated balance sheet.

              For the three and nine months ended September 30, 2005, we incurred $1,380,863 and $3,222,709, respectively, in base management fees and $1,777,526 and $2,648,827, respectively, in incentive management fees related to pre-incentive fee net investment income. For the three and nine months ended September 30, 2005, we incurred $865,827 and $2,063,729, respectively, in incentive management fees related to realized capital gains.

              We also entered into a separate administration agreement (the "Administration Agreement") with Ares Administration under which Ares Administration furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, Ares Administration also performs or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Ares Administration assists us in determining and publishing the net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Under the Administration Agreement, Ares Administration also provides on our behalf, managerial assistance to those portfolio companies to which we are required to provide such assistance. The Administration Agreement may be terminated by either party without penalty upon 60-days' written notice to the other party.

              For the three and nine months ended September 30, 2006, we incurred $201,763 and $567,787, respectively, in administrative fees. As of September 30, 2006, $201,763 was unpaid and included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.

              For the three and nine months ended September 30, 2005, we incurred $195,360 and $684,747, respectively, in administrative fees.

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4.    EARNINGS PER SHARE

              The following information sets forth the computation of basic and diluted net increase in stockholders' equity per share resulting from operations for the three and nine months ended September 30, 2006:

 
  Three Months
Ended
September 30, 2006

  Nine Months
Ended
September 30, 2006

Numerator for basic and diluted net increase in stockholders' equity resulting from operations per share:   $ 18,141,122   $ 48,676,835
Denominator for basic and diluted net increase in stockholders' equity resulting from operations per share:     46,880,245     41,018,821
Basic and diluted net increase in stockholders' equity resulting from operations per share:   $ 0.39   $ 1.19

              The following information sets forth the computation of basic and diluted net increase in stockholders' equity per share resulting from operations for the three and nine months ended September 30, 2005:

 
  Three Months
Ended
September 30, 2005

  Nine Months
Ended
September 30, 2005

Numerator for basic and diluted net increase in stockholders' equity resulting from operations per share:   $ 9,881,890   $ 25,988,053
Denominator for basic and diluted net increase in stockholders' equity resulting from operations per share:     23,323,314     19,583,970
Basic and diluted net increase in stockholders' equity resulting from operations per share:   $ 0.42   $ 1.33


5.    INVESTMENTS

              For the nine months ended September 30, 2006, the Company purchased (A) $495.8 million aggregate principal amount of senior term debt, (B) $179.7 million aggregate principal amount of senior subordinated debt and (C) $63.3 million of investments in equity securities.

              In addition, for the nine months ended September 30, 2006, (1) $132.2 million aggregate principal amount of senior term debt, (2) $9.0 million aggregate principal amount of collateralized obligation notes and (3) $33.0 million aggregate principal amount of senior subordinated debt were redeemed. Additionally, (A) $64.0 million of investments in equity securities, (B) $25.1 million aggregate principal amount of senior term debt and (C) $17.0 million aggregate principal amount of senior subordinated debt were sold.

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              As of September 30, 2006, investments and cash and cash equivalents consisted of the following:

 
  Amortized Cost
  Fair Value
Cash and cash equivalents   $ 67,610,129   $ 67,610,129
Senior term debt     663,625,556     659,218,764
Senior notes     10,000,000     10,000,000
Senior subordinated debt     278,078,174     278,590,942
Collateralized debt obligations     7,411,433     7,343,166
Equity securities     84,994,014     77,834,416
   
 
  Total   $ 1,111,719,306   $ 1,100,597,417
   
 

              As of December 31, 2005, investments and cash and cash equivalents consisted of the following:

 
  Amortized Cost
  Fair Value
Cash and cash equivalents   $ 16,613,334   $ 16,613,334
Senior term debt     338,993,970     338,467,061
Senior notes     10,000,000     10,000,000
Senior subordinated debt     129,816,927     130,042,698
Collateralized debt obligations     16,980,590     17,386,561
Equity securities     85,560,378     90,072,055
   
 
  Total   $ 597,965,199   $ 602,581,709
   
 

              The amortized cost represents the original cost adjusted for the accretion of discounts and amortization of premiums on debt using the effective interest method.

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              The industry and geographic compositions of the portfolio at fair value at September 30, 2006 and December 31, 2005 were as follows:

Industry

  September 30, 2006
  December 31, 2005
 
Health Care   18.5 % 13.1 %
Printing/Publishing   12.0   2.8  
Manufacturing   10.3   9.5  
Other Services   8.4   10.5  
Retail   7.3   0.0  
Consumer Products   7.2   11.2  
Containers/Packaging   7.0   12.0  
Education   5.2   5.6  
Business Services   4.7   1.5  
Restaurants   4.6   10.6  
Environmental Services   2.6   11.0  
Aerospace and Defense   2.5   2.7  
Broadcasting/Cable   2.5   0.9  
Computers/Electronics   2.1   0.0  
Cargo Transport   1.2   2.1  
Beverage/Food/Tobacco   1.2   0.0  
Homebuilding   1.0   1.7  
Farming and Agriculture   1.0   1.8  
Financial   0.7   3.0  
   
 
 
  Total   100.0 % 100.0 %
   
 
 
Geographic Region

  September 30, 2006
  December 31, 2005
 
West   27.5 % 38.9 %
Mid-Atlantic   24.3   24.3  
Southeast   20.3   10.2  
Midwest   18.0   12.3  
Northeast   6.8   11.3  
International   3.1   3.0  
   
 
 
  Total   100.0 % 100.0 %
   
 
 


6.    COMMITMENTS AND CONTINGENCIES

              As of September 30, 2006, the Company had committed to make a total of approximately $90.6 million of investments in various revolving senior secured loans. As of September 30, 2006, $50.2 million was unfunded. Included within the $90.6 million commitment in revolving secured loans is a commitment to issue up to $3.8 million in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. As of September 30, 2006, the Company had $2.7 million in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability. Of these letters of credit, $2.2 million expire on September 30, 2007 and $500,000 expire on July 31, 2007. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company's option until the revolving line of credit, under which the letters of credit were issued, matures on September 30, 2011.

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              As of September 30, 2006, the Company was subject to a subscription agreement to fund up to $10.0 million of equity commitments in a private equity investment partnership. As of September 30, 2006, $202,000 was funded to this partnership.

              As of December 31, 2005, the Company had committed to make a total of approximately $43.0 million of investments in various revolving senior secured loans. As of December 31, 2005, $28.8 million was unfunded. Included within the $43.0 million commitment in revolving secured loans is a commitment to issue up to $3.2 million in standby letters of credit through a financial intermediary on behalf of a portfolio company. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio company was to default on its related payment obligations. As of December 31, 2005, the Company had $2.2 million in standby letters of credit issued and outstanding on behalf of the portfolio company, of which no amounts were recorded as a liability.


7.    BORROWINGS

              In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. On October 29, 2004, we formed Ares Capital CP Funding LLC ("Ares Capital CP"), a wholly owned subsidiary of the Company, through which we established a revolving credit facility (the "CP Funding Facility"). On November 3, 2004, we entered into the CP Funding Facility that, as amended, allows Ares Capital CP to issue up to $350.0 million of variable funding certificates ("VFC"). As part of the CP Funding Facility, we are subject to limitations as to how borrowed funds may be used including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings as well as regulatory restrictions on leverage which may affect the amount of VFC that we may issue from time to time. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early amortization of the CP Funding Facility and limit further advances under the CP Funding Facility and in some cases could be an event of default. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the CP Funding Facility. As of September 30, 2006, there was $15.0 million outstanding under the CP Funding Facility and the Company continues to be in compliance with all of the limitations and requirements of the CP Funding Facility. As of December 31, 2005 there was $18.0 million outstanding under the CP Funding Facility.

              The CP Funding Facility was scheduled to expire on November 1, 2006 (see Note 14) and is secured by all of the assets held by Ares Capital CP, which as of September 30, 2006 consisted of eight investments. At expiration, at our election, any principal amounts then outstanding will be amortized over a 24-month period from the termination date. Under the terms of the CP Funding Facility, we are required to pay a renewal fee of 0.375% of the total amount available for borrowing on or around each November 3rd.

              The interest charged on the VFC is based on the commercial paper rate plus 0.75%. The interest charged on the VFC is payable quarterly. As of September 30, 2006 the commercial paper rate was 5.3610% and as of December 31, 2005 the commercial paper rate was 4.3223%. For the three and nine months ended September 30, 2006, the average interest rate (i.e. commercial paper rate plus the spread) was 6.10% and 5.71%, respectively. For the three and nine months ended September 30, 2005, the average interest rate (i.e. commercial paper rate plus the spread) was 4.73% and 4.26%, respectively. For the three and nine months ended September 30, 2006, the average outstanding balance was $12,360,870 and $55,939,927, respectively. For the three and nine months ended September 30, 2005, the average outstanding balance was $7,894,273 and $21,550,661, respectively. For the three and nine months ended September 30, 2006 the interest expense incurred was $190,747 and $2,381,652, respectively. For the three and nine months ended September 30, 2005 the interest expense

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incurred was $252,939 and $577,673, respectively. Cash paid for interest expense during the nine months ended September 30, 2006 and September 30, 2005 was $2,412,539 and $385,265, respectively.

              The Company is also required to pay a commitment fee for any unused portion of the CP Funding Facility. Initially, the commitment fee was 0.175% per annum. On April 8, 2005 the CP Funding Facility was amended pursuant to which among other things, the commitment fee was temporarily reduced to 0.11% per annum until the earlier of (a) the date the total borrowings outstanding exceed $150.0 million or (b) October 3, 2005, after which the commitment fee was 0.175% per annum. On November 14, 2005 the CP Funding Facility was further amended pursuant to which among other things, the commitment fee was reduced to 0.10% per annum prior to the first time that the borrowings outstanding under the CP Funding Facility equal or exceed $200.0 million and 0.125% per annum on and after the first time that the borrowings outstanding under the CP Funding Facility exceed $200.0 million. On July 13, 2006 the CP Funding Facility was further amended pursuant to which among other things, the commitment fee was increased to 0.125% per annum calculated based on an amount equal to $200.0 million less the borrowings outstanding under the CP Funding Facility. As soon as the borrowings outstanding under the CP Funding Facility equal or exceed $200.0 million, the fee is calculated based on an amount equal to $350.0 million less the borrowings outstanding under the CP Funding Facility. For the three and nine months ended September 30, 2006, the commitment fee incurred was $64,806 and $201,258, respectively. For the three and nine months ended September 30, 2005, the commitment fee incurred was $57,524 and $171,059, respectively.

              In December 2005, we entered into a senior secured revolving credit facility (the "Revolving Credit Facility") under which the lenders have agreed to extend credit to the Company in an initial aggregate principal amount not exceeding $250 million at any one time outstanding. The Revolving Credit Facility expires on December 28, 2010 and with certain exceptions is secured by substantially all of the assets in our portfolio (other than investments held by Ares Capital CP under the CP Funding Facility and those held as a part of the Debt Securitization, discussed below) which as of September 30, 2006 consisted of 96 investments. Under the Revolving Credit Facility, we have made certain representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar revolving credit facilities, including, without limitation, covenants related to: (a) limitations on the incurrence of additional indebtedness and liens, (b) limitations on certain investments, (c) limitations on certain restricted payments, (d) maintaining a certain minimum stockholders' equity, (e) maintaining a ratio of total assets (less total liabilities) to total indebtedness, of the Company and its subsidiaries, of not less than 2.0:1.0, (f) maintaining minimum liquidity, and (g) limitations on the creation or existence of agreements that prohibit liens on certain properties of the Company and its subsidiaries.

              In addition to the asset coverage ratio described above, borrowings under the Revolving Credit Facility (and the incurrence of certain other permitted debt) will be subject to compliance with a borrowing base that will apply different advance rates to different types of assets in our portfolio. The Revolving Credit Facility also includes an "accordion" feature that allows us to increase the size of the Revolving Credit Facility to a maximum of $500 million under certain circumstances. The Revolving Credit Facility also includes usual and customary events of default for senior secured revolving credit facilities of this nature. As of September 30, 2006, there was $87.0 million outstanding under the Revolving Credit Facility and the Company continues to be in compliance with all of the limitations and requirements of the Revolving Credit Facility. As of December 31, 2005, there were no amounts outstanding under the Revolving Credit Facility.

              The interest charged under the Revolving Credit Facility is generally based on LIBOR (one, two, three or six month) plus 1.00%. As of September 30, 2006, the one, two, three and six month LIBOR were 5.32%, 5.35%, 5.37% and 5.37%, respectively. For the three and nine months ended September 30, 2006, the average interest rate was 6.77% and 6.30%, respectively. For the three and nine months ended September 30, 2006, the average outstanding balance was $33,923,913 and

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$75,183,150, respectively. For the three and nine months ended September 30, 2006, the interest expense incurred was $351,050 and $3,541,037, respectively. Cash paid for interest expense during the nine months ended September 30, 2006 was $3,521,372. As of December 31, 2005, the one, two, three and six month LIBOR were 4.39%, 4.48%, 4.54% and 4.70%, respectively. The Company is also required to pay a commitment fee of 0.20% for any unused portion of the Revolving Credit Facility. For the three and nine months ended September 30, 2006, the commitment fee incurred was $108,556 and $257,844, respectively.

              As of September 30, 2006, the Company had $3.8 million in standby letters of credit issued through the Revolving Credit Facility.

              On July 7, 2006, through our wholly owned subsidiary, ARCC CLO 2006 LLC ("ARCC CLO"), we completed a $400.0 million debt securitization (the "Debt Securitization") and issued approximately $314.0 million principal amount of asset-backed notes (including a $50.0 million revolver with no amounts drawn as of September 30, 2006) (the"CLO Notes") to third parties that were secured by a pool of middle market loans that have been purchased or originated by the Company. The CLO Notes are included in the September 30, 2006 consolidated balance sheet.

              We retained approximately $86.0 million of certain BBB and non-rated securities in the Debt Securitization. The CLO Notes mature on December 20, 2019, and, as of September 30, 2006, there is $264.0 million outstanding. The blended pricing of the CLO Notes, excluding fees, is approximately 3-month LIBOR plus 34 basis points.

              The classes, amounts, ratings and interest rates (expressed as a spread to LIBOR) of the CLO Notes are:

Class

  Amount
(millions)

  Rating
(S&P/Moody's)

  LIBOR Spread
(basis points)

A-1A   $ 75   AAA/Aaa   25
A-1A VFN     50 (1) AAA/Aaa   28
A-1B     14   AAA/Aaa   37
A-2A     75   AAA/Aaa   22
A-2B     33   AAA/Aaa   35
B     23   AA/Aa2   43
C     44   A/A2   70
   
       
Total   $ 314        
   
       

(1)
Revolving class, none of which was drawn as of September 30, 2006.

              During the first five years from the closing date, principal collections received on the underlying collateral may be used to purchase new collateral, allowing us to maintain the initial leverage in the securitization for the entire five-year period. Under the terms of the securitization, up to 15% of the collateral may be subordinated loans that are neither first nor second lien loans.

              The Class A-1A VFN Notes are a revolving class of secured notes and allow us to borrow and repay AAA/Aaa financing over the initial five-year period thereby providing more efficiency in funding costs. All of the notes are secured by the assets of ARCC Commercial Loan Trust 2006, including commercial loans totaling $308.1 million as of the closing date, currently which were sold to the trust by the Company, the originator and servicer of the assets. As of September 30, 2006, there were 46 investments securing the notes. Additional commercial loans will be purchased by the trust from the Company primarily using the proceeds from the Class A-1A VFN Notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration,

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collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.

              The interest charged under the ARCC CLO debt securitization is based on 3-month LIBOR which as of September 30, 2006 was 5.37%. For the three months ended September 30, 2006, the effective average interest rate was 5.86%. For the three months ended September 30, 2006, we incurred $3,653,371 of interest expense. The Company is also required to pay a commitment fee of 0.175% for any unused portion of the Class A-1A VFN Notes. For the three and nine months ended September 30, 2006, the commitment fee incurred was $23,611 on these notes.


8.    DERIVATIVE INSTRUMENTS

              In 2005, we entered into a costless collar agreement in order to manage the exposure to changing interest rates related to the Company's fixed rate investments. The costless collar agreement is for a notional amount of $20 million, has a cap of 6.5%, a floor of 2.72% and matures in 2008. The costless collar agreement allows us to receive an interest payment for any quarterly period when the 3-month LIBOR exceeds 6.5%, and requires us to pay an interest payment for any quarterly period when the 3-month LIBOR is less than 2.72%. The costless collar resets quarterly based on the 3-month LIBOR. As of September 30, 2006, the 3-month LIBOR was 5.37%. As of September 30, 2006 these derivatives had no fair value.


9.    RELATED PARTY TRANSACTIONS

              The underwriting costs related to the IPO were $7,425,000 or $0.675 per share. As a part of the IPO, the Investment Adviser, on our behalf, agreed to pay the underwriters $0.225 of the $0.675 per share in underwriting discount and commissions for a total of approximately $2.5 million. We were obligated to repay this amount, together with accrued interest (charged at the 3-month LIBOR plus 2% starting on October 8, 2004) (a) if during any four calendar quarter period ending on or after October 8, 2005 the sum of (i) the aggregate distributions, including return of capital, if any, to the stockholders and (ii) the change in net assets (defined as total assets less indebtedness) equals or exceeds 7.0% of the net assets at the beginning of such period (as adjusted for any share issuances or repurchases) or (b) upon the Company's liquidation. On March 8, 2005, the Company's board of directors approved entering into an amended and restated agreement with the Investment Adviser whereby the Company would be obligated to repay the Investment Adviser for the approximate $2.5 million only if the conditions for repayment referred to above were met before the third anniversary of the IPO. If one or more such events did not occur on or before October 8, 2007, we would not be obligated to repay this amount to the Investment Adviser. For the year ended December 31, 2005, the sum of our aggregate distributions to our stockholders and our change in net assets exceeded 7.0% of net assets as of December 31, 2004 (as adjusted for any share issuances). As a result, in February 2006 we repaid this amount together with accrued interest.

              In accordance with the Advisory Agreement, we bear all costs and expenses of the operation of the Company and reimburse the Investment Adviser for all such costs and expenses incurred in the operation of the Company. For the three and nine months ended September 30, 2006, the Investment Adviser incurred such expenses totaling $434,298 and $665,026, respectively. There were no payable amounts relating to these expenses outstanding to the Investment Adviser as of September 30, 2006. For the three and nine months ended September 30, 2005, the Investment Adviser incurred such expenses totaling $102,739 and $144,651, respectively.

              As of September 30, 2006, Ares Management LLC, of which the Investment Adviser is a wholly owned subsidiary, owned 666,667 shares of the Company's common stock representing approximately 1.4% of the total shares outstanding as of September 30, 2006.

              See Note 3 for a description of other related party transactions.

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10.    STOCKHOLDERS' EQUITY

              During the nine months ended September 30, 2005, we completed a public add-on offering on March 23, 2005, of 12,075,000 shares of common stock (including the underwriters' overallotment of 1,575,000 shares) at $16.00 per share, less an underwriting discount and commissions totaling $0.72 per share. Total proceeds received from this add-on offering, net of the underwriters' discount and offering costs, were $183.9 million.

              During the nine months ended September 30, 2006, we completed a public add-on offering on July 18, 2006 (the "July Add-on Offering"), of 10,781,250 shares of common stock (including the underwriters' overallotment of 1,406,250 shares) at $15.67 per share, less an underwriting discount and commissions totaling $0.58 per share. Total proceeds received from the July Add-on Offering, net of the underwriters' discount and offering costs, were approximately $162.0 million.


11.    DIVIDEND

              For the three months ended September 30, 2006, the Company declared a dividend on August 9, 2006 of $0.40 per share for a total of $19,595,399. The record date was September 15, 2006 and the dividend was distributed on September 29, 2006. For the three months ended June 30, 2006, the Company declared a dividend on May 8, 2006 of $0.38 per share for a total of $14,481,380. The record date was June 15, 2006 and the dividend was distributed on June 30, 2006. For the three months ended March 31, 2006, the Company declared a dividend on February 28, 2006 of $0.36 per share for a total of $13,682,573. The record date was March 24, 2006 and the dividend was distributed on April 14, 2006.

              For the three months ended September 30, 2005, the Company declared a dividend on September 6, 2005 of $0.34 per share for a total of $7,940,174. The record date was September 16, 2005 and the dividend was distributed on September 30, 2005. For the three months ended June 30, 2005, the Company declared a dividend on June 20, 2005 of $0.32 per share for a total of $7,413,951. The record date was June 30, 2005 and the dividend was distributed on July 15, 2005. For the three months ended March 31, 2005, the Company declared a dividend on February 23, 2005 of $0.30 per share for a total of $3,320,524. The record date was March 7, 2005 and the dividend was distributed on April 15, 2005.

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12.    FINANCIAL HIGHLIGHTS

              The following is a schedule of financial highlights for the nine months ended September 30, 2006 and for the nine months ended September 30, 2005:

              Per Share Data:

 
  For the Nine
Months Ended
September 30, 2006

  For the Nine
Months Ended
September 30, 2005

 
Net asset value, beginning of period(1)   $ 15.03   $ 14.43  
Issuance of common stock     0.01     0.45  
Effect of dilution     (0.03 )   (0.04 )
Underwriting costs paid by the Investment Adviser (see Note 9)(2)         (0.13 )
Net investment income for period(2)     0.94     0.80  
Net realized and unrealized gains for period(2)     0.25     0.53  
   
 
 
Net increase in stockholders' equity     1.17     1.61  
Distributions from net investment income     (0.94 )   (0.80 )
Distributions from net realized capital gains on securities     (0.20 )   (0.16 )
   
 
 
Total distributions to stockholders     (1.14 )   (0.96 )
Net asset value at end of period(1)   $ 15.06   $ 15.08  
   
 
 
Per share market value at end of period   $ 17.42   $ 16.28  
Total return based on market value(3)     15.49 %   (11.27 )%
Total return based on net asset value(4)     7.89 %   8.97 %
Shares outstanding at end of period     49,091,195     23,409,484  
Ratio/Supplemental Data:              
Net assets at end of period   $ 739,268,870   $ 353,109,493  
Ratio of operating expenses to average net assets(5)(6)     8.34 %   5.18 %
Ratio of net investment income to average net assets(5)(7)     9.02 %   7.05 %
Portfolio turnover rate(5)     47 %   46 %

(1)
The net assets used equals the total stockholders' equity on the consolidated balance sheets.

(2)
Weighted average basic per share data.

(3)
For the nine months ended September 30, 2006, the total return based on market value equals the increase of the ending market value at September 30, 2006 of $17.42 per share over the ending market value at December 31, 2005 of $16.07, plus the declared dividend of $0.40 per share for holders of record on September 15, 2006, the declared dividend of $0.38 per share for holders of record on June 15, 2006 and the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the market value at December 31, 2005. For the nine months ended September 30, 2005, the total return based on market value equals the decrease of the ending market value at September 30, 2005 of $16.28 per share over the ending market value at December 31, 2004 of $19.43, plus the declared dividend of $0.34 per share for holders of record on September 16, 2005, the declared dividend of $0.32 per share for holders of record on June 30, 2005 and the declared dividend of $0.30 per share for holders of record on March 7, 2005, divided by the market value at December 31, 2004. Total return based on market value is not annualized.

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(4)
For the nine months ended September 30, 2006, the total return based on net asset value equals the change in net asset value during the period plus the declared dividend of $0.40 per share for holders of record on September 15, 2006, the declared dividend of $0.38 per share for holders of record on June 15, 2006 and the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the beginning net asset value during the period. The calculation was adjusted for shares issued in connection with the dividend reinvestment plan and the issuance of common stock in connection with the July Add-on Offering. For the nine months ended September 30, 2005, the total return based on net asset value equals the change in net asset value during the period plus the declared dividend of $0.34 per share for holders of record on September 16, 2005, the declared dividend of $0.32 per share for holders of record on June 30, 2005 and the declared dividend of $0.30 per share for holders of record on March 7, 2005, divided by the beginning net asset value during the period. The calculation was adjusted for shares issued in connection with the dividend reinvestment plan, the issuance of common stock in connection with an add-on offering and the reimbursement of underwriting costs paid by the Investment Adviser. Total return based on net asset value is not annualized. The Company's performance changes over time and currently may be different than that shown. Past performance is no guarantee of future results.

(5)
The ratios reflect an annualized amount.

(6)
For the nine months ended September 30, 2006, the ratio of operating expenses to average net assets consisted of 1.98% of base management fees, 3.04% of incentive management fees, 2.42% of the cost of borrowing and other operating expenses of 0.90%. For the nine months ended September 30, 2005, the ratio of operating expenses to average net assets consisted of 1.46% of base management fees, 2.14% of incentive management fees, 0.44% of the cost of borrowing and other operating expenses of 1.14%. These ratios reflect annualized amounts.

(7)
The ratio of net investment income to average net assets excludes income taxes related to realized gains.


13.    IMPACT OF NEW ACCOUNTING STANDARDS

              In July 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," ("FIN 48"). FIN 48 provides guidance on how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the "more-likely-than-not" threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the effective date. At this time, the Company is evaluating the implications of FIN 48, and its impact in the consolidated financial statements has not yet been determined.

              In September 2006, the FASB issued SFAS No. 157 Fair Value Measurement ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements, but does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At this time, the Company is evaluating the implications of SFAS No. 157, and its impact in the consolidated financial statements has not yet been determined.

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14.    SUBSEQUENT EVENTS

              On November 1, 2006, we entered into an amendment to extend the maturity of the CP Funding Facility to October 31, 2007. Additionally, the interest rate charged on the CP Funding Facility was reduced to the commercial paper rate plus 0.70%.

              On November 7, 2006, we declared a dividend of $0.40 per share and an additional dividend of $0.10 per share for a total of $19,636,478 and $4,909,120, respectively. The record date for both dividends is December 15, 2006 and the dividends will be distributed on December 29, 2006.

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PROSPECTUS

$250,000,000

GRAPHIC

Common Stock


              Ares Capital Corporation is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the Investment Company Act of 1940. We were founded in April 2004 and completed our initial public offering on October 8, 2004. Our investment objectives are to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments, in private middle market companies.

              We are managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, an independent Los Angeles based firm that currently manages investment funds that have approximately $10.7 billion of committed capital. Ares Technical Administration LLC provides the administrative services necessary for us to operate.

              Our common stock is quoted on The NASDAQ National Market under the symbol "ARCC." On June 15, 2006, the last reported sales price of our common stock on The NASDAQ National Market was $16.77 per share.

              Investing in our common stock involves risks that are described in the "Risk Factors" section beginning on page 15 of the prospectus.

              We may offer, from time to time, up to $250 million aggregate initial offering price of our common stock in one or more offerings. We will offer the shares of common stock at prices and on terms to be described in one or more supplements to this prospectus. The offering price per share of our common stock less any underwriting commissions or discounts will not be less than the net value per share of our common stock at the time we make the offering. This prospectus and the accompanying prospectus supplement concisely provide important information you should know before investing in our common stock. Please read the prospectus and the accompanying prospectus supplement before you invest and keep it for future reference. Our Internet address is http://www.arescapitalcorporation.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The SEC also maintains a website at www.sec.gov that contains such information.


              Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

              This prospectus may not be used to consummate sales of shares of common stock unless accompanied by a prospectus supplement.


The date of this prospectus is June 23, 2006.


              You should rely only on the information contained in this prospectus and the accompanying prospectus supplement. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and the accompanying prospectus supplement is accurate only as of the date on the front cover of this prospectus and the accompanying prospectus supplement, as applicable. Our business, financial condition, results of operations and prospects may have changed since that date.


TABLE OF CONTENTS

 
  Page
Prospectus Summary   1
The Company   1
Offerings   8
Fees and Expenses   10
Selected Financial and Other Data   13
Risk Factors   15
Forward-Looking Statements   32
Use of Proceeds   33
Price Range of Common Stock and Distributions   34
Management's Discussion and Analysis of Financial Condition and Results of Operations   36
Senior Securities   51
Business   52
Portfolio Companies   64
Management   69
Certain Relationships   87
Control Persons and Principal Stockholders   88
Determination of Net Asset Value   90
Dividend Reinvestment Plan   91
Material U.S. Federal Income Tax Considerations   92
Description of our Stock   100
Regulation   107
Custodian, Transfer and Dividend Paying Agent and Registrar   114
Brokerage Allocation and Other Practices   114
Plan of Distribution   115
Legal Matters   116
Independent Registered Public Accountants   116
Available Information   116
Financial Statements   F-1

i



ABOUT THIS PROSPECTUS

              This prospectus is part of a registration statement that we have filed with the SEC, using the "shelf" registration process. Under the shelf registration process, we may offer, from time to time, up to $250 million aggregate initial offering price of our common stock on the terms to be determined at the time of the offering. Shares of our common stock may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the shares of our common stock that we may offer. Each time we use this prospectus to offer shares of our common stock, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and any prospectus supplement together with any exhibits and the additional information described under the headings "Available Information" and "Risk Factors" before you make an investment decision.

ii



PROSPECTUS SUMMARY

              This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under "Risk Factors" and the other information included in this prospectus. Except where the context suggests otherwise, the terms "we," "us," "our," "the Company" and "Ares Capital" refer to Ares Capital Corporation and its subsidiaries; "Ares Capital Management" or "investment adviser" refers to Ares Capital Management LLC; "Ares Administration" refers to Ares Technical Administration LLC; and "Ares" refers to Ares Partners Management Company LLC and its affiliated companies, including Ares Management LLC.


THE COMPANY

              Ares Capital is a specialty finance company that is a closed-end, non-diversified management investment company, regulated as a business development company, or a "BDC," under the Investment Company Act of 1940, or the "1940 Act." We were founded in April 2004, completed our initial public offering on October 8, 2004 and completed two additional equity offerings in March 2005 and October 2005. Ares Capital's investment objectives are to generate both current income and capital appreciation through debt and equity investments by primarily investing in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive.

              We primarily invest in first and second lien senior loans and long-term mezzanine debt. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt is subordinated to senior loans and is generally unsecured. In some cases, we may also receive warrants or options in connection with our debt instruments. Our investments have generally ranged between $10 million and $50 million each, although the investment sizes may be more or less than the targeted range and are expected to grow with our capital availability. We also, to a lesser extent, make equity investments in private middle market companies. These investments have generally been less than $10 million each but may grow with our capital availability and are usually made in conjunction with loans we make to these companies. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In this prospectus, we generally use the term "middle market" to refer to companies with annual EBITDA between $5 million and $50 million. EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization.

              The first and second lien senior loans generally have stated terms of three to ten years and the mezzanine debt investments generally have stated terms of up to ten years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The debt that we invest in typically is not rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's or lower than "BBB-" by Standard & Poor's). We may invest without limit in debt of any rating, including securities that have not been rated by any nationally recognized statistical rating organization.

              We believe that our investment adviser, Ares Capital Management, is able to leverage Ares' current investment platform, resources and existing relationships with financial sponsors, financial institutions, hedge funds and other investment firms to provide us with attractive investments. In addition to deal flow, the Ares investment platform assists our investment adviser in analyzing, structuring and monitoring investments. Ares' senior principals have worked together for many years and have substantial experience in investing in senior loans, high yield bonds, mezzanine debt and

1



private equity. The Company has access to the Ares staff of approximately 58 investment professionals and to the 38 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance and investor relations.

              While our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity securities of private companies, we also may invest up to 30% of the portfolio in opportunistic investments. Such investments may include investments in high-yield bonds, debt and equity securities in collateralized debt obligation vehicles and distressed debt or equity securities of public companies. We expect that these public companies generally will have debt that is non-investment grade. As part of this 30% of the portfolio, we may also invest in debt of middle market companies located outside of the United States, which investments are not anticipated to be in excess of 10% of the portfolio at the time such investments are made.


About Ares

              Ares is an independent firm with approximately $10.7 billion of total committed capital and 129 employees. Ares was founded in 1997 by a group of highly experienced investment professionals.

              Ares specializes in originating and managing assets in both the leveraged finance and private equity markets. Ares' leveraged finance activities include the acquisition and management of senior loans, high yield bonds, mezzanine and special situation investments. Ares' private equity activities focus on providing flexible, junior capital to middle market companies. Ares has the ability to invest across a capital structure, from senior secured floating rate debt to common equity.

              Ares is comprised of the following groups:

              Ares' senior principals have been working together as a group for many years and have an average of over 20 years of experience in leveraged finance, private equity, distressed debt, investment banking and capital markets. They are backed by a large team of highly-disciplined professionals. Ares' rigorous investment approach is based upon an intensive, independent financial analysis, with a focus on preservation of capital, diversification and active portfolio management. These fundamentals underlie Ares' investment strategy and have resulted in large pension funds, banks, insurance companies, endowments and high net worth individuals investing in Ares funds.

2




Ares Capital Management

              Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of 17 investment professionals, including our President, Michael J. Arougheti, which team is augmented by Ares' additional investment professionals, primarily its 24 member Capital Markets Group. Ares Capital Management's investment committee has 5 members, including Mr. Arougheti and 4 founding members of Ares. In addition, Ares Capital Management leverages off of Ares' entire investment platform and benefits from the Ares investment professionals' significant capital markets, trading and research expertise developed through Ares industry analysts. Ares funds have made investments in over 1,000 companies in over 30 different industries and currently hold over 400 investments in over 30 different industries.


MARKET OPPORTUNITY

              We believe the environment for investing in middle market companies is attractive for the following reasons:


COMPETITIVE ADVANTAGES

              We believe that we have the following competitive advantages over other capital providers in middle market companies:


Existing investment platform

              Ares currently manages approximately $10.7 billion of committed capital in the related asset classes of syndicated loans, high yield bonds, mezzanine debt and private equity. We believe Ares' current investment platform provides a competitive advantage in terms of access to origination and marketing activities and diligence for Ares Capital.


Seasoned management team

              Ares senior professionals have an average of over 20 years experience in leveraged finance, including substantial experience in investing in leveraged loans, high yield bonds, mezzanine debt, distressed debt and private equity securities. As a result of Ares' extensive investment experience, Ares and its senior principals have developed a strong reputation in the capital markets. We believe that this experience affords Ares Capital a competitive advantage in identifying and investing in middle market companies with the potential to generate positive returns.


Experience and focus on middle market companies

              Ares has historically focused on investments in middle market companies and we benefit from this experience. Our investment adviser uses Ares' extensive network of relationships with intermediaries focused on middle market companies, to attract well-positioned prospective portfolio

3



company investments. In particular, our investment adviser works closely with the Ares investment professionals, who oversee a portfolio of investments in over 400 companies, and provide access to an extensive network of relationships and special insights into industry trends and the state of the capital markets.


Disciplined investment philosophy

              In making its investment decisions, our investment adviser has adopted Ares' long-standing, consistent investment approach that was developed over 14 years ago by several of its founders. Ares Capital Management's investment philosophy and portfolio construction involves an assessment of the overall macroeconomic environment, financial markets and company-specific research and analysis. Our investment approach emphasizes capital preservation, low volatility and minimization of downside risk.


Extensive industry focus

              We concentrate our investing activities in industries with a history of predictable and dependable cash flows and in which the Ares investment professionals historically have had extensive investment experience. Since its inception in 1997, Ares investment professionals have invested in over 1,000 companies in over 30 different industries, and over this time have developed long-term relationships with management teams and management consultants within these industries. The experience of Ares' investment professionals in investing across these industries, throughout various stages of the economic cycle, provides our investment adviser with access to ongoing market insights and favorable investment opportunities.


Flexible transaction structuring

              We are flexible in structuring investments, the types of securities in which we invest and the terms associated with such investments. The principals of Ares have extensive experience in a wide variety of securities for leveraged companies with a diverse set of terms and conditions. This approach and experience should enable our investment adviser to identify attractive investment opportunities throughout the economic cycle and across a company's capital structure so that we can make investments consistent with our stated objectives.


OPERATING AND REGULATORY STRUCTURE

              Our investment activities are managed by Ares Capital Management and supervised by our board of directors, a majority of whom are independent of Ares and its affiliates. Ares Capital Management is an investment adviser that is registered under the Investment Advisers Act of 1940, or the "Advisers Act." Under our amended and restated investment advisory and management agreement, referred to herein as our investment advisory and management agreement, we have agreed to pay Ares Capital Management an annual base management fee based on our total assets, as defined under the 1940 Act (other than cash and cash equivalents but including assets purchased with borrowed funds), and an incentive fee based on our performance. See "Management—Investment Advisory and Management Agreement."

              As a BDC, we are required to comply with certain regulatory requirements. While we are permitted to finance investments using debt, our ability to use debt is limited in certain significant respects. See "Regulation." We have elected to be treated for federal income tax purposes as a regulated investment company, or a "RIC," under Subchapter M of the Internal Revenue Code of 1986, or the "Code." See "Material U.S. Federal Income Tax Considerations."

4




LIQUIDITY

              We are party to a Senior Secured Revolving Credit Agreement that provides for up to $250 million of borrowings, which expires on December 28, 2010. In addition, our wholly owned subsidiary, Ares Capital CP Funding LLC, is party to a separate credit facility (together with the Senior Secured Revolving Credit Agreement, the "Facilities") that provides for up to $350 million of borrowings, which expires on November 1, 2006, unless extended prior to such date with the consent of the lenders.


RISK FACTORS

              Investing in Ares Capital involves risks. The following is a summary of certain risks that you should carefully consider before investing in shares of our common stock. In addition, see "Risk Factors" beginning on page 15 for a more detailed discussion of the factors you should carefully consider before deciding to invest in our common stock.

Risks Relating to Our Business

5



Risks Relating To Our Investments

6


Risks Relating To Offerings


OUR CORPORATE INFORMATION

              Our administrative offices are located at 1999 Avenue of the Stars, Suite 1900, Los Angeles, California, 90067, telephone number (310) 201-4200, and our executive offices are located at 280 Park Avenue, 22nd Floor, Building East, New York, New York 10017, telephone number (212) 750-7300.

7



OFFERINGS

              We may offer, from time to time, up to $250 million of our common stock, on terms to be determined at the time of the offering. We will offer our common stock at prices and on terms to be set forth in one or more supplements to this prospectus; provided that the offering price per share, less any underwriting commissions or discounts, will not be less than the net asset value per share of our common stock at the time of the offering.

              We may offer our common stock directly to one or more purchasers, through agents that we designate from time to time, or to or through underwriters or dealers. The prospectus supplement relating to the offering will identify any agents or underwriters involved in the sale of our common stock, and will set forth any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See "Plan of Distribution." We may not sell any of our common stock through agents, underwriters or dealers without delivery of a prospectus supplement describing the method and terms of the offering of our securities.

              Set forth below is additional information regarding offerings of our securities:

Use of proceeds   Unless otherwise specified in a prospectus supplement, we intend to use the net proceeds from the sale of our securities for general corporate purposes, which includes investing in portfolio companies in accordance with our investment objectives and strategies and repaying indebtedness, if any, incurred under our credit facilities. The supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such offering. See "Use of Proceeds."

Distributions

 

We intend to distribute quarterly dividends to our stockholders out of assets legally available for distribution. Our quarterly dividends, if any, will be determined by our board of directors. For more information, see "Dividends."

Taxation

 

We have elected to be treated for federal income tax purposes as a RIC. As a RIC, we generally will not pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To maintain our RIC status, we must meet specified source-of-income and asset diversification requirements and distribute annually an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, out of assets legally available for distribution. See "Risk Factors—We will be subject to corporate level income tax if we are unable to qualify as a RIC" and "Distributions."

Dividend reinvestment plan

 

We have a dividend reinvestment plan for our stockholders. This is an "opt out" dividend reinvestment plan. As a result, if we declare a dividend, then stockholders' cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends. Stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. See "Dividend Reinvestment Plan."

NASDAQ National Market symbol

 

"ARCC"
     

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Anti-takeover provisions

 

Our board of directors is divided into three classes of directors serving staggered three-year terms. This structure is intended to provide us with a greater likelihood of continuity of management, which may be necessary for us to realize the full value of our investments. A staggered board of directors also may serve to deter hostile takeovers or proxy contests, as may certain other measures adopted by us. See "Description of Our Stock."

Leverage

 

We borrow funds to make additional investments. We use this practice, which is known as "leverage," to attempt to increase returns to our common stockholders, but it involves significant risks. See "Risk Factors," "Senior Securities" and "Regulation—Indebtedness and Senior Securities." With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ at any particular time will depend on our investment adviser's and our board of directors' assessment of market and other factors at the time of any proposed borrowing.

Management arrangements

 

Ares Capital Management serves as our investment adviser. Ares Administration serves as our administrator. For a description of Ares Capital Management, Ares Administration, Ares and our contractual arrangements with these companies, see "Management—Investment Advisory and Management Agreement," and "—Administration Agreement."

Available information

 

We are required to file periodic reports, proxy statements and other information with the SEC. This information is available free of charge on our website at
www.arescapitalcorp.com. The SEC also maintains a website at www.sec.gov that contains such information.

9



FEES AND EXPENSES

              The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by "you," "us" or "Ares Capital," or that "we" will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Ares Capital.

Stockholder transaction expenses (as a percentage of offering price):      
Sales load paid by us       (1)
Offering expenses borne by us       (2)
Dividend reinvestment plan expenses   None     (3)
   
 
Total stockholder transaction expenses paid by us       (4)
   
 

Estimated annual expenses (as a percentage of consolidated net assets attributable to common stock)(5):

 

 

 
Management fees   2.04 %(6)
Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee net investment income, subject to certain limitations)   0.00 %(7)
Interest payments on borrowed funds   1.23 %(8)
Other expenses   0.78 %(9)
   
 
Total annual expenses (estimated)   4.05 %(10)

(1)
In the event that the shares of common stock to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load.

(2)
The related prospectus supplement will disclose the estimated amount of offering expenses, the offering price and the offering expenses borne by us as a percentage of the offering price.

(3)
The expenses of the dividend reinvestment plan are included in "other expenses."

(4)
The related prospectus supplement will disclose the offering price and the total stockholder transaction expenses as a percentage of the offering price.

(5)
"Consolidated net assets attributable to common stock" equals net asset value at March 31, 2006.

(6)
Our management fee is 1.5% of our total assets other than cash and cash equivalents (which includes assets purchased with borrowed amounts). For the purposes of this table, we have assumed that we maintain no cash or cash equivalents. The 2.04% reflected on the table is calculated on our net assets (rather than our total assets). See "Management—Investment Advisory and Management Agreement."

(7)
We expect to invest all of the net proceeds from shares of common stock registered under the registration statement of which this prospectus is a part within two years or less of the date of the initial registration and may have capital gains and interest income that could result in the payment of an incentive fee to our investment adviser in the first year after completion of offerings pursuant to this prospectus. However, the incentive fee payable to our investment adviser is based on our performance and will not be paid unless we achieve certain goals. As we cannot predict whether we will meet the necessary performance targets, we have assumed a base incentive fee of 0% in this chart. Since our inception, the average quarterly incentive fee payable to our investment adviser has been approximately 0.34% of our weighted net assets (1.36% on an annualized basis). For more detailed information about incentive fees previously incurred by us, please see Note 3 to our

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(8)
"Interest payments on borrowed funds" represents an estimate of our annualized interest expenses based on actual interest and credit facility expense incurred and amortization of debt issuance cost for the quarter ended March 31, 2006. During the quarter ended March 31, 2006, the average borrowings were $82.9 million and cash paid for interest expense was $308,038. We had outstanding borrowings of $185.2 million at March 31, 2006. The estimate is based on our assumption that our borrowings and interest costs after an offering will remain similar to those prior to such offering. The amount of leverage that we employ at any particular time will depend on, among other things, our investment adviser's and our board of directors' assessment of market and other factors at the time of any proposed borrowing. See "Risk Factors—We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing with us."

(9)
Includes our overhead expenses, including payments under the administration agreement based on our allocable portion of overhead and other expenses incurred by Ares Administration in performing its obligations under the administration agreement. Such expenses are based on annualized other expenses for the quarter ended March 31, 2006. See "Management—Administration Agreement." The holders of shares of our common stock (and not the holders of our debt securities or preferred stock, if any) indirectly bear the cost associated with our annual expenses.

(10)
"Total annual expenses" as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. We borrow money to leverage our net assets and increase our total assets. The SEC requires that the "Total annual expenses" percentage be calculated as a percentage of net assets, rather than the total assets, including assets that have been funded with borrowed monies. If the "Total annual

11



Example

              The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage, that none of our assets are cash or cash equivalents, and that our annual operating expenses would remain at the levels set forth in the table above. Transaction expenses are not included in the following example. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.

 
  1 year
  3 years
  5 years
  10 years
You would pay the following expenses on a $1,000 investment, assuming a 5% annual return(1)   $ 41.50   $ 125.56   $ 211.06   $ 431.24

(1)
The above illustration assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation. The expenses you would pay, based on a $1,000 investment and assuming a 5% annual return resulting entirely from net realized capital gains (and therefore subject to the capital gain incentive fee), and otherwise making the same assumptions in the example above, would be: 1 year, $51.50; 3 years, $154.88; 5 years, $258.73; and 10 years, $520.16. However, cash payment of the capital incentive fee would be deferred if during the most recent four full calendar quarter period ending on or prior to the date the payment set forth in the example is to be made, the sum of (a) our aggregate distributions to our stockholders and (b) our change in net assets (defined as total assets less indebtedness) was less than 8.0% of our net assets at the beginning of such period (as adjusted for any share issuances or repurchases).

              The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the investment advisory and management agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan who have not otherwise elected to receive cash will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See "Dividend Reinvestment Plan" for additional information regarding our dividend reinvestment plan.

              This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.

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SELECTED FINANCIAL AND OTHER DATA

              The following selected financial and other data for the period from June 23, 2004 (inception) through December 31, 2004 and the year ended December 31, 2005, are derived from our consolidated financial statements that have been audited by KPMG LLP, an independent registered public accounting firm whose report thereon is included within this registration statement. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results at and for the three months ended March 31, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The data should be read in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this registration statement.


ARES CAPITAL CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
Three Months Ended March 31, 2006
Year Ended December 31, 2005 and
Period June 23, 2004 (inception) Through December 31, 2004

 
  Three Months
Ended
March 31, 2006

  Year Ended
December 31, 2005

  For the Period
June 23, 2004
(inception)
Through
December 31, 2004

 
Total Investment Income   $ 20,191,305   $ 41,850,477   $ 4,380,848  
Net Realized and Unrealized Gain on Investments     2,151,498     14,727,276     475,393  
Total Expenses     (8,499,770 )   (14,726,677 )   (1,665,753 )
   
 
 
 
Net Increase in Stockholders' Equity Resulting from Operations   $ 13,843,033   $ 41,851,076   $ 3,190,488  
   
 
 
 
Per Share Data:                    
  Net Increase in Stockholder's Equity Resulting from Operations:                    
    Basic:   $ 0.36   $ 1.78   $ 0.29  
    Diluted:   $ 0.36   $ 1.78   $ 0.29  
  Cash Dividend Declared:   $ 0.36   $ 1.30   $ 0.30  

Total Assets

 

$

778,620,556

 

$

613,645,144

 

$

220,455,614

 
Total Debt   $ 185,200,000   $ 18,000,000   $ 55,500,000  
Total Stockholders' Equity   $ 571,375,338   $ 569,612,199   $ 159,708,305  

Other Data:

 

 

 

 

 

 

 

 

 

 
  Number of Portfolio Companies at Period End     48     38     20  
  Principal Amount of Investments Purchased(1)   $ 195,411,000   $ 504,299,000   $ 234,102,000  
  Principal Amount of Investments Sold and Repayments(2)   $ 36,745,000   $ 108,415,000   $ 52,272,000  
  Total Return Based on Market Value(3)     9.15 %   (10.60 )%   31.53 %
  Total Return Based on Net Asset Value(4)     2.42 %   12.04 %   (1.80 )%
  Weighted Average Yield of Income Producing Equity Securities and Debt(5):     11.47 %   11.25 %   12.36 %

(1)
The information presented for the period June 23, 2004 (inception) through December 31, 2004 includes $140.8 million of the assets purchased from Royal Bank of Canada and excludes $9.7 million of publicly traded fixed income securities.

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(2)
The information presented for the period June 23, 2004 (inception) through December 31, 2004 excludes $9.7 million of publicly traded fixed income securities.

(3)
Total return based on market value for the three months ended March 31, 2006 equals the increase of the ending market value at March 31, 2006 or $17.18 per share over the ending market value at December 31, 2005 of $16.07, plus the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the market value at December 31, 2005. Total return based on market value for the year ended December 31, 2005 equals the decrease of the ending market value at December 31, 2005 of $16.07 per share over the ending market value at December 31, 2004 of $19.43 per share plus the declared dividends of $1.30 per share for the year ended December 31, 2005. Total return based on market value for the period June 23, 2004 (inception) through December 31, 2004 equals the increase of the ending market value at December 31, 2004 of $19.43 per share over the offering price of $15.00 per share plus the declared dividend of $0.30 per share (includes return of capital of $0.01 per share) for holders of record on December 27, 2004, divided by the offering price. Total return based on market value is not annualized.

(4)
Total return based on net asset value for the three months ended March 31, 2006 equals the change in net asset value during the period plus the declared dividend of $0.36 per share for holders of record on March 24, 2006, divided by the beginning net asset value during the period. Total return based on net asset value for the year ended December 31, 2005 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.30 per share for the year ended December 31, 2005, divided by the beginning net asset value. Total return based on net asset value for the period June 23, 2004 (inception) through December 31, 2004 equals the change in net asset value during the period plus the declared dividend of $0.30 per share (includes return of capital of $0.01 per share) for holders of record on December 27, 2004, divided by the beginning net asset value. Total return based on net asset value is not annualized.

(5)
Weighted average yield on income producing equity securities and debt is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount on accruing debt divided by (b) total income producing equity securities and debt at fair value.


SELECTED QUARTERLY DATA (Unaudited)

 
  2006
  2005
  2004
 
  Q1
  Q4
  Q3
  Q2
  Q1
  Q4(1)
Total Investment Income   $ 20,191,305   $ 14,890,281   $ 11,607,989   $ 9,601,615   $ 5,750,592   $ 4,380,848
Net investment income before net realized and unrealized gain on investments and incentive compensation   $ 14,614,419   $ 11,071,081   $ 8,887,631   $ 7,567,053   $ 3,800,113   $ 3,009,749
Incentive compensation   $ 2,922,884   $ (510,478 ) $ 2,643,353   $ 1,798,919   $ 270,284   $ 95,471
Net investment income before net realized and unrealized gain on investments   $ 11,691,535   $ 11,581,559   $ 6,244,278   $ 5,768,134   $ 3,529,829   $ 2,914,278
Net realized and unrealized gain on investments   $ 2,151,498   $ 4,281,465   $ 3,637,612   $ 1,834,122   $ 4,974,077   $ 475,393
Net increase in stockholders' equity resulting from operations   $ 13,843,033   $ 15,863,024   $ 9,881,890   $ 7,602,256   $ 8,503,906   $ 3,389,671
Basic and diluted earnings per common share   $ 0.36   $ 0.45   $ 0.42   $ 0.33   $ 0.69   $ 0.34
Net asset value per share as of the end of the quarter   $ 15.03   $ 15.03   $ 15.08   $ 14.97   $ 14.96   $ 14.43

(1)
The Company was initially funded on June 23, 2004 (inception) but had no significant operations until the fourth quarter of 2004. The sole activity for the second and third quarters of 2004 was the incurrence of $199,183 in organizational expenses.

14



RISK FACTORS

              Before you invest in our shares, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to make an investment in our common stock. The risks set out below are not the only risks we face. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.


RISKS RELATING TO OUR BUSINESS

A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.

              If we do not continue to qualify as a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility.


The Company may not replicate Ares' historical success.

              Our primary focus in making investments differs from those of other private funds that are or have been managed by Ares' investment professionals. Further, investors in Ares Capital are not acquiring an interest in other Ares funds. While Ares Capital may consider potential co-investment participation in portfolio investments with other Ares funds (other than ACOF), no investment opportunities are currently under consideration and any such investment activity could be subject to, among other things, regulatory and independent board member approvals, the receipt of which, if sought, cannot be assured. Accordingly, we cannot assure you that Ares Capital will replicate Ares' historical success, and we caution you that our investment returns could be substantially lower than the returns achieved by those private funds.


We are dependent upon Ares Capital Management's key personnel for our future success and upon their access to Ares investment professionals.

              We depend on the diligence, skill and network of business contacts of the members of Ares Capital Management's investment committee. We also depend, to a significant extent, on Ares Capital Management's access to the investment professionals of Ares and the information and deal flow generated by Ares' investment professionals in the course of their investment and portfolio management activities. Our future success will depend on the continued service of Ares Capital Management's investment committee. The departure of any of the members of Ares Capital Management's investment committee, or of a significant number of the investment professionals or partners of Ares, could have a material adverse effect on our ability to achieve our investment objectives. In addition, we cannot assure you that Ares Capital Management will remain our investment adviser or that we will continue to have access to Ares' investment professionals or its information and deal flow.


We are a new company with a limited operating history.

              We were incorporated in April 2004, completed our initial public offering in October 2004 and have a limited operating history. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially.

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Our investment adviser and the members of its investment committee have limited experience managing a BDC.

              The 1940 Act imposes numerous constraints on the operations of business development companies. For example, business development companies are required to invest at least 70% of their total assets primarily in securities of private or thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Our investment adviser and the majority of the members of our senior management only have limited experience managing or providing management consultant services to an operating company, such as may be required of a BDC. Our investment adviser's, and the members of its investment committee's, lack of experience in managing a portfolio of assets under such constraints may hinder their ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.


Our financial condition and results of operation will depend on our ability to manage future growth effectively.

              Our ability to achieve our investment objectives depends on our ability to acquire suitable investments and monitor and administer those investments, which depends, in turn, on Ares Capital Management's ability to identify, invest in and monitor companies that meet our investment criteria.

              Accomplishing this result on a cost-effective basis is largely a function of Ares Capital Management's structuring of the investment process and its ability to provide competent, attentive and efficient services to us. Our executive officers and the members of Ares Capital Management have substantial responsibilities in connection with their roles at Ares and with the other Ares funds as well as responsibilities under the investment advisory and management agreement. They may also be called upon to provide managerial assistance to our portfolio companies on behalf of our administrator. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, Ares Capital Management will need to hire, train, supervise and manage new employees. However, we cannot assure you that any such employees will be retained. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.


Our ability to grow will depend on our ability to raise capital.

              We will need to periodically access the capital markets to raise cash to fund new investments. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any. With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ will depend on our investment adviser's and our board of directors' assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our current Facilities or obtain other lines of credit at all or on terms acceptable to us.


We operate in a highly competitive market for investment opportunities.

              A number of entities compete with us to make the types of investments that we make in middle market companies. We compete with other business development companies, public and private funds, commercial and investment banks, commercial financing companies, insurance companies, high yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial,

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technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot assure you that we will be able to identify and make investments that meet our investment objectives.

              We do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer.

              We may lose investment opportunities if we do not match our competitors' pricing, terms and structure. If we match our competitors' pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies than what we may have originally anticipated, which may impact our return on these investments.


We will be subject to corporate-level income tax if we are unable to qualify as a RIC.

              To qualify as a RIC under the Code, we must meet certain income source, asset diversification and annual distribution requirements.

              The annual distribution requirement for a RIC is satisfied if we distribute to our stockholders on a timely basis an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses for each year. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under our loan agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax.

              To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of RIC status. If we fail to qualify as a RIC for any reason and become or remain subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.


We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

              For federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount or increases in loan balances are included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash, including, for example, non-cash income from pay-in-kind securities and deferred payment securities.

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              Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to distribute an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, to maintain our status as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thus be subject to corporate-level income tax. See "Material U.S. Federal Income Tax Considerations—Taxation as a RIC."

              If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. The investment adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never receive as a result of a default by an entity on the obligation that resulted in the accrual of such income.


Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.

              We may issue debt securities or preferred stock, which we refer to collectively as "senior securities," and borrow money from banks or other financial institutions up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we will be permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. If the value of our assets declines, we may be unable to satisfy this test, which would prohibit us from paying dividends and could prevent us from maintaining our status as a RIC. If we cannot satisfy this test, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. As of March 31, 2006, our asset coverage for senior securities was 409%.

              We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities (less any commission or discount). If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital.

              In addition, we may seek to securitize our loans to generate cash for funding new investments. To securitize loans, we may create a wholly owned subsidiary and contribute a pool of loans to the subsidiary. This could include the sale of interests in the subsidiary on a non-recourse basis to purchasers who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools, and we would retain a portion of the equity in the securitized pool of loans. An inability to successfully securitize our loan portfolio could limit our ability to grow our business, fully execute our business strategy and decrease our earnings, if any. The securitization market is subject to changing market conditions and we may not be able to access this market when we would otherwise deem appropriate. Moreover, the successful securitization of our loan portfolio might expose us to losses as the residual loans in which we do not sell interests will tend to be those that are riskier and more apt to generate losses. The 1940 Act may also impose restrictions on the structure of any securitization.

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If our primary investments are deemed not to be qualifying assets, we could lose our status as a BDC or be precluded from investing according to our current business plan.

              If we are to maintain our status as a BDC, we must not acquire any assets other than "qualifying assets" unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. If we acquire senior loans, mezzanine investments or equity securities from an issuer that has outstanding marginable securities at the time we make an investment, these acquired assets may not be treated as qualifying assets. See "Regulation—Qualifying Assets." This results from the definition of "eligible portfolio company" under the 1940 Act, which in part looks to whether a company has outstanding marginable securities.

              Amendments promulgated in 1998 by the Board of Governors of the Federal Reserve System to Regulation T under the Securities Exchange Act of 1934 (the "Exchange Act"), expanded the definition of marginable security to include any non-equity security. These amendments have raised questions as to whether a private company that