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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K


ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission File No. 000-50697



ARES CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)
  33-1089684
(I.R.S. Employer
Identification No.)

280 Park Avenue, 22nd Floor, New York, NY 10017
(Address of principal executive offices) (Zip Code)

(212) 750-7300
(Registrant's telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:

Title of each class    Name of each exchange on which registered 
Common Stock, par value $0.001 per share   The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

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

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

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2008, based on the closing price on that date of $10.08 on The NASDAQ Global Select Market, was $948,827,095.78. As of February 27, 2009, there were 97,152,820 shares of the registrant's common stock outstanding.

        Portions of the registrant's Proxy Statement for its 2009 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III of this Form 10-K.



PART I

Item 1.    Business

GENERAL

        Ares Capital Corporation, a Maryland corporation (together with its subsidiaries, where applicable, "Ares Capital" or the "Company," which may also be referred to as "we," "us," or "our") is a specialty finance company that is a closed-end, non-diversified management investment company. We have elected to be regulated as a business development company or a "BDC" under the Investment Company Act of 1940, or the "Investment Company Act." We were founded on April 16, 2004, were initially funded on June 23, 2004 and completed our initial public offering on October 8, 2004. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. However, we may from time to time invest in larger companies. In this Annual Report, we generally use the term "middle market" to refer to companies with annual EBITDA between $5 million and $100 million. EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization.

        We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component like warrants. 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. Our investments have ranged between $10 million and $100 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. Our equity investments have generally been less than $20 million each but may grow with our capital availability and are usually made in conjunction with loans we make to these companies.

        The proportion of these investments will change over time given our views on, among other things, the economic and credit environment we are operating in. 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 such situations, while we may initially agree to fund up to a certain dollar amount of an investment, we may syndicate a portion of such amount to third parties prior to closing such investment, such that we make a smaller investment than what was reflected in our original commitment.

        The first and second lien senior loans generally have stated terms of three to 10 years and the mezzanine debt investments generally have stated terms of up to 10 years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, we may invest in securities with any maturity or duration. 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 Investors Service or lower than "BBB-" by Standard & Poor's Corporation). We may invest without limit in debt of any rating, as well as debt that has not been rated by any nationally recognized statistical rating organization.

        We believe that our investment adviser, Ares Capital Management LLC ("Ares Capital Management," the "Investment Adviser" or "investment adviser"), is able to leverage the current investment platform, resources and existing relationships of Ares Partners Management Company LLC and its affiliate companies (collectively, "Ares") 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

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investments. Ares has been in existence for more than 11 years and our senior principals have an average of over 20 years experience investing in senior loans, high yield bonds, mezzanine debt and private equity. The Company has access to the Ares staff of approximately 100 investment professionals and to the approximately 150 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance, technology 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 eligible portfolio companies, we also may invest up to 30% of our portfolio in opportunistic investments of non-eligible portfolio companies. Specifically, as part of this 30% basket, we may invest in debt of middle market companies located outside of the United States, in investment funds that are operating pursuant to certain exceptions to the Investment Company Act, in advisers to similar investment funds and in debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the Investment Company Act. We expect that these public companies generally will have debt that may be non-investment grade. From time to time we may also invest in high yield bonds, which, depending on the issuer, may or may not be included in the 30% basket.

        In addition to making investments in the Ares Capital portfolio, our wholly owned subsidiary, Ivy Hill Asset Management L.P. ("Ivy Hill Management"), manages two senior debt funds, Ivy Hill Middle Market Credit Fund, Ltd. ("Ivy Hill I") and Ivy Hill Middle Market Credit Fund II, Ltd. ("Ivy Hill II," and together with Ivy Hill I, the "Ivy Hill Funds").

About Ares

        Founded in 1997, Ares is an independent international investment management firm with approximately $29.0 billion of total committed capital and over 250 employees as of the date of this Annual Report.

        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 debt 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 floating rate debt to common equity. This flexibility, combined with Ares' "buy and hold" philosophy, enables Ares to structure an investment to meet the specific needs of a company rather than the less flexible demands of the public markets.

        Ares is comprised of the following groups:

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        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.

Ares Capital Management

        Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of 31 investment professionals led by our President, Michael Arougheti, and the partners of Ares Capital Management, Eric Beckman, Kipp deVeer, Mitchell Goldstein and Michael Smith. Ares Capital Management leverages off of Ares' entire investment platform and benefits from the significant capital markets, trading and research expertise of all of Ares' investment professionals. Ares funds currently hold over 600 investments in over 30 different industries and have made investments in over 1,600 companies since inception. Ares Capital Management's investment committee has nine members, including Mr. Arougheti, the Ares Capital Management partners, and four founding members of Ares.

MARKET OPPORTUNITY

        We believe there are opportunities for us to invest in middle market companies for the following reasons:

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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 $29.0 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. The Ares platform provides the Company an advantage through its deal flow generation and investment evaluation process. Ares' professionals maintain extensive financial sponsor and intermediary relationships, which provide valuable insight and access to transactions and information.

Seasoned management team

        John Kissick, Antony Ressler, Bennett Rosenthal, and David Sachs are all founding members of Ares who serve on Ares Capital Management's investment committee. These 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. Ares Capital Management's investment professionals and members of its investment committee also have significant experience investing across market cycles. In addition, our president, Michael Arougheti, leads a dedicated origination and transaction development team of 31 investment professionals, including Mr. Arougheti and the partners of Ares Capital Management, Eric Beckman, Kipp deVeer, Mitch Goldstein and Michael Smith. As a result of Ares' extensive investment experience and the history of its seasoned management team, Ares has developed a strong reputation across U.S. and European capital markets. We believe that Ares' long history in the leveraged loan market and the extensive experience of the principals investing across market cycles provides Ares Capital Management with a competitive advantage in identifying, investing in, and managing a portfolio of investments in middle market companies.

Experience and focus on middle market companies

        Ares has historically focused on investments in middle market companies and we benefit from this experience. In sourcing and analyzing deals, our investment adviser uses Ares' extensive network of relationships with intermediaries focused on middle market companies, including management teams, members of the investment banking community, private equity groups and other investment firms with whom Ares has had long-term relationships. We believe this network enables us to attract well-positioned prospective portfolio company investments. Our investment adviser works closely with the Ares investment professionals who oversee a portfolio of investments in over 600 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 credit-based investment approach that was developed over 18 years ago by its founders. Specifically, Ares Capital Management's investment philosophy, portfolio construction and portfolio management involve 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. In addition to engaging in extensive due diligence from

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the perspective of a long-term investor, Ares Capital Management's approach seeks to reduce risk in investments by focusing on:

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 have had extensive investment experience. Since its inception in 1997, Ares investment professionals have invested in over 1,600 companies in over 30 different industries. Ares investment professionals have developed long-term relationships with management teams and management consultants in these industries, and have accumulated substantial information concerning these industries and potential trends within these industries. The experience of Ares' investment professionals investing across these industries throughout various stages of the economic cycle provides our investment adviser with access to market insights and investment opportunities.

Flexible transaction structuring

        We are flexible in structuring investments, including 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. We believe this approach and experience enables our investment adviser to identify attractive investment opportunities throughout the economic cycle and across a company's capital structure so we can make investments consistent with our stated investment objective and preserve principal while seeking appropriate risk adjusted returns. In addition, we have the ability to provide "one stop" financing with the ability to invest capital across the balance sheet and hold larger investments than many of our competitors. The ability to underwrite, syndicate and hold larger investments (i) increases flexibility, (ii) may increase net fee income and earnings through syndication, (iii) broadens market relationships and deal flow and (iv) allows us to optimize our portfolio composition. We believe that the ability to provide capital at every level provides a strong value proposition to middle market borrowers and our senior debt capabilities provide superior deal origination and relative value analysis capabilities compared to traditional "mezzanine only" lenders.

Broad origination strategy

        Our investment adviser focuses on self-originating most of our investments by identifying a broad array of investment opportunities across multiple channels. We believe that this allows for asset selectivity and that there is a significant relationship between proprietary deal origination and credit performance. Our focus on generating proprietary deal flow and lead investing also gives us greater control over capital structure, deal terms, pricing and documentation and results in active portfolio management of investments. Moreover, by leading the investment process, our investment adviser is able to secure controlling positions in credit tranches providing additional control in investment outcomes. Our investment adviser also has originated substantial proprietary deal flow from middle

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market intermediaries, which often allows us to act as the sole or principal source of institutional junior capital to the borrower.

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 Investment Company Act (other than cash and cash equivalents, but including assets purchased with borrowed funds), and an incentive fee based on our performance.

        As a BDC, we are required to comply with certain regulatory requirements. For example, we are not generally permitted to invest in any portfolio company in which Ares or any of its affiliates currently has an investment (although we may co-invest on a concurrent basis with funds managed by Ares, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures). Some of these co-investments would only be permitted pursuant to an exemptive order from the Securities and Exchange Commission (the "SEC"). We have applied for an exemptive order from the SEC that would permit us to co-invest with funds managed by Ares. Any such order will be subject to certain terms and conditions. There is no assurance that the application for exemptive relief will be granted by the SEC. Accordingly, we cannot assure you that the Company will be permitted to co-invest with funds managed by Ares. See "Risk Factors—Risks Relating to Our Business—The Company may not replicate Ares' historical success and our ability to enter into transactions with Ares and our other affiliates is restricted."

        Also, while we may borrow funds to make investments, our ability to use debt is limited in certain significant respects. As a BDC and a regulated investment company ("RIC") for tax purposes, the Company is dependent on its ability to raise capital through the issuance of its common stock. RICs generally must distribute substantially all of their earnings to stockholders as dividends in order to achieve pass-through tax treatment, which prevents the Company from using those earnings to support operations, which may include new investments (including investments into existing portfolio companies). Further, BDCs must meet a debt to equity ratio of less than 1:1 in order to incur debt or issue senior securities, which requires the Company to finance its investments with at least as much equity as debt and senior securities in the aggregate. Our credit facilities also require that we maintain a debt to equity ratio of less than 1:1.

INVESTMENTS

Ares Capital Corporation portfolio

        We have built an investment portfolio of primarily first and second lien loans, mezzanine debt and to a lesser extent equity investments in private middle market companies. Our portfolio is well diversified by industry sector and its concentration to any single issuer is limited. Our debt investments generally range between $10 million to $100 million on average, although the investment size may be more or less than this range and depending on capital availability. Our equity investments have generally been less than $20 million each but may grow with our capital availability and are usually made in conjunction with loans we make to these companies. In addition, the proportion of these investments will change over time given our views on, among other things, the economic and credit environment we are operating in. 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 such situations, while we may initially agree to fund up to a certain

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dollar amount of an investment, we may syndicate a portion of such amount to third parties prior to closing such investment, such that we make a smaller investment than what was reflected in our original commitment. In addition to originating investments, we may also acquire investments in the secondary market.

        Structurally, mezzanine debt usually ranks subordinate in priority of payment to senior loans and is often unsecured. However, mezzanine debt ranks senior to common and preferred equity in a borrowers' capital structure. Typically, mezzanine debt has elements of both debt and equity instruments, offering the fixed returns in the form of interest payments associated with senior loans, while providing lenders an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest. This equity interest typically takes the form of warrants. Due to its higher risk profile and often less restrictive covenants as compared to senior loans, mezzanine debt generally earns a higher return than senior secured debt. The warrants associated with mezzanine debt are typically detachable, which allows lenders to receive repayment of their principal on an agreed amortization schedule while retaining their equity interest in the borrower. Equity issued in connection with mezzanine debt also may include a "put" feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed formula.

        In making an equity investment, in addition to considering the factors discussed below under "Investment Selection," we also consider the anticipated timing of a liquidity event, such as a public offering, sale of the company or redemption of our equity securities.

        Our principal focus is investing in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity capital, of middle market companies in a variety of industries. We generally target companies that generate positive cash flows. Ares has a staff of approximately 100 investment professionals who specialize in specific industries. We generally seek to invest in companies from the industries in which Ares' investment professionals have direct expertise. The following is a representative list of the industries in which Ares has invested:

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        However, we may invest in other industries if we are presented with attractive opportunities.

        The industrial and geographic compositions of our portfolio at fair value as of December 31, 2008 and 2007 were as follows:

 
  As of December 31,  
 
  2008   2007  

Industry

             

Health Care

    20.2 %   17.1 %

Beverage/Food/Tobacco

    12.3     6.2  

Education

    11.1     6.9  

Other Services

    7.4     5.8  

Financial

    7.0     9.9  

Business Services

    6.7     8.5  

Retail

    5.7     6.5  

Environmental Services

    4.1     4.9  

Printing/Publishing/Media

    3.8     7.3  

Manufacturing

    3.8     4.7  

Restaurants

    3.6     4.2  

Aerospace and Defense

    3.0     2.5  

Consumer Products

    3.0     5.6  

Telecommunications

    2.0     0.5  

Cargo Transport

    1.4     0.8  

Containers/Packaging

    1.4     2.7  

Computers/Electronics

    1.2     2.0  

Health Clubs

    1.2     1.9  

Grocery

    1.0     1.5  

Homebuilding

    0.1     0.5  
           
   

Total

    100.0 %   100.0 %
           

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  As of December 31,  
 
  2008   2007  

Geographic Region

             

Southeast

    22.2 %   18.3 %

Mid-Atlantic

    21.0     22.9  

Midwest

    20.6     22.6  

West

    18.3     19.0  

International

    14.1     12.7  

Northeast

    3.8     4.5  
           
   

Total

    100.0 %   100.0 %
           

        In addition to such investments, we may invest up to 30% of the portfolio in opportunistic investments of non-eligible portfolio companies. Specifically, as part of this 30% basket, we may invest in debt of middle market companies located outside of the United States, in investment funds that are operating pursuant to certain exceptions to the Investment Company Act, in advisers to similar investment funds and in debt and equity of public companies that do not meet the definition of eligible portfolio companies because their market capitalization of publicly traded equity securities exceeds the levels provided for in the Investment Company Act. We expect that these public companies generally will have debt that is non-investment grade. From time to time we may also invest in high yield bonds, which, depending on the issuer, may or may not be included in the 30% basket.

Managed funds portfolio

        Our wholly owned subsidiary, Ivy Hill Management, manages a middle market credit fund, Ivy Hill I, in exchange for a 0.50% management fee on the average total assets of Ivy Hill I. Ivy Hill I primarily invests in first and second lien bank debt of middle market companies. Ivy Hill I was initially funded in November 2007 with $404.0 million of capital including a $56.0 million investment by the Company consisting of $40.0 million of Class B notes and $16.0 million of subordinated notes. Ivy Hill I purchased $68.0 million and $133.0 million of investments from the Company for the years ended December 31, 2008 and 2007, respectively.

        On November 5, 2008, we established a second middle market credit fund, Ivy Hill II, which is also managed by Ivy Hill Management in exchange for a 0.50% management fee on the average total assets of Ivy Hill II. Ivy Hill II primarily invests in second lien and subordinated bank debt of middle market companies. Ivy Hill II was initially funded with $250.0 million of subordinated notes, and may grow over time with leverage. Ivy Hill II purchased $7.5 million of investments from the Company during the year ended December 31, 2008.

        The Ivy Hill Funds may from time to time, buy additional loans from the Company.

        Ivy Hill Management is party to separate services agreement, referred to herein as the "services agreement," with Ares Capital Management. Pursuant to the services agreement, Ares Capital Management provides Ivy Hill Management with office facilities, equipment, clerical, bookkeeping and record keeping services, services of investment professionals and others to perform investment advisory, research and related services, services of, and oversight of, custodians, depositories, accountants, attorneys, underwriters and such other persons in any other capacity deemed to be necessary. Ivy Hill Management will reimburse Ares Capital Management for all of the costs associated with such services, including Ares Capital Management's allocable portion of overhead and the cost of its officers and respective staff in performing its obligations under the services agreement. The services agreement may be terminated by either party without penalty upon 60-days' written notice to the other party.

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INVESTMENT SELECTION

        Ares' investment philosophy was developed over the past 18 years and has remained consistent and relevant throughout a number of economic cycles. In managing the Company, Ares Capital Management employs the same investment philosophy and portfolio management methodologies used by the investment professionals of Ares in Ares' private investment funds.

        Ares Capital Management's investment philosophy and portfolio management involve:

        The foundation of Ares' investment philosophy is intensive credit investment analysis, a portfolio management discipline based on both market technicals and fundamental value-oriented research, and diversification strategy. Ares Capital Management follows a rigorous process based on:

        Ares Capital Management seeks to identify those issuers exhibiting superior fundamental risk-reward profiles and strong defensible business franchises while focusing on relative value of the security across the industry as well as for the specific issuer.

Intensive due diligence

        The process through which Ares Capital Management makes an investment decision involves extensive research into the target company, its industry, its growth prospects and its ability to withstand adverse conditions. If the senior investment professional responsible for the transaction determines that an investment opportunity should be pursued, Ares Capital Management will engage in an intensive due diligence process. Approximately 30-40% of the investments initially reviewed proceed to this phase. Though each transaction will involve a somewhat different approach, the regular due diligence steps generally to be undertaken include:

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Selective investment process

        Ares Capital Management employs Ares' long-standing, consistent investment approach, which is focused on selectively narrowing investment opportunities through a process designed to identify the most attractive opportunities.

        After an investment has been identified and diligence has been completed, a credit research and analysis report is prepared. This report will be reviewed by the senior investment professional in charge of the potential investment. If such senior and other investment professionals are in favor of the potential investment, then it is first presented to an underwriting committee, which is comprised of Mr. Arougheti and the partners of Ares Capital Management. If the underwriting committee approves of the potential investment it is then presented to the investment committee. However, the portfolio managers of Ares Capital Management are responsible for the day-to-day management of the Company's portfolio.

        After the investment is approved by the underwriting committee, a more extensive due diligence process is employed by the transaction team. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys, independent accountants, and other third party consultants and research firms prior to the closing of the investment, as appropriate on a case by case basis. Approximately 7-10% of all investments initially reviewed by the underwriting committee will be presented to the investment committee. Approval of an investment for funding requires the consensus of the investment committee, including a majority of the members of Ares serving on the investment committee.

Issuance of Formal Commitment

        Once we have determined that a prospective portfolio company is suitable for investment, we work with the management of that company and its other capital providers, including senior, junior, and equity capital providers, to finalize the structure of the investment. We negotiate among these parties to agree on how our investment is expected to perform relative to the other capital in the portfolio company's capital structure. Approximately 5% of the investments initially reviewed eventually result in the issuance of formal commitments.

Debt investments

        We invest in portfolio companies primarily in the form of first and second lien senior loans and mezzanine debt. The first and second lien senior loans generally have terms of three to 10 years. We generally obtain security interests in the assets of our portfolio companies that will serve as collateral in support of the repayment of the first and second lien senior loans. This collateral may take the form of first or second priority liens on the assets of a portfolio company.

        We structure our mezzanine investments primarily as unsecured, subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current interest income. The mezzanine debt investments generally have terms of up to 10 years. These loans typically have interest-only payments in the early years, with amortization of principal deferred to the later years of the mezzanine debt. In some cases, we may enter into loans that, by their terms, convert into equity or additional debt or defer payments of interest (or at least cash interest) for the first few years after our investment. Also, in some cases our mezzanine debt will be collateralized by a subordinated lien on some or all of the assets of the borrower.

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        In some cases, our debt investments may provide for a portion of the interest payable to be payment-in-kind interest. To the extent interest is payment-in-kind, it will be payable through the increase of the principal amount of the loan by the amount of interest due on the then-outstanding aggregate principal amount of such loan. In the case of our first and second lien senior loans and mezzanine debt, we tailor the terms of the investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that aims to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan and improve its profitability. For example, in addition to seeking a senior position in the capital structure of our portfolio companies, we will seek, where appropriate, to limit the downside potential of our investments by:

        We generally require financial covenants and terms that require an issuer to reduce leverage, thereby enhancing credit quality. These methods include: (i) maintenance leverage covenants requiring a decreasing ratio of indebtedness to cash flow; (ii) maintenance cash flow covenants requiring an increasing ratio of cash flow to the sum of interest expense and capital expenditures; and (iii) indebtedness incurrence prohibitions, limiting a company's ability to take on additional indebtedness. In addition, by including limitations on asset sales and capital expenditures we may be able to prevent a company from changing the nature of its business or capitalization without our consent.

        Our debt investments may include equity features, such as warrants or options to buy a minority interest in the portfolio company. Warrants we receive with our debt investments may require only a nominal cost to exercise, and thus, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure the warrants to provide provisions protecting our rights as a minority-interest holder, as well as puts, or rights to sell such securities back to the portfolio company, upon the occurrence of specified events. In many cases, we also obtain registration rights in connection with these equity interests, which may include demand and "piggyback" registration rights.

Equity investments

        Our equity investments may consist of preferred equity that is expected to pay dividends on a current basis or preferred equity that does not pay current dividends. Preferred equity generally has a preference over common equity as to dividends and distributions upon liquidation. In some cases, we may acquire common equity. In general, our equity investments are not control-oriented investments and in many cases we acquire equity securities as part of a group of private equity investors in which we are not the lead investor. Our equity investments have generally been less than $20 million each but may grow with our capital availability and are usually made in conjunction with loans we make to these companies. In many cases, we will also obtain registration rights in connection with these equity interests, which may include demand and "piggyback" registration rights.

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ON-GOING RELATIONSHIPS WITH AND MONITORING OF PORTFOLIO COMPANIES

        Ares Capital Management closely monitors each investment we make, maintains a regular dialogue with both the management team and other stakeholders and seeks specifically tailored financial reporting. In addition, senior investment professionals of Ares may take board seats or obtain board observation rights for our portfolio companies. As of December 31, 2008, of our 91 funded portfolio companies, we were entitled to board seats or board observation rights on 42% of the operating companies in our portfolio or 59% of our total portfolio at fair value.

        We seek to exert significant influence post-investment, in addition to covenants and other contractual rights and through board participation, when appropriate, by actively working with management on strategic initiatives. We often introduce managers of companies in which we have invested to other portfolio companies to capitalize on complementary business activities and best practices.

        In addition to various risk management and monitoring tools, our investment adviser grades the credit status of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. Under this system, investments with a grade of 4 involve the least amount of risk in our portfolio. This portfolio company is performing above expectations and the trends and risk factors are generally favorable, including a potential exit. Investments graded 3 involve a level of risk that is similar to the risk at the time of origination. This portfolio company is performing as expected and the risk factors are neutral to favorable. All new investments are initially assessed a grade of 3. Investments graded 2 involve a portfolio company performing below expectations and indicates that the investment risk has increased materially since origination. This portfolio company may be out of compliance with debt covenants, however, payments are generally not more than 120 days past due. For investments graded 2, our investment adviser increases procedures to monitor the portfolio company and will write down the fair value of the investment if it is deemed to be impaired. An investment grade of 1 indicates that the portfolio company is performing materially below expectations and that the investment risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Investments graded 1 are not anticipated to be repaid in full and our investment adviser will reduce the fair market value of the investment to the amount our investment adviser anticipates will be recovered. Our investment adviser employs half-point increments to reflect underlying trends in portfolio company operating or financial performance, as well as the general outlook. As of December 31, 2008, the weighted average investment grade of the investments in our portfolio was 2.9 and six loans were past due or on non-accrual status.

COMPETITION

        Our primary competition to provide financing to middle market companies include public and private funds, commercial and investment banks, commercial financing companies and private equity funds. Many of our competitors are substantially larger and have considerably greater financial and marketing resources than we do. For example, some competitors may have 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 Investment Company Act imposes on us as a BDC. We use the industry information of Ares' investment professionals to which we have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe that the relationships of the members of Ares Capital Management's investment committees and of the senior principals of Ares, enable us to learn about, and compete effectively for, financing opportunities with attractive middle market companies in the industries in which we seek to invest. The Ares'

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professionals' deep and long-standing direct sponsor relationships and the resulting proprietary transaction opportunities that these relationships often present provide valuable insight and access to transactions and information.

MARKET CONDITIONS

        We do not currently have a material pipeline or backlog in place. Due to increasing volatility in global markets, the availability of capital and access to capital markets has been limited. Until constraints on raising new capital ease, we intend to pursue other avenues of liquidity such as adjusting the pace of our investments, becoming more selective in evaluating investment opportunities, pursuing asset sales, and/or recycling lower yielding investments. We also intend to pursue additional funds to manage at Ivy Hill Management. As the global liquidity situation and market conditions evolve, we will continue to monitor and adjust our approach to funding accordingly. However, given the unprecedented nature of the volatility in the global markets, there can be no assurances that these activities will be successful. Moreover, if current levels of market disruption and volatility continue or worsen, we could face materially higher financing costs. Consequently, our operating strategy could be materially and adversely affected.

        Consistent with the depressed market conditions of the general economy, the stocks of BDCs as an industry have been trading at near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. As a result of the deterioration of the market, several of our peers are no longer active in the market and are winding down their investments, have decreased their distributions to stockholders or have announced share repurchase programs. We cannot assure you that the market pressures we face will not have a material adverse effect on our business, financial condition and results of operations.

        See "Risk Factors—Risks Related to Our Business."

MANAGERIAL ASSISTANCE

        As a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services.

INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT

Management services

        Ares Capital Management serves as our investment adviser and is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of our board of directors, the investment adviser manages the day-to-day operations of, and provides investment advisory and management services to, Ares Capital. Under the terms of the investment advisory and management agreement, Ares Capital Management:

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        Ares Capital Management was initially formed to provide investment advisory services to us and it has not previously provided investment advisory services to anyone else. However, its services to us under the investment advisory and management agreement are not exclusive, and it is free to furnish similar services to other entities.

        The sole member of Ares Capital Management is Ares Management LLC ("Ares Management"), an independent international investment management firm. Ares funds, including funds managed by Ares Management, have approximately $29 billion of total committed capital.

Management fee

        Pursuant to the investment advisory and management agreement with Ares Capital Management and subject to the overall supervision of our board of directors, Ares Capital Management provides investment advisory services to the Company. For providing these services, Ares Capital Management 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% 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 base management fee is payable quarterly in arrears.

        The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the quarter. 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 interest that we never actually receive.

        Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses.

        Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed "hurdle rate" of 2.00% per quarter. If market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for our investment adviser to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income. Our pre-incentive fee net investment income used to calculate this part of the incentive fee is also included in the amount of our total assets (other than cash and cash equivalents but including assets purchased with borrowed funds) used to calculate the 1.5% base management fee.

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

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

        The second part of the incentive fee (the "Capital Gains Fee"), is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and management agreement, as of the termination date) and is calculated at the end of each applicable year by subtracting (a) the sum of the our cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (b) our cumulative aggregate realized capital gains, in each case calculated from October 8, 2004. If such amount is positive at the end of such year, then the Capital Gains Fee for such year is equal to 20.0% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years. If such amount is negative, then there is no Capital Gains Fee for such year.

        The cumulative aggregate realized capital gains are calculated as the sum of the differences, if positive, between (a) the net sales price of each investment in our portfolio when sold and (b) the accreted or amortized cost basis of such investment.

        The cumulative aggregate realized capital losses are calculated as the sum of the amounts by which (a) the net sales price of each investment in the Company's portfolio when sold is less than (b) the accreted or amortized cost basis of such investment.

        The aggregate unrealized capital depreciation is calculated as the sum of the differences, if negative, between (a) the valuation of each investment in the Company's portfolio as of the applicable Capital Gains Fee calculation date and (b) the accreted or amortized cost basis of such investment.

        We defer cash payment of any incentive fee otherwise earned by the investment adviser if during the most recent four full calendar quarter period ending on or prior to the date such payment is to be made the sum of (a) the aggregate distributions to the stockholders of the Company and (b) the change in net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) is less than 8.0% of our net assets at the beginning of such period. These calculations were appropriately pro rated during the first three calendar quarters following October 8, 2004 and are adjusted for any share issuances or repurchases. As of December 31, 2008, $25.3 million in incentive management fees had been deferred pursuant to the investment advisory and management agreement.

Payment of our expenses

        All investment professionals of the investment adviser and its staff when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by Ares Capital

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Management, (not including services provided to any of our portfolio companies pursuant to separate contractual agreements, like Ivy Hill Management). We bear all other costs and expenses of our operations and transactions, including those relating to: rent; organization; calculation of our net asset value (including the cost and expenses of any independent valuation firm); expenses incurred by Ares Capital Management payable to third parties, including agents, consultants or other advisers, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; interest payable on indebtedness, if any, incurred to finance our investments; offerings of our common stock and other securities; investment advisory and management fees; administration fees; fees payable to third parties, including agents, consultants or other advisers, relating to, or associated with, evaluating and making investments; transfer agent and custodial fees; registration fees; listing fees; taxes; independent directors' fees and expenses; costs of preparing and filing reports or other documents of the SEC; the costs of any reports, proxy statements or other notices to stockholders, including printing costs; to the extent we are covered by any joint insurance policies, our allocable portion of the insurance premiums for such policies; direct costs and expenses of administration, including auditor and legal costs; and all other expenses incurred by us or Ares Administration in connection with administering our business, such as our allocable portion of overhead under the administration agreement, including our allocable portion of the salary and cost of our officers (including our chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs (including travel).

Duration and termination

        At a meeting of our board of directors on February 24, 2006, the current investment advisory and management agreement was approved by our board of directors with the recommendation that stockholders of the Company vote to approve the agreement. A discussion regarding the basis for our board of directors' approval is available in our proxy statement for our 2006 annual stockholders meeting. Our stockholders approved the investment advisory and management agreement on May 30, 2006, which was entered into on June 1, 2006. Unless terminated earlier, the investment advisory and management agreement will automatically renew for successive annual periods if approved annually by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons.

        At a meeting of the board of directors of the Company held on May 29, 2008, the board of directors, including all of the directors who are not "interested persons" of the Company as defined in the Investment Company Act, voted to approve the continuation of the investment advisory and management agreement through June 1, 2009. The independent directors had the opportunity to consult in executive session with counsel to the Company regarding the approval of such agreement. In reaching a decision to approve the investment advisory and management agreement, the board of directors reviewed a significant amount of information and considered, among other things:

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        In approving the continuation of the investment advisory and management agreement, the board of directors, including all of the directors who are not "interested persons," made the following conclusions:

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        In view of the wide variety of factors that our board of directors considered in connection with its evaluation of the investment advisory and management agreement, it is not practical to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision. The board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the board of directors. Rather, our board of directors based its approval on the totality of information presented to, and the investigation conducted by, it. In considering the factors discussed above, individual directors may have given different weights to different factors.

        Based on the information reviewed and the factors discussed above, our directors (including those directors who are not "interested persons") concluded that the terms of the investment advisory and management agreement, including the fee rates thereunder, are fair and reasonable in relation to the services provided and approved the continuation of the investment advisory and management agreement with the investment adviser as being in the best interests of the Company and its stockholders.

        The investment advisory and management agreement will automatically terminate in the event of its assignment. The investment advisory and management agreement may be terminated by either party without penalty upon 60 days' written notice to the other.

        Conflicts of interest may arise if our investment adviser seeks to change the terms of our investment advisory and management agreement, including, for example, the terms for compensation. Any material change to the investment advisory and management agreement must be submitted to stockholders for approval under the Investment Company Act and we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the agreement. See "Risk

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Factors—Risks Relating to our Business—We are dependent upon Ares Capital Management's key personnel for our future success and upon their access to Ares investment professionals."

Indemnification

        The investment advisory and management agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Ares Capital Management, its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of Ares Capital Management's services under the investment advisory and management agreement or otherwise as an investment adviser of the Company.

Organization of the Investment Adviser

        Ares Capital Management LLC is a Delaware limited liability company that is registered as an investment adviser under the Advisers Act. The principal executive offices of Ares Capital Management are located at 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.

ADMINISTRATION AGREEMENT

        We are also party to a separate administration agreement, referred to herein as the administration agreement, with Ares Operations LLC ("Ares Administration" or the "administrator"), an affiliate of our investment adviser. Our board of directors approved the continuation of our administration agreement on May 29, 2008, which extended the term of the agreement until June 1, 2009. Pursuant to the administration agreement, Ares Administration furnishes us with office equipment and clerical, bookkeeping and record keeping services. 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 that 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 our 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. Payments under the administration agreement are equal to an amount based upon our allocable portion of Ares Administration's overhead in performing its obligations under the administration agreement, including our allocable portion of the cost of our officers (including our chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs. The administration agreement may be terminated by either party without penalty upon 60-days' written notice to the other party.

Indemnification

        The administration agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Ares Administration, its members and their respective officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of Ares Administration's services under the administration agreement or otherwise as administrator for the Company.

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LEVERAGE

        On November 3, 2004, through our wholly owned subsidiary, Ares Capital CP Funding LLC ("Ares Capital CP"), we entered into a revolving facility (the "CP Funding Facility") that, as amended, allows Ares Capital CP to issue up to $350 million of variable funding certificates ("VFC").

        Under the CP Funding Facility, funds are loaned to Ares Capital CP by or through Wachovia Capital Markets, LLC at prevailing commercial paper rates, or if the commercial paper market is at any time unavailable at prevailing LIBOR rates, plus, in each case, an applicable spread. The funds are used for the simultaneous purchase by Ares Capital CP from the Company of loan investments originated or otherwise acquired by the Company. Through this simultaneous purchase from the Company by Ares Capital CP with funds obtained by Ares Capital CP from the CP Funding Facility, the Company is able to obtain the benefits of the CP Funding Facility.

        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 funds that Ares Capital CP may obtain. 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. The CP Funding Facility is scheduled to expire on July 21, 2009.

        The interest rate charged on the funding is based on the commercial paper rate plus 250 basis points and payable quarterly. As of December 31, 2008, the commercial paper rate was 2.3271%. The commitment fee for any unused portions of the CP Funding Facility is 0.5%.

        As of December 31, 2008, the principal amount outstanding under the CP Funding Facility was $114.3 million.

        On December 28, 2005, we entered into a senior secured revolving facility (the "Revolving Credit Facility" and together with the CP Funding Facility, the "Facilities") with the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, together with various supporting documentation, including a guarantee and security agreement.

        Under the Revolving Credit Facility, the lenders initially agreed to extend credit to Ares Capital in an initial aggregate principal amount not exceeding $250.0 million at any one time outstanding. The Revolving Credit Facility provides also for issuing letters of credit. The Revolving Credit Facility is a five-year revolving facility (with a stated maturity date of 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 investments held by ARCC CLO under the Debt Securitization (defined below)). The Revolving Credit Facility also includes an "accordion" feature that allows us to increase the size of the Revolving Credit Facility under certain circumstances. In November 2007, the aggregate principal amount of the Revolving Credit Facility was increased to $510.0 million and the "accordion" feature was amended allowing us to increase the size of the Revolving Credit Facility to a maximum of $765.0 million under certain circumstances. On January 21, 2009, pursuant to the "accordion" feature, the aggregate principal amount available for borrowing under the Revolving Credit Facility was increased to $525.0 million.

        Subject to certain exceptions, the interest rate payable under the Revolving Credit Facility is 100 basis points over LIBOR and the commitment fee for unused portions of the credit facility is 0.20%.

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        As of December 31, 2008, the principal amount outstanding under the Revolving Credit Facility was $480.5 million. In addition, as of December 31, 2008, the Company had $16.7 million in standby letters of credit issued through the Revolving Credit Facility.

        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 Ares Capital 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 Ares Capital 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 usual and customary events of default for senior secured revolving credit facilities of this nature.

        On July 7, 2006, through our 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, all of which was drawn down as of December 31, 2008) (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 "Retained Notes"). 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 December 31, 2008, $314.0 million was outstanding under the Debt Securitization (excluding the Retained Notes). The CLO Notes mature on December 20, 2019.

        We intend to continue borrowing under the Facilities and our CLO Notes in the future and we may increase the size of the Facilities or otherwise issue debt securities or other evidences of indebtedness in the future.

STAFFING

        We do not currently have any employees and do not expect to have any employees. Services necessary for our business are provided by individuals who are employees of Ares Capital Management and Ares Administration, pursuant to the terms of the management agreement and the administration agreement. Each of our executive officers is an employee of Ares Administration and/or Ares Capital Management. Our day-to-day investment operations are managed by our investment adviser. Most of the services necessary for the origination and administration of our investment portfolio are provided by investment professionals employed by Ares Capital Management. Ares Capital Management has 31 investment professionals who focus on origination and transaction development and the ongoing monitoring of our investments. In addition, we reimburse Ares Administration for our allocable portion of expenses incurred by it in performing its obligations under the administration agreement, including our allocable portion of the cost of our officers (including our chief compliance officer, chief financial officer, secretary and treasurer) and their respective staffs.

REGULATION

        We have elected to be regulated as a BDC under the Investment Company Act and have elected to be treated as a RIC under Subchapter M of the Code. As with other companies regulated by the

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Investment Company Act, a BDC must adhere to certain substantive regulatory requirements. The Investment Company Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates (including any investment advisers or sub-advisers), principal underwriters and certain affiliates of those affiliates or underwriters. Among other things, we cannot invest in any portfolio company in which any of the funds managed by Ares currently has an investment (although we may co-invest on a concurrent basis with other funds managed by Ares, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures). Some of these co-investments would only be permitted pursuant to an exemptive order from the SEC. We have applied for an exemptive order from the SEC that would permit us to co-invest with funds managed by Ares. Any such order will be subject to certain terms and conditions. There is no assurance that the application for exemptive relief will be granted by the SEC. Accordingly, we cannot assure you that the Company will be permitted to co-invest with funds managed by Ares. See "Risk Factors—Risks Relating to Our Business—The Company may not replicate Ares' historical success and our ability to enter into transactions with Ares and our other affiliates is restricted."

        The Investment Company Act also requires that a majority of the directors be persons other than "interested persons," as that term is defined in the Investment Company Act. In addition, the Investment Company Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless that change is approved by a majority of our outstanding voting securities. Under the Investment Company Act, the vote of holders of a "majority" means the vote of the holders of the lesser of: (i) 67% or more of the outstanding shares of the Company's common stock present at a meeting or represented by proxy if holders of more than 50% of the shares of the Company's common stock are present or represented by proxy or (ii) more than 50% of the Company's outstanding shares of common stock.

        We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an "underwriter" as that term is defined in the Securities Act of 1933 (the "Securities Act"). Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks associated with interest rate and currency fluctuations. However, we may purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition financing or other investment. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the Investment Company Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any investment company (as defined in the Investment Company Act), invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of investment companies in the aggregate. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of these are fundamental policies, and they may be changed without stockholder approval.

PRIVACY PRINCIPLES

        We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.

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        Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. The non-public personal information that we may receive falls into the following categories:

        We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except:

        Any party that receives this information will agree to use it only for the services required and as allowed by applicable law or regulation. These parties will agree not to share this information or use it for any other purpose. In addition, we maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders.

AVAILABLE INFORMATION

        We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). This information is available free of charge by calling us collect at (310) 201-4200 or on our website at www.arescapitalcorp.com. You also may inspect and copy these reports, proxy statements and other information, as well as the Annual Report and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC's Internet site at www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Room, 100 F Street, NE, Washington, D.C. 20549.

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Item 1A.    Risk Factors

RISK FACTORS

        You should carefully consider these risk factors, together with all of the other information included in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes thereto, before you decide whether to make an investment in our securities. The risks set out below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, the net asset value of our common stock and the trading price of our securities could decline, and you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS

Capital markets are currently in a period of disruption and instability. These market conditions have materially and adversely affected debt and equity capital markets in the United States, which has had, and may continue to have, a negative impact on our business and operations.

        Beginning in 2007 and continuing as of the date of this Annual Report, the U.S. capital markets entered into a period of disruption as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the United States federal government, these events have contributed to worsening general economic conditions that are materially and adversely impacting the broader financial and credit markets and reducing the availability of debt and equity capital for the market as a whole and financial services firms in particular. These conditions could continue for a prolonged period of time or worsen in the future. While these conditions persist, we and other companies in the financial services sector may have to access alternative markets for debt and equity capital in order to grow. Equity capital may be difficult to raise because, subject to some limited exceptions, we are not generally able to issue and sell our common stock at a price below net asset value per share. In addition, the debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any continued inability to raise capital could have a negative effect on our business, financial condition and results of operations.

        Moreover, current market conditions may make it difficult to extend the maturity of or refinance our existing indebtedness and any failure to do so could have a material adverse effect on our business. For example, the CP Funding Facility is scheduled to mature on July 21, 2009. We are currently discussing an extension of the maturity date of this Facility. If we are unable to obtain an extension, after the maturity of the CP Funding Facility the administrative agent or the trustee may elect to exercise various remedies, including the sale of all or a portion of the collateral securing the Facility after providing us with at least 90-days prior notice of its intention to sell collateral. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments.

        As a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors. In addition, our ability to incur indebtedness is limited by applicable regulations such that our asset coverage, as defined in the Investment Company Act, must equal at least 200% immediately after each time we incur indebtedness.

        Capital markets volatility also affects our investment valuations. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation

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process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can adversely affect our valuations.

        As a result, in periods of extreme volatility and dislocation in the capital markets, many BDCs are facing a challenging environment in which to raise capital. As a result of the recent significant changes in the capital markets affecting our ability to raise capital, the pace of our investment activity has slowed. In addition, significant changes in the capital markets, including the recent extreme volatility and disruption, has had and may continue to have a negative effect on the valuations of our investments, and on the potential for liquidity events involving such investments. An inability to raise capital (including to renew or replace the CP Funding Facility with other indebtedness), and any required sale of all or portion of our investments as a result, could have a material adverse impact on our business, financial condition and results of operations.

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 Investment Company Act, which would subject us to additional regulatory restrictions and significantly decrease our operating flexibility.

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 depends 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 objective. 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.

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

        Our ability to achieve our investment objective 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's investment committee 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

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have a material adverse effect on our business, financial condition and results of operations. In addition, as we grow, we may open up new offices in new geographic regions that may increase our direct operating expenses without corresponding revenue growth.

Our ability to grow depends on our ability to raise capital.

        We will need to periodically access the capital markets to raise cash to fund new investments. In order to maintain our RIC status, we must distribute to our stockholders on a timely basis an amount equal to at least 90% of our ordinary income and net short-term capital gain in excess of net long-term capital loss, if any, reduced by deductible expenses, for each year and, as a result, such earnings are not available to fund investment originations. We must continue to borrow from financial institutions and issue additional securities to fund our growth. 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.

        In addition, with certain limited exceptions, we are only allowed to borrow amounts or issue debt securities or preferred stock such that our asset coverage, as defined in the Investment Company Act, equals at least 200% immediately after such borrowing, which, in certain circumstances, may restrict our ability to borrow or issue debt securities or preferred stock. 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 or issuance of debt securities or preferred stock. 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.

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/or borrow money from banks or other financial institutions, up to the maximum amount permitted by the Investment Company Act. Under the provisions of the Investment Company Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the Investment Company Act, equals at least 200% after each such incurrence or issuance. If the value of our assets declines, we may be unable to satisfy this test, which could prohibit us from paying dividends and could prevent us from maintaining our status as a RIC or could prohibit us from repurchasing shares of our common stock. If we cannot satisfy this test, we may be required to sell a portion of our investments at a time when such sales may be disadvantageous and, depending on the nature of our leverage, repay a portion of our indebtedness. As of December 31, 2008, our asset coverage for senior securities was 220%.

        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 per share 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, in certain instances, our stockholders approve such sale. Any such sale would be dilutive to existing stockholders. 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.

        To generate cash for funding new investments, we have also securitized, and may in the future seek to securitize, our loans. To securitize loans, we may create a separate, wholly owned subsidiary and contribute or sell a pool of loans to such subsidiary (or one of its subsidiaries). Such subsidiary may

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then sell equity, issue debt or sell interests in the pool of loans, on a limited-recourse basis, the payments on which are generally limited to the pool of loans and the proceeds therefrom. We may also retain a portion of the equity interests in the securitized pool of loans. Any retained equity would be exposed to losses on the related pool of loans before any of the related debt securities. An inability to securitize successfully our loan portfolio could limit our ability to grow our business and fully execute our business strategy. The securitization market is subject to changing market conditions (including the recent, unprecedented dislocation of the securitization and finance markets generally) 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 may be those that are riskier and more apt to generate losses. The Investment Company Act may also impose restrictions on the structure of any securitization.

We borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing with us.

        As of December 31, 2008, we had $594.8 million of outstanding borrowings under our Facilities and $314.0 million of CLO Notes. In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our December 31, 2008 total assets of at least 1.75%. The weighted average interest rate charged on our borrowings as of December 31, 2008 was 3.03%. We intend to continue borrowing under the Facilities in the future and we may increase the size of the Facilities or issue debt securities or other evidences of indebtedness. Our ability to service our debt depends largely on our financial performance and is subject to prevailing economic conditions and competitive pressures. 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.

        Our Facilities and the CLO Notes impose financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC. A failure to renew our Facilities or to add new or replacement debt facilities could have a material adverse effect on our business, financial condition and results of operations.

        Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. We currently borrow under our Facilities and in the future may borrow from or issue senior debt securities to banks, insurance companies and other lenders. Holders of such senior debt securities have fixed dollar claims on our consolidated assets that are superior to the claims of our common stockholders or any preferred stockholders. If the value of our consolidated assets increases, then leveraging would cause the net asset value per share of our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our consolidated assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our consolidated income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our consolidated income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. There can be no assurance that a leveraging strategy will be successful.

        The following table illustrates the effect on return to a holder of our common stock of the leverage created by our use of borrowing at the interest rate of 3.03% and assumes (i) our total value

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of net assets as of December 31, 2008; (ii) $908.8 million debt outstanding as of December 31, 2008 and (iii) hypothetical annual returns on our portfolio of minus 15 to plus 15 percent.

Assumed Return on Portfolio
(Net of Expenses)(1)

    -15%     -10%     -5%     0%     5%     10%     15%  

Corresponding Return to Common Stockholders(2)

    -31%     -22%     -12%     -3%     7%     17%     26%  

(1)
The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance. Actual returns may be greater or less than those appearing in the table.

(2)
In order to compute the "Corresponding Return to Common Stockholders," the "Assumed Return on Portfolio" is multiplied by the total value of our assets at December 31, 2008 to obtain an assumed return to us. From this amount, the interest expense calculated by multiplying the interest rate of 3.03% times the $908.8 million debt is subtracted to determine the return available to stockholders. The return available to stockholders is then divided by the total value of our net assets as of December 31, 2008 to determine the "Corresponding Return to Common Stockholders."

In addition to regulatory restrictions that restrict our ability to raise capital, the Revolving Credit Facility and the CP Funding Facility contain various covenants which, if not complied with, could accelerate repayment under these Facilities, thereby materially and adversely affecting our liquidity, financial condition and results of operations.

        The agreements governing the Facilities require us to comply with certain financial and operational covenants. These covenants include:

        As of December 31, 2008, we were in compliance with these covenants. However, our continued compliance with these covenants depends on many factors, some of which are beyond our control. For example, during the quarter ended December 31, 2008, net unrealized depreciation in our portfolio increased and, depending on the condition of the public debt and equity markets and pricing levels subsequent to this period, net unrealized depreciation in our portfolio may continue to increase in the future. Any such further increase could result in our inability to comply with our obligation to restrict the level of indebtedness that we are able to incur in relation to the value of our assets or to maintain a minimum level of stockholders' equity.

        Accordingly, although we believe we will continue to be in compliance, there are no assurances that we will continue to comply with the covenants in our Facilities. Failure to comply with these covenants would result in a default under the Facilities which, if we were unable to obtain a waiver from the lenders under the Facilities, could accelerate repayment under the Facilities and thereby have a material adverse impact on our business, financial condition and results of operations.

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 BDCs, public and private funds, commercial and investment banks, commercial financing companies, insurance companies, high yield investors, hedge funds, and, to

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the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, 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 Investment Company Act imposes on us as a BDC and that the Code imposes on us as a RIC. 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 are consistent with our investment objective.

        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 are comparable to or lower than the rates we offer. We also compete with our competitors based on our existing investment platform, our seasoned management team, our experience and focus on middle market companies, our disciplined investment philosophy, our extensive industry focus and our flexible transaction structuring. For a more detailed discussion of these competitive advantages, see "Business—Competitive Advantages."

        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 fail to qualify as a RIC.

        The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. As a RIC, we generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. 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 net short-term capital gain in excess of net long-term capital loss, 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 Investment Company Act and financial covenants under our indebtedness 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. Because we must make distributions to our stockholders as described above, such amounts, to the extent a stockholder is not participating in our dividend reinvestment plan, will not be available to fund investment originations.

        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. Because most of our investments are in private companies and are generally illiquid, any such dispositions may be at disadvantageous prices and may result in losses. Also, the rules applicable to our qualification as a RIC under the Code are complex with many areas of uncertainty. Accordingly, no assurance can be given that we have qualified or will qualify as a RIC. If we fail to qualify as a RIC for any reason and become subject to corporate income tax, the resulting corporate taxes could substantially reduce our

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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 U.S. 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 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 payment in kind securities and deferred payment securities.

        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.

        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.

We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings.

        Because preferred stock is another form of leverage and the dividends on any preferred stock we issue must be cumulative, preferred stock has the same risks to our common stockholders as borrowings. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.

We are exposed to risks associated with changes in interest rates.

        General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our investment objective and our rate of return on invested capital. Because we borrow money and may issue debt securities or preferred stock to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities or preferred stock and the rate at which we invest these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed-rate securities that have longer maturities. We have entered into certain hedging transactions, such as interest rate swap agreements, to

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mitigate our exposure to adverse fluctuations in interest rates, and we may continue to do so in the future. However, we cannot assure you that such transactions will be successful in mitigating our exposure to credit risk. Hedging transactions may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio investments. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally having maturities of up to 10 years. This means that we are subject to greater risk (other things being equal) than a fund invested solely in shorter-term securities. A decline in the prices of the debt we own could adversely affect the trading price of our shares. Also, an increase in interest rates available to investors could make investment in our common stock less attractive if we are not able to increase our dividend rate, which could reduce the value of our common stock.

Many of our portfolio investments are not publicly traded and, as a result, there is uncertainty as to the value of our portfolio investments.

        A large percentage of our portfolio investments are not publicly traded. The fair value of investments that are not publicly traded may not be readily determinable. We value these investments quarterly at fair value as determined in good faith by our board of directors based on the input of our management and audit committee and independent valuation firms that have been engaged at the direction of the board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12 month period and under a valuation policy and a consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, with approximately 50% (based on value) of our valuations of portfolio companies without readily available market quotations subject to review by an independent valuation firm. However, we may be required to value our investments more frequently as determined in good faith by our board of directors to the extent necessary to reflect significant events affecting their value. The types of factors that may be considered in valuing our investments include the enterprise value of the portfolio company, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed and may differ materially from the values that we may ultimately realize. Our net asset value per share could be adversely affected if our determinations regarding the fair value of these investments are materially higher than the values that we realize upon disposition of such investments.

The lack of liquidity in our investments may adversely affect our business.

        As we generally make investments in private companies, substantially all of these investments are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or an affiliated manager of Ares has material non-public information regarding such portfolio company.

We may experience fluctuations in our quarterly results.

        We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rates payable on the debt investments we make, the default rates on such

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investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses and the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

There are significant potential conflicts of interest that could impact our investment returns.

        Certain of our executive officers and directors, and members of the investment committee of our investment adviser serve or may serve as officers, directors or principals of other entities and affiliates of our investment adviser and investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders or that may require them to devote time to services for other entities, which could interfere with the time available to provide services to us. For example, Messrs. Ressler, Rosenthal, Kissick and Sachs each are and, will continue to be, founding members of Ares with significant responsibilities for other Ares funds. Messrs. Ressler and Rosenthal are required to devote a substantial majority of their business time, and Mr. Kissick is required to devote a majority of his business time, to the affairs of ACOF. However, Ares believes that the efforts of Messrs. Ressler, Rosenthal and Kissick relative to Ares Capital and ACOF are synergistic with and beneficial to the affairs of each of Ares Capital and ACOF.

        Although other Ares funds generally have different primary investment objectives than Ares Capital, they may from time to time invest in asset classes similar to those targeted by Ares Capital. Ares Capital Management endeavors to allocate investment opportunities in a fair and equitable manner, and in any event consistent with any fiduciary duties owed to Ares Capital. Nevertheless, it is possible that we may not be given the opportunity to participate in certain investments made by investment funds managed by investment managers affiliated with Ares Capital Management.

        We pay management and incentive fees to Ares Capital Management, and reimburse Ares Capital Management for certain expenses it incurs. As a result, investors in our common stock will invest on a gross basis and receive distributions on a net basis after expenses, resulting in, among other things, a lower rate of return than one might achieve through direct investments.

        Ares Capital Management's management fee is based on a percentage of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) and Ares Capital Management may have conflicts of interest in connection with decisions that could affect the Company's total assets, such as decisions as to whether to incur indebtedness.

        The incentive fees payable to our investment adviser are subject to certain hurdles. To the extent we or Ares Capital Management are able to exert influence over our portfolio companies, these hurdles may provide Ares Capital Management (subject to its fiduciary duty to us) with an incentive to induce our portfolio companies to accelerate or defer interest or other obligations owed to us from one calendar quarter to another under circumstances where accrual would not otherwise occur, such as acceleration or deferral of the declaration of a dividend or the timing of a voluntary redemption.

        Acceleration of obligations may result in stockholders recognizing taxable gains earlier than anticipated, while deferral of obligations creates incremental risk of an obligation becoming uncollectible in whole or in part if the issuer of the security suffers subsequent deterioration in its financial condition. Any such inducement by the investment adviser solely for the purpose of adjusting the incentive fees would be a breach of the investment adviser's fiduciary duty to us.

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        The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income is computed and paid on income that may include interest that is accrued but not yet received in cash. 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.

        Our investment advisory and management agreement automatically renews for successive annual periods if approved by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. However, both we and Ares Capital Management have the right to terminate the agreement without penalty upon 60 days' written notice to the other party. Moreover, conflicts of interest may arise if our investment adviser seeks to change the terms of our investment advisory and management agreement, including, for example, the terms for compensation. While any material change to the investment advisory and management agreement must be submitted to stockholders for approval under the Investment Company Act, we may from time to time decide it is appropriate to seek stockholder approval to change the terms of the agreement.

        Pursuant to a separate amended and restated administration agreement, referred to herein as our "administration agreement", Ares Administration, an affiliate of Ares Capital Management, furnishes us with administrative services and we pay Ares Administration our allocable portion of overhead and other expenses incurred by Ares Administration in performing its obligations under the administration agreement, including our allocable portion of the cost of our officers and their respective staffs.

        Our wholly owned subsidiary, Ivy Hill Management, is party to a services agreement with Ares Capital Management, pursuant to which Ares Capital Management provides Ivy Hill Management with the facilities, investment advisory services and administrative services necessary for the operations of Ivy Hill Management. Ivy Hill Management will reimburse Ares Capital Management for the costs associated with such services, including Ares Capital Management's allocable portion of overhead and the cost of its officers and respective staff on performing its obligations under the services agreement.

        We lease office facilities directly (the "ARCC Office Space") from a third party. We have entered into a sublease with Ares Management whereby Ares Management subleases approximately 25% of the ARCC Office Space for a fixed rent equal to 25% of the basic annual rent payable by us under our lease, plus certain additional costs and expenses. As a result of these arrangements, there may be times when the management team of Ares Management has interests that differ from those of our stockholders, giving rise to a conflict.

        Our stockholders may have conflicting investment, tax and other objectives with respect to their investments in us. The conflicting interests of individual stockholders may relate to or arise from, among other things, the nature of our investments, the structure or the acquisition of our investments, and the timing of disposition of our investments. As a consequence, conflicts of interest may arise in connection with decisions made by our investment adviser, including with respect to the nature or structuring of our investments, that may be more beneficial for one stockholder than for another stockholder, especially with respect to stockholders' individual tax situations. In selecting and structuring investments appropriate for us, our investment adviser will consider the investment and tax objectives of the Company and our stockholders as a whole, not the investment, tax or other objectives of any stockholder individually.

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Our investment adviser's liability is limited under the investment advisory and management agreement, and we are required to indemnify our investment adviser against certain liabilities, which may lead our investment adviser to act in a riskier manner on our behalf than it would when acting for its own account.

        Our investment adviser has not assumed any responsibility to us other than to render the services described in the investment advisory and management agreement, and it will not be responsible for any action of our board of directors in declining to follow our investment adviser's advice or recommendations. Pursuant to the investment advisory and management agreement, our investment adviser and its managing members, officers and employees will not be liable to us for their acts under the investment advisory and management agreement, absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect our investment adviser and its managing members, officers and employees with respect to all damages, liabilities, costs and expenses resulting from acts of our investment adviser not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the investment advisory and management agreement. These protections may lead our investment adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account. See "Risk Factors—Risks Relating to our Investments—Our investment adviser's incentive fee may induce Ares Capital Management to make certain investments, including speculative investments."

We may be obligated to pay our investment adviser incentive compensation even if we incur a loss.

        Our investment adviser is entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our pre-incentive fee net investment income for that quarter (before deducting incentive compensation, net operating losses and certain other items) above a threshold return for that quarter. Our pre-incentive fee net investment income for incentive compensation purposes excludes realized and unrealized capital losses or depreciation that we may incur in the fiscal quarter, even if such capital losses or depreciation result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay our manager incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter.

        Under the investment advisory and management agreement, we will defer cash payment of any incentive fee otherwise earned by our investment adviser if, during the most recent four full calendar quarter period ending on or prior to the date such payment 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 and before taking into account any incentive fees payable during the period) is less than 8.0% of our net assets at the beginning of such period. These calculations will be adjusted for any share issuances or repurchases. Any deferred incentive fees will be carried over for payment in subsequent calculation periods to the extent such payment can then be made under the investment advisory and management agreement.

Changes in laws or regulations governing our operations, or changes in the interpretation thereof, and any failure by us to comply with laws or regulations governing our operations may adversely affect our business.

        We and our portfolio companies are subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations, or their interpretation, or any failure by us to comply with these laws or regulations may adversely affect our business.

35


The Company may not replicate Ares' historical success and our ability to enter into transactions with Ares and our other affiliates is restricted.

        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. 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. Additionally, we can offer no assurance that we will be able to continue to implement our investment objective with the same degree of success as in the past or that shares of our common stock will continue to trade at the current price.

        Further, we are prohibited under the Investment Company Act from knowingly participating in certain transactions with our affiliates, our investment adviser and its affiliates without the prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the Investment Company Act and we are generally prohibited from buying or selling any security from or to such affiliate, absent the prior approval of our independent directors. The Investment Company Act also prohibits "joint" transactions with an affiliate, or our investment adviser or its affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors. In addition, we are prohibited from buying or selling any security from or to, or entering into joint transactions with, our investment adviser and its affiliates, or any person who owns more than 25% of our voting securities or is otherwise deemed to control, be controlled by, or be under common control with us, absent the prior approval of the SEC through an exemptive order (other than in certain limited situations pursuant to current regulatory guidance).

        We have applied for an exemptive order from the SEC that would permit us to co-invest with funds managed by Ares. Any such order will be subject to certain terms and conditions and there can be no assurance that the application for exemptive relief will be granted by the SEC. Accordingly, we cannot assure you that the Company will be permitted to co-invest with funds managed by Ares, other than in the limited circumstances currently permitted by regulatory guidance.

RISKS RELATING TO OUR INVESTMENTS

Price declines and illiquidity in the corporate debt markets have adversely affected, and may continue to adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation.

        As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the direction of our board of directors. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), 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, a comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future 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 valuation. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The continuing unprecedented declines in prices and liquidity in the corporate debt markets have resulted in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio has reduced our net asset value by increasing net

36



unrealized depreciation in our portfolio. As a result, depending on market conditions, we could incur substantial realized losses and may continue to suffer additional unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.

Our investments may be risky, and we could lose all or part of our investment.

        The debt that we invest in is typically 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). Indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. Our mezzanine investments may result in an above average amount of risk and volatility or loss of principal. We also invest in assets other than mezzanine investments including first and second lien loans, high-yield securities, U.S. government securities, credit derivatives and other structured securities and certain direct equity investments. These investments will entail additional risks that could adversely affect our investment returns. In addition, to the extent interest payments associated with such debt are deferred, such debt will be subject to greater fluctuations in value based on changes in interest rates. Also, such debt could subject us to phantom income, and since we generally do not receive any cash prior to maturity of the debt, the investment is of greater risk.

        In addition, investments in privately held middle market companies involve a number of significant risks, including:

37


Economic recessions or downturns could impair our portfolio companies and harm our operating results.

        As of the date of this Annual Report, the economy is in the midst of a recession and in the difficult part of a credit cycle with industry defaults increasing. Many of our portfolio companies may be materially and adversely affected by the current cycle and, in turn, may be unable to satisfy their financial obligations (including their loans to us) over the coming months.

        Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods if we are required to write down the values of our investments. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also 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. These events could prevent us from increasing investments and harm our operating results.

        A portfolio company's failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets, which could trigger cross defaults under other agreements and jeopardize our portfolio company's ability to meet its obligations under the debt that we hold and the value of any equity securities we own. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

        If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower's business or exercise control over the borrower. Consequently, we could become subject to a lender's liability claim, if, among other things, we actually render significant managerial assistance.

Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.

        Our portfolio companies may have, or may be permitted to incur, other debt, or issue other equity securities, that rank equally with, or senior to, our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company typically are entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on an equal basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

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        The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights as junior lenders are adversely affected.

Investments in equity securities involve a substantial degree of risk.

        We may purchase common and other equity securities. Although common stocks have historically generated higher average total returns than fixed income securities over the long term, common stocks also have experienced significantly more volatility in those returns and in recent years have significantly under performed relative to fixed income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our portfolio company's success. Investments in equity securities involve a number of significant risks, including:

        There are special risks associated with investing in preferred securities, including:

        Additionally, when we invest in first and second lien senior loans or mezzanine debt, we may acquire warrants or other equity securities as well. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we

39



receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

Our investment adviser's incentive fee may induce Ares Capital Management to make certain investments, including speculative investments.

        The incentive fee payable by us to Ares Capital Management may create an incentive for Ares Capital Management to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to our investment adviser is determined, which is calculated as a percentage of the return on invested capital, may encourage our investment adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock. In addition, the investment adviser will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, the investment adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. The part of the incentive fee payable by us that relates to our pre-incentive fee net investment income will be computed and paid on income that may include interest that is accrued but not yet received in cash. 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 such accrued interest that we never actually receive.

        Because of the structure of the incentive fee, it is possible that we may have to pay an incentive fee in a quarter where we incur a loss. For example, if we receive pre-incentive fee net investment income in excess of the hurdle rate for a quarter, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized capital losses. In addition, if market interest rates rise, we may be able to invest our funds in debt instruments that provide for a higher return, which would increase our pre-incentive fee net investment income and make it easier for our investment adviser to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income.

        We may invest, to the extent permitted by law, in the securities and instruments of investment funds that are operating pursuant to certain exceptions to the Investment Company Act and in advisers to similar investment funds, and, to the extent we so invest, will bear our ratable share of any such company's expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to Ares Capital Management with respect to the assets invested in the securities and instruments of such companies. With respect to each of these investments, each of our common stockholders will bear his or her share of the management and incentive fee of Ares Capital Management as well as indirectly bearing the management and performance fees and other expenses of any such investment funds or advisers.

Our portfolio companies may be highly leveraged.

        Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair these companies' ability to finance their future operations and capital needs. As a result, these companies' flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a

40



leveraged company's income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

Our investments in foreign debt may involve significant risks in addition to the risks inherent in U.S. investments. We may expose ourselves to risks if we engage in hedging transactions.

        Our investment strategy contemplates potential investments in debt of foreign companies. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets, less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

        Although most of our investments will be U.S. dollar denominated, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but we cannot assure you that such strategies will be effective.

        We have and may in the future enter into hedging transactions, which may expose us to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may include counter party credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

        The success of our hedging transactions will depend on our ability to correctly predict movements, currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations. See also "Risk Factors—Risk Relating to our Business—We are exposed to risks associated with changes in interest rates."

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When we are a debt or minority equity investor in a portfolio company, we may not be in a position to control the entity, and management of the company may make decisions that could decrease the value of our portfolio holdings.

        We make both debt and minority equity investments; therefore, we are subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of our investment.

RISKS RELATING TO OUR COMMON STOCK

Our shares of common stock may trade at discounts from net asset value, which limits our ability to raise additional equity capital.

        Shares of closed-end investment companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict whether any shares of common stock will trade at, above, or below net asset value. As of the date of this Annual Report, the stocks of BDCs as an industry, including shares of our common stock, have been trading below net asset value and at near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. When our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining approval for such issuance from our stockholders and our independent directors.

There is a risk that investors in our equity securities may not receive dividends or that our dividends may not grow over time.

        We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If we declare a dividend and if more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in order to make cash dividend payments.

        In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution. See "Price Range of Common Stock."

Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

        The Maryland General Corporation Law, our charter and our bylaws contain provisions that may discourage, delay or make more difficult a change in control of Ares Capital or the removal of our directors. We are subject to the Maryland Business Combination Act, subject to any applicable requirements of the Investment Company Act. Our board of directors has adopted a resolution exempting from the Business Combination Act any business combination between us and any other person, subject to prior approval of such business combination by our board, including approval by a majority of our disinterested directors. If the resolution exempting business combinations is repealed or our board does not approve a business combination, the Business Combination Act may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act acquisitions of our stock by any person. If we amend our bylaws to repeal the exemption from the Control Share Acquisition Act,

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the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such an offer.

        We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying our board of directors in three classes serving staggered three-year terms, and provisions of our charter authorizing our board of directors to classify or reclassify shares of our stock in one or more classes or series, to cause the issuance of additional shares of our stock, and to amend our charter, without stockholder approval, to increase or decrease the number of shares of stock that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.

Investing in our securities may involve an above average degree of risk.

        The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be highly speculative and aggressive, and therefore, an investment in our securities may not be suitable for someone with lower risk tolerance.

The market price of our common stock may fluctuate significantly.

        The capital and credit markets have been experiencing extreme volatility and disruption for more than 18 months. In recent months, the volatility and disruption have reached unprecedented levels and we have experienced greater than usual stock price volatility. The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

        In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. If our stock price fluctuates

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significantly, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources from our business.

Stockholders will experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.

        All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are generally automatically reinvested in shares of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan will experience dilution over time.

Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.

        Sales of substantial amounts of our common stock, or the availability of such common stock for sale, could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.

Item 1B.    Unresolved Staff Comments

        None.

Item 2.    Properties

        We do not own any real estate or other physical properties materially important to our operation. Our headquarters are currently located at 280 Park Avenue, 22nd Floor, Building East, New York, New York. We rent the ARCC Office Space directly from a third party pursuant to a lease that expires on February 27, 2011. In addition, we have entered into a sublease agreement with Ares Management whereby Ares Management subleases approximately 25% of the ARCC Office Space for a fixed rent equal to 25% of the basic annual rent payable by us under our lease, plus certain additional costs and expenses.

Item 3.    Legal Proceedings

        We are not subject to any pending legal proceeding, and no such proceedings are known to be contemplated.

Item 4.    Submission Of Matters To A Vote Of Security Holders

        No matters were submitted to a vote of stockholders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year ended December 31, 2008.

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PART II

Item 5.    Market For Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities

PRICE RANGE OF COMMON STOCK

        Our common stock is traded on The NASDAQ Global Select Market under the symbol "ARCC." We completed our initial public offering in October 2004 at a price of $15.00 per share. Prior to October 2004, there was no public market for our common stock. Our common stock has historically traded at prices both above and below its net asset value. It is not possible to predict whether our common stock will trade at, above or below net asset value. See "Risk Factors—Risks Relating to our Common Stock—Our shares of common stock may trade at discounts from net asset value, which limits our ability to raise additional equity capital."

        The following table sets forth the net asset value per share of our common stock, the range of high and low closing sales prices of our common stock as reported on The NASDAQ Global Select Market and the dividends declared by us for each fiscal quarter for the years ended December 31, 2007 and 2008. On February 27, 2009, the last reported closing sales price of our common stock on The NASDAQ Global Select Market was $3.60 per share, which represented a discount of approximately 68% to the net asset value per share reported by us as of December 31, 2008.

 
   
  Price Range    
 
 
  Net Asset
Value(1)
  High   Low   Cash Dividend
Per Share(2)
 

Fiscal 2007

                         
 

First quarter

  $ 15.34   $ 20.46   $ 17.82   $ 0.41  
 

Second quarter

  $ 15.84   $ 18.84   $ 16.85   $ 0.41  
 

Third quarter

  $ 15.74   $ 17.53   $ 14.92   $ 0.42  
 

Fourth quarter

  $ 15.47   $ 17.47   $ 14.40   $ 0.42  

Fiscal 2008

                         
 

First quarter

  $ 15.17   $ 13.81   $ 11.65   $ 0.42  
 

Second quarter

  $ 13.67   $ 12.98   $ 10.08   $ 0.42  
 

Third quarter

  $ 12.83   $ 12.60   $ 9.30   $ 0.42  
 

Fourth quarter

  $ 11.27   $ 10.15   $ 3.77   $ 0.42  

(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 the relevant quarter.

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


HOLDERS

        As of February 27, 2009, there were 21 holders of record of our common stock (including Cede & Co.).


DIVIDEND POLICY

        We currently intend to distribute quarterly dividends to our stockholders. Our quarterly dividends, if any, are determined by our board of directors.

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        The following table summarizes our dividends declared during 2007 and 2008:

Date Declared
  Record Date   Payment Date   Amount  

March 8, 2007

    March 19, 2007     March 30, 2007   $ 0.41  

May 10, 2007

    June 15, 2007     June 29, 2007   $ 0.41  

August 9, 2007

    September 14, 2007     September 28, 2007   $ 0.42  

November 8, 2007

    December 14, 2007     December 31, 2007   $ 0.42  
                   
 

Total declared for 2007

              $ 1.66  
                   

February 28, 2008

   
March 17, 2008
   
March 31, 2008
 
$

0.42
 

May 8, 2008

    June 16, 2008     June 30, 2008   $ 0.42  

August 7, 2008

    September 15, 2008     September 30, 2008   $ 0.42  

November 6, 2008

    December 15, 2008     January 2, 2009   $ 0.42  
                   
 

Total declared for 2008

              $ 1.68  
                   

        Of the dividends declared during the year ended December 31, 2007, $1.59 comprised ordinary income and $0.07 comprised long-term capital gains. Of the dividends declared during the year ended December 31, 2008, $1.60 comprised ordinary income and $0.08 comprised long-term capital gains.

        To maintain our RIC status, we must timely 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, out of the assets legally available for distribution, for each year. To avoid certain excise taxes imposed on RICs, we are generally required to distribute during each calendar year an amount at least equal to the sum of (i) 98% of our ordinary income for the calendar year, plus (ii) 98% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year plus (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years. If this requirement is not met, we will be required to pay a nondeductible excise tax equal to 4% of the amount by which 98% of the current year's taxable income exceeds the distribution for the year. The taxable income on which an excise tax is paid is generally carried forward and distributed to stockholders in the next tax 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 distributions into the next tax year and pay a 4% excise tax on such income, as required. For the years ended December 31, 2008 and 2007, we recorded a net excise tax provision of $0.1 million for both years. We cannot assure you that we will achieve results that will permit the payment of any cash distributions.

        We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a cash 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.


RECENT SALES OF UNREGISTERED SECURITIES

        We did not sell any securities during the period covered by this report that were not registered under the Securities Act.


ISSUER PURCHASES OF EQUITY SECURITIES

        In December 2008, as a part of the Company's dividend reinvestment plan for our common stockholders, we purchased 563,196 shares of our common stock for $3.5 million in the open market in

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order to satisfy the reinvestment portion of our dividends. The following chart outlines repurchases of our common stock during the year ended December 31, 2008.

Period
  Total Number
of Shares
Purchased
  Average Price
Paid Per
Share
  Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs
  Maximum (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the Plans
or Programs
 

January 1, 2008 through January 31, 2008

                 

February 1, 2008 through February 29, 2008

                 

March 1, 2008 through March 31, 2008

    76,548   $ 12.72          

April 1, 2008 through April 30, 2008

                 

May 1, 2008 through May 31, 2008

                 

June 1, 2008 through June 30, 2008

    374,255   $ 10.62          

July 1, 2008 through July 31, 2008

                 

August 1, 2008 through August 31, 2008

                 

September 1, 2008 through September 30, 2008

    390,853   $ 10.95          

October 1, 2008 through October 31, 2008

                 

November 1, 2008 through November 30, 2008

                 

December 1, 2008 through December 31, 2008

    563,196   $ 6.19          
                       

Total

    1,404,852   $ 9.05          
                       

47



COMPARISON OF CUMULATIVE TOTAL RETURN AMONG ARES CAPITAL
CORPORATION, S&P 500 AND S&P SPECIALIZED FINANCE INDEX

LOGO

SOURCE:   Standard & Poor's Institutional Market Services
NOTES:   Assumes $100 invested on 10/8/2004 (the date of Ares Capital Corporation's initial public offering) in Ares Capital Corporation, in S&P 500 and in S&P Specialized Finance Index. Assumes all dividends are reinvested on a monthly basis.

 

 
  Oct04   Dec04   Dec05   Dec06   Dec07   Dec08  

Ares Capital Corporation

    100     132     118     153     130     68  

S&P 500 Index

    100     108     114     132     139     88  

S&P Specialized Finance Index

    100     118     154     162     153     53  

        The graph and other information furnished under this Part II Item 5 (d) of this Form 10-K shall not be deemed to be "soliciting material" or to be "filed" with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act, as amended.

48


Item 6.    Selected Consolidated Financial Data

        The following selected financial and other data for the years ended December 31, 2008, 2007, 2006 and 2005, and for the period from June 23, 2004 (inception) through December 31, 2004 are derived from our consolidated financial statements which have been audited by KPMG LLP, an independent registered public accounting firm whose report thereon is included elsewhere in this Annual Report. 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 Annual Report.


ARES CAPITAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
As of and For the Years Ended December 31, 2008, 2007, 2006 and 2005 and As of and For the
Period June 23, 2004 (inception) Through December 31, 2004
(dollar amounts in thousands, except per share data and as otherwise indicated)

 
  As of and
For the
Year Ended
December 31,
2008
  As of and
For the
Year Ended
December 31,
2007
  As of and
For the
Year Ended
December 31,
2006
  As of and
For the
Year Ended
December 31,
2005
  As of and
For the Period
June 23, 2004
(inception)
Through
December 31,
2004
 

Total Investment Income

  $ 240,461   $ 188,873   $ 120,021   $ 41,850   $ 4,381  

Net Realized and Unrealized Gains (Losses) on Investments and Foreign Currencies

    (266,447 )   (4,117 )   13,064     14,727     475  

Total Expenses

    113,221     94,751     58,458     14,569     1,666  
                       

Income Tax Expense (Benefit), Including Excise Tax

    248     (826 )   4,931     158      
                       

Net (Decrease) Increase in Stockholders' Equity Resulting from Operations

  $ (139,455 ) $ 90,832   $ 69,695   $ 41,851   $ 3,190  
                       

Per Share Data:

                               
 

Net Increase (Decrease) in Stockholder's Equity Resulting from Operations:

                               
 

Basic(1):

  $ (1.56 ) $ 1.34   $ 1.58   $ 1.75   $ 0.28  
 

Diluted(1):

  $ (1.56 ) $ 1.34   $ 1.58   $ 1.75   $ 0.28  
 

Cash Dividend Declared:

  $ 1.68   $ 1.66   $ 1.64   $ 1.30   $ 0.30  

Total Assets

  $ 2,091,333   $ 1,829,405   $ 1,347,991   $ 613,645   $ 220,456  

Total Debt

  $ 908,786   $ 681,528   $ 482,000   $ 18,000   $ 55,500  

Total Stockholders' Equity

  $ 1,094,879   $ 1,124,550   $ 789,433   $ 569,612   $ 159,708  

Other Data:

                               
 

Number of Portfolio Companies at Period End(2)

    91     78     60     38     20  
 

Principal Amount of Investments Purchased(3)

  $ 925,945   $ 1,251,300   $ 1,087,507   $ 504,299   $ 234,102  
 

Principal Amount of Investments Sold and Repayments(4)

  $ 485,270   $ 718,695   $ 430,021   $ 108,415   $ 52,272  
 

Total Return Based on Market Value(5)

    (45.25 )%   (14.76 )%   29.12 %   (10.60 )%   31.53 %
 

Total Return Based on Net Asset Value(6)

    (11.17 )%   8.98 %   10.73 %   12.04 %   (1.80 )%
 

Weighted Average Yield of Debt and Income Producing Equity Securities at Fair Value(7):

    12.79 %   11.68 %   11.95 %   11.25 %   12.36 %
 

Weighted Average Yield of Debt and Income Producing Equity Securities at Amortized Cost(7):

    11.73 %   11.64 %   11.63 %   11.40 %   12.25 %

(1)
In accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share, the weighted average shares of common stock outstanding used in computing basic and diluted earnings per common share have been adjusted

49


(2)
Includes commitments to portfolio companies for which funding has yet to occur.

(3)
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.

(4)
The information presented for the period June 23, 2004 (inception) through December 31, 2004 excludes $9.7 million of publicly traded fixed income securities.

(5)
Total return based on market value for the year ended December 31, 2008 equals the decrease of the ending market value at December 31, 2008 of $6.33 per share over the ending market value at December 31, 2007 of $14.63 per share plus the declared dividends of $1.68 per share for the year ended December 31, 2008. Total return based on market value for the year ended December 31, 2007 equals the decrease of the ending market value at December 31, 2007 of $14.63 per share over the ending market value at December 31, 2006 of $19.11 per share plus the declared dividends of $1.66 per share for the year ended December 31, 2007. Total return based on market value for the year ended December 31, 2006 equals the increase of the ending market value at December 31, 2006 of $19.11 per share over the ending market value at December 31, 2005 of $16.07 per share plus the declared dividends of $1.64 per share for the year ended December 31, 2006. 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.

(6)
Total return based on net asset value for the year ended December 31, 2008 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.68 per share for the year ended December 31, 2008, divided by the beginning net asset value. Total return based on net asset value for the year ended December 31, 2007 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.66 per share for the year ended December 31, 2007, divided by the beginning net asset value. Total return based on net asset value for the year ended December 31, 2006 equals the change in net asset value during the period (adjusted for share issuances) plus the declared dividends of $1.64 per share for the year ended December 31, 2006, divided by the beginning net asset value. 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.

(7)
Weighted average yield on debt and income producing equity securities at fair value 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. Weighted average yield on debt and income producing equity securities at amortized cost 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 amortized cost.

50


Item 7.    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 Annual Report. In addition, some of the statements in this report constitute forward-looking statements, which relate to future events or the future performance or financial condition of the Company. The forward-looking statements contained in this report involve risks and uncertainties, including statements as to:

        We use words such as "anticipates," "believes," "expects," "intends," "will," "should," "may" 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" and elsewhere in this Annual Report.

        We have based the forward-looking statements included in this Annual Report on information available to us on the date of this Annual Report, 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 registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.

OVERVIEW

        We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland. We have elected to be regulated as a BDC under the Investment

51



Company Act. We were founded on April 16, 2004 and 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 mezzanine debt, which in some cases includes an equity component like warrants. To a lesser extent we make equity investments.

        We are externally managed by Ares Capital Management, an affiliate of Ares Management, an independent international investment management firm, pursuant to the investment advisory and management agreement. Ares Administration, an affiliate of Ares Management, 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 and indebtedness of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.

        The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements and timely distribute to our stockholders at least 90% of our investment company taxable income, as defined by the Code, for each year. Pursuant to this election, we generally will not have to pay corporate level taxes on any income that we distribute to our stockholders.

CRITICAL 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 as of and 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.

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 typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available (i.e., substantially all of our investments) are valued at fair value as determined in good faith by our board of directors, based on the input of our management and audit

52



committee and independent valuation firms that have been engaged at the direction of the board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12 month period and under a valuation policy and a consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, with approximately 50% (based on value) of our valuations of portfolio companies without readily available market quotations subject to review by an independent valuation firm.

        As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), 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, a comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future 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 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 of directors, based on the input of our management and audit committee and independent valuation firms 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 fluctuate from period to period. Additionally, 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 may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

        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. See "Risk Factors—Risks Relating to our Investments—Price declines and illiquidity in the corporate debt markets have adversely affected, and may continue to adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation."

        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:

53


        Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"), which expands the application of fair value accounting for investments (see Note 9 to the consolidated financial statements).

Interest Income Recognition

        Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. 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 amortization of premiums.

        Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current. The Company may make exceptions to this if the loan has sufficient collateral value and is in the process of collection.

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.

Capital Structuring Service Fees and Other Income

        The Company's investment adviser seeks to provide assistance to our 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 multiple equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice, which concludes upon closing of the investment. 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 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. 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.

        Other income includes fees for asset management, consulting, loan guarantees, commitments, and other services rendered by the Company to portfolio companies. Such fees are recognized as income when earned or the services are rendered.

54


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:

        Results of operations based on changes in foreign exchange rates are separately disclosed in the statement of operations. 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, currency fluctuation and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.

Accounting for Derivative Instruments

        The Company does not utilize hedge accounting and marks its derivatives to market through operations.

Offering Expenses

        The Company's offering costs are charged against the proceeds from equity offerings when received.

Debt Issuance Costs

        Debt issuance costs are being amortized over the life of the related credit facility using the straight line method, which closely approximates the effective yield method.

U.S. Federal Income Taxes

        The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, 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. The Company has made and intends to continue to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. 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.

        Certain of our wholly owned subsidiaries are subject to U.S. federal and state income taxes.

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 current and expected future earnings estimated by management. Net realized capital

55



gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for investment.

        We have adopted a dividend reinvestment plan that provides for reinvestment of any distributions we declare in cash 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 dividend. While we generally use primarily newly issued shares to implement the plan (especially if our shares are trading at a premium to net asset value), we may purchase shares in the open market in connection with our obligations under the plan. In particular, if our shares are trading at a significant enough discount to net asset value and we are otherwise permitted under applicable law to purchase such shares, we intend to purchase shares in the open market in connection with our obligations under our dividend reinvestment plan.

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 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.

New Accounting Pronouncements

        On October 10, 2008, FASB Staff Position No. 157-3—Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, or FSP "157-3", was issued. FSP 157-3 provides an illustrative example of how to determine the fair value of a financial asset in an inactive market. FSP 157-3 does not change the fair value measurement principles set forth in SFAS 157 (see Note 9 to the consolidated financial statements for a description of SFAS 157). Since adopting SFAS 157 in January 2008, our process for determining the fair value of our investments has been, and continues to be, consistent with the guidance provided in the example in FSP 157-3. As a result, the adoption of FSP 157-3 did not affect our process for determining the fair value of our investments and did not have a material effect on our financial position or results of operations.

56


PORTFOLIO AND INVESTMENT ACTIVITY

 
  Year Ended December 31,
(in millions, except number of
new investment commitments,
terms and percentages)
 
 
  2008   2007   2006  

New investments(1):

                   
 

New portfolio companies

  $ 600.5   $ 1,091.6   $ 812.5  
 

Existing portfolio companies

    305.0     256.0     297.5  
               
 

Total new investments

    905.5     1,347.6     1,110.0  

Less:

                   
 

Investments exited

    430.3     654.1     404.9  
               
 

Net investments

  $ 475.2   $ 693.5   $ 705.1  

New investments funded:

                   
 

New portfolio companies

  $ 455.5   $ 876.8   $ 736.1  
 

Existing portfolio companies

    279.7     253.0     292.1  
               
 

Total

  $ 735.2   $ 1,129.8   $ 1,028.2  

Principal amount of investments purchased:

                   
 

Senior term debt

  $ 529.2   $ 886.7   $ 726.4  
 

Senior subordinated debt

    336.3     187.1     249.4  
 

Equity and other

    60.4     177.6     111.7  
               
 

Total

  $ 925.9   $ 1,251.4   $ 1,087.5  

Principal amount of investments sold or repaid:

                   
 

Senior term debt

  $ 448.8   $ 608.3   $ 255.5  
 

Senior subordinated debt

    29.0     89.8     99.2  
 

Equity and other

    7.4     20.6     75.3  
               
 

Total

  $ 485.2   $ 718.7   $ 430.0  

Number of new investments(2)

    39     47     54  

Average new investment amount

  $ 23.2   $ 28.7   $ 19.0  

Weighted average term for new investments (in months)

    66     69     69  

Weighted average yield of debt and income producing securities at fair value funded during the period(3)

    12.57 %   11.51 %   11.76 %

Weighted average yield of debt and income producing securities at amortized cost funded during the period(3)

    12.58 %   11.53 %   11.76 %

Weighted average yield of debt and income producing securities at fair value sold or repaid during the period(3)

    9.49 %   11.67 %   11.39 %

Weighted average yield of debt and income producing securities at amortized cost sold or repaid during the period(3)

    9.79 %   11.72 %   11.95 %

(1)
New investment commitments include new agreements to fund revolving credit facilities or delayed draw loans.

(2)
Number of new investments represents each commitment to a particular portfolio company.

(3)
When we refer to the "weighted average yield at fair value" in this report, we compute it with respect to particular securities by taking the (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt included in such securities, and dividing it by (b) total debt and income producing securities at fair value included in such securities. When we refer to the "weighted average yield at amortized cost" in this report, we compute it with respect to particular securities by taking the (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market

57


        The investment adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, the investment adviser grades the credit status of all investments on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. Under this system, investments with a grade of 4 involve the least amount of risk in our portfolio. This portfolio company is performing above expectations and the trends and risk factors are generally favorable, including a potential exit. Investments graded 3 involve a level of risk that is similar to the risk at the time of origination. This portfolio company is performing as expected and the risk factors are neutral to favorable. All new investments are initially assessed a grade of 3. Investments graded 2 involve a portfolio company performing below expectations and indicates that the investment's risk has increased materially since origination. This portfolio company may be out of compliance with debt covenants, however, payments are generally not more than 120 days past due. For investments graded 2, our investment adviser increases procedures to monitor the portfolio company and will write down the fair value of the investment if it is deemed to be impaired. An investment grade of 1 indicates that the portfolio company is performing materially below expectations and that the investment risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Investments graded 1 are not anticipated to be repaid in full and our investment adviser will reduce the fair market value of the investment to the amount our investment adviser anticipates will be recovered. Our investment adviser employs half-point increments to reflect underlying trends in portfolio company operating or financial performance, as well as the general outlook. As of December 31, 2008, the weighted average investment grade of the investments in our portfolio was 2.9 and six loans were past-due or on non-accrual status. The weighted average investment grade of the investments in our portfolio as of December 31, 2007 was 3.0. The distribution of the grades of our portfolio companies as of December 31, 2008 and 2007 is as follows (dollar amounts in thousands):

 
  As of December 31, 2008   As of December 31, 2007  
 
  Fair
Value
  Number of
Companies
  Fair
Value
  Number of
Companies
 

Grade 1

  $ 48,192     8   $ 13,927     1  

Grade 2

    180,527     9     115,585     6  

Grade 3

    1,632,136     68     1,581,811     66  

Grade 4

    112,122     6     62,879     3  
                   

  $ 1,972,977     91   $ 1,774,202     76  
                   

        The weighted average yields of the following portions of our portfolio as of December 31, 2008 and 2007 were as follows:

 
  As of December 31,  
 
  2008   2007  
 
  Fair
Value
  Amortized
Cost
  Fair
Value
  Amortized
Cost
 

Debt and income producing securities

    12.79 %   11.73 %   11.68 %   11.64 %

Total portfolio

    11.24 %   9.78 %   10.22 %   10.14 %

Senior term debt

    12.01 %   10.85 %   11.19 %   11.05 %

Senior subordinated debt

    14.78 %   13.69 %   13.23 %   12.97 %

Income producing equity securities

    8.42 %   9.30 %   10.36 %   9.90 %

First lien senior term debt

    10.80 %   9.99 %   10.53 %   10.47 %

Second lien senior term debt

    13.75 %   12.04 %   12.38 %   12.10 %

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RESULTS OF OPERATIONS

For the years ended December 31, 2008, 2007 and 2006

        Operating results for the years ended December 31, 2008, 2007 and 2006 are as follows (in thousands):

 
  For the Year Ended December 31,  
 
  2008   2007   2006  

Total Investment Income

  $ 240,461   $ 188,873   $ 120,021  

Total Expenses

    113,221     94,750     58,458  
               

Net Investment Income Before Income Taxes

    127,240     94,123     61,563  

Income Tax Expense (Benefit), Including Excise Tax

    248     (826 )   4,931  
               
 

Net Investment Income

    126,992     94,949     56,632  

Net Realized Gains

    6,371     6,544     27,616  

Net Unrealized Losses

    (272,818 )   (10,661 )   (14,553 )
               

Net (Decrease) Increase in Stockholders' Equity Resulting From Operations

  $ (139,455 ) $ 90,832   $ 69,695  
               

Investment Income

        For the year ended December 31, 2008, total investment income increased $51.6 million, or 27% over the year ended December 31, 2007. Interest income from investments increased $46.0 million, or 28%, to $208.5 million for the year ended December 31, 2008 from $162.4 million for the comparable period in 2007. The increase in interest income from investments was primarily due to the increase in the size of the portfolio as well as increases in the weighted average yield on the portfolio. The average investments, at fair value, for the year increased to $2.0 billion for the year ended December 31, 2008 from $1.5 billion for the comparable period in 2007. Capital structuring service fees increased $3.2 million, or 18%, to $21.2 million for the year ended December 31, 2008 from $18.0 million for the comparable period in 2007. The increase in capital structuring service fees was primarily due to the increase in fee percentages as a result of more favorable terms available in the current market.

        For the year ended December 31, 2007, total investment income increased $68.9 million, or 57%, from the year ended December 31, 2006. Interest income from investments increased $64.1 million, or 65%, to $162.4 million for the year ended December 31, 2007 from $98.3 million for the comparable period in 2006. The increase in interest income from investments was primarily due to the increase in the overall size of the portfolio. The average investments, at fair value, for the year increased to $1.5 billion for the year ended December 31, 2007 from $871.0 million for the comparable period in 2006. Capital structuring service fees increased $2.0 million, or 12%, to $18.0 million for the year ended December 31, 2007 from $16.0 million for the comparable period in 2006. The increase in capital structuring service fees was primarily due to the increased amount of new investments made. The amount of new investments made increased to $1.3 billion during the year ended December 31, 2007 from $1.1 billion for the comparable period in 2006.

Operating Expenses

        For the year ended December 31, 2008, total expenses increased $18.5 million, or 19%, from the year ended December 31, 2007. Base management fees increased $6.9 million, or 29%, to $30.5 million for the year ended December 31, 2008 from $23.5 million for the comparable period in 2007, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $8.2 million, or 35%, to $31.7 million for the year ended December 31, 2008 from $23.5 million for the comparable period in 2007, primarily due to the increase in the size of

59



the portfolio and the related increase in net investment income. The increase in total expenses was partially offset by the decline in interest expense and credit facility fees. Interest expense and credit facility fees decreased $0.4 million, or 1%, to $36.5 million for the year ended December 31, 2008 from $36.9 million for the comparable period in 2007, despite significant increases in the outstanding borrowings for the period. The average outstanding borrowings during the year ended December 31, 2008 was $819.0 million compared to average outstanding borrowings of $567.9 million for the comparable period in 2007. The increase in outstanding borrowings was more than offset by the decline in the average cost of borrowing which went from 6.08% for the year ended December 31, 2007 to 4.06% for the year ended December 31, 2008.

        For the year ended December 31, 2007, total expenses increased $36.3 million, or 62%, from the year ended December 31, 2006. Base management fees increased $9.9 million, or 72%, to $23.5 million for the year ended December 31, 2007 from $13.6 million for the comparable period in 2006, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $7.5 million, or 46%, to $23.5 million for the year ended December 31, 2007 from $16.1 million for the comparable period in 2006, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Interest expense and credit facility fees increased $18.3 million, or 99%, to $36.9 million for the year ended December 31, 2007 from $18.6 million for the comparable period in 2006, primarily due to the significant increase in the outstanding borrowings. The average outstanding borrowings during the year ended December 31, 2007 was $567.9 million compared to average outstanding borrowings of $262.4 million for the comparable period in 2006. The increase in total expenses was partially offset by the decline in incentive fees related to realized gains. There were no incentive fees related to realized gains during the year ended December 31, 2007 compared to $3.4 million for the year ended December 31, 2006, due to gross unrealized depreciation offsetting net realized gains for the period. Net realized gains were $6.6 million during the year ended December 31, 2007 whereas gross unrealized depreciation recognized was $61.2 million.

Income Tax Expense, Including Excise Tax

        The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. Among other things, the Company has, in order to maintain its RIC status, made and intends to continue to make the requisite distributions to its stockholders which will generally relieve the Company from U.S. 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 years ended December 31, 2008, 2007 and 2006 provisions of approximately $0.1 million, $0.1 million and $0.6 million respectively, were recorded for federal excise tax.

        Certain of our wholly owned subsidiaries are subject to U.S. federal and state income taxes. For the year ended December 31, 2008, we recorded a tax provision of approximately $0.1 for these subsidiaries. For the year ended December 31, 2007, we recorded a tax benefit of approximately $0.9 million for these subsidiaries. For the year ended December 31, 2006, we recorded a tax provision of $4.4 million, for these subsidiaries.

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Net Realized Gains/Losses

        During the year ended December 31, 2008, the Company had $495.6 million of sales and repayments resulting in $6.6 million of net realized gains. These sales and repayments included the $75.5 million of loans sold to the Ivy Hill Funds. Net realized gains were comprised of $6.8 million of gross realized gains and $0.2 of gross realized losses. The most significant realized gains and losses during the year ended December 31, 2008 were as follows (in millions):

Portfolio Company
  Realized
Gain (Loss)
 

Hudson Group, Inc. 

  $ 2.8  

Waste Pro USA, Inc. 

    2.0  

Daily Candy, Inc. 

    1.3  

Other

    0.5  
       
 

Total

  $ 6.6  
       

        During the year ended December 31, 2007, the Company had $725.2 million of sales and repayments resulting in $6.6 million of net realized gains. These sales and repayments included the $133.0 million of loans sold to Ivy Hill I. Net realized gains were comprised of $16.2 million of gross realized gains and $9.7 million of gross realized losses. The most significant realized gains and losses during the year ended December 31, 2007 were as follows (in millions):

Portfolio Company
  Realized
Gain (Loss)
 

The GSI Group, Inc. 

  $ 6.2  

Varel Holdings, Inc. 

    4.0  

Equinox SMU Partners LLC

    3.5  

Berkline/Benchcraft Holdings LLC

    (8.8 )

Other

    1.7  
       
 

Total

  $ 6.6  
       

        During the year ended December 31, 2006, the Company had $457.7 million of sales and repayments resulting in $27.6 million of net realized gains. Net realized gains were comprised of $27.7 million of gross realized gains and $0.1 million of gross realized losses. The most significant realized gains and losses during the year ended December 31, 2006 were as follows (in millions):

Portfolio Company
  Realized
Gain (Loss)
 

CICQ, LP

  $ 18.6  

United Site Services, Inc. 

    4.5  

GCA Services Group, Inc. 

    1.0  

Other

    3.5  
       
 

Total

  $ 27.6  
       

Net Unrealized Gains/Losses

        For the year ended December 31, 2008, the Company had net unrealized losses of $272.8 million, which was comprised of $54.9 million in unrealized appreciation, $323.9 million in unrealized depreciation and $3.8 million relating to the reversal of prior period net unrealized appreciation. The

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most significant changes in net unrealized appreciation and depreciation during the year ended December 31, 2008 were as follows (in millions):

Portfolio Company
  Unrealized Appreciation
(Depreciation)
 

R3 Education, Inc. 

  $ 5.0  

Instituto de Banco Y Comercio, Inc. 

    4.5  

Industrial Container Services LLC

    4.1  

Diversified Collection Services, Inc. 

    3.4  

Campus Management Corp. 

    3.0  

Prommis Solutions, LLC

    (3.1 )

309179 Nova Scotia, Inc. 

    (3.1 )

National Print Group, Inc. 

    (3.1 )

Athletic Club Holdings, Inc. 

    (3.2 )

Booz Allen Hamilton, Inc. 

    (3.2 )

Wastequip, Inc. 

    (3.3 )

Direct Buy Holdings, Inc. 

    (3.6 )

OnCURE Medical Corp. 

    (3.6 )

VSS-Tranzact Holdings, LLC

    (4.0 )

Summit Business Media, LLC

    (4.0 )

Best Brands Corporation

    (4.3 )

GG Merger Sub I, Inc. 

    (4.7 )

Apogee Retail, LLC

    (4.8 )

Ivy Hill Middle Market Credit Fund, Ltd. 

    (5.6 )

Making Memories Wholesale, Inc. 

    (6.7 )

Vistar Corporation

    (6.9 )

HB&G Building Products

    (7.4 )

Growing Family, Inc. 

    (7.5 )

Primis Marketing Group, Inc. 

    (7.6 )

Capella Healthcare, Inc. 

    (9.5 )

Wear Me Apparel, LLC

    (12.1 )

Things Remembered, Inc. 

    (12.3 )

Apple & Eve, LLC

    (12.4 )

MPBP Holdings, Inc. 

    (15.3 )

DSI Renal, Inc. 

    (18.1 )

Reflexite Corporation

    (19.2 )

Courtside Acquisition Corp. 

    (30.9 )

Firstlight Financial Corporation

    (37.0 )

Other

    (32.5 )
       
 

Total

  $ (269.0 )
       

        For the year ended December 31, 2007, the Company had net unrealized losses of $10.7 million, which was comprised of $52.5 million in unrealized appreciation, $60.4 million in unrealized depreciation and $2.8 million relating to the reversal of prior period net unrealized appreciation.

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The most significant changes in unrealized appreciation and depreciation during the year ended December 31, 2007 were as follows (in millions):

Portfolio Company
  Unrealized Appreciation
(Depreciation)
 

Reflexite Corporation

  $ 27.2  

The GSI Group, Inc. 

    5.6  

Waste Pro, Inc. 

    4.0  

Daily Candy, Inc. 

    3.6  

Industrial Container Services, Inc. 

    3.2  

Varel Holdings, Inc. 

    3.0  

Wastequip, Inc. 

    (3.2 )

Making Memories Wholesale, Inc. 

    (5.0 )

Primis Marketing Group, Inc. 

    (5.6 )

Universal Trailer Corporation

    (7.2 )

Wear Me Apparel, LLC

    (8.0 )

Firstlight Financial Corporation

    (10.0 )

MPBP Holdings, Inc. 

    (10.5 )

Other

    (5.0 )
       
 

Total

  $ (7.9 )
       

        For the year ended December 31, 2006, the Company had net unrealized losses of $14.6 million, which was comprised of $9.2 million in unrealized appreciation, $8.9 million in unrealized depreciation and $14.9 million relating to the reversal of prior period net unrealized appreciation. The most significant changes in unrealized appreciation and depreciation during the year ended December 31, 2006 were as follows (in millions):

Portfolio Company
  Unrealized Appreciation
(Depreciation)
 

CICQ, LP

  $ 4.0  

Universal Trailer Corporation

    3.4  

Varel Holdings, Inc. 

    1.0  

Making Memories Wholesale, Inc. 

    (2.4 )

Berkshire/Benchcraft Holdings LLC

    (6.5 )

Other

    0.8  
       
 

Total

  $ 0.3  
       

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

        Since the Company's inception, the Company's liquidity and capital resources have been generated primarily from the net proceeds of public offerings of common stock, the Debt Securitization, advances from the CP Funding Facility and Revolving Credit Facility (together, the "Facilities"), as well as cash flows from operations.

        As of December 31, 2008, the Company had $89.4 million in cash and cash equivalents and $908.8 million in total indebtedness outstanding. Subject to leverage restrictions, the Company had approximately $265.2 million available for additional borrowings under the Facilities as of December 31, 2008.

        Due to increasing volatility in global markets, the availability of capital and access to capital markets has been limited. Until constraints on raising new capital ease, we intend to pursue other avenues of liquidity such as adjusting the pace of our investments, becoming more selective in

63



evaluating investment opportunities to ensure appropriate risk-adjusted returns, pursuing asset sales, and/or recycling lower yielding investments. As the global liquidity situation evolves, we will continue to monitor and adjust our funding approach accordingly. However, given the unprecedented nature of the volatility in the global markets, there can be no assurances that these activities will be successful. Moreover, if current levels of market disruption and volatility continue or worsen, we could face materially higher financing costs. Consequently, our operating strategy could be materially and adversely affected. The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less than the value at which we have recorded our investments. A failure to renew or replace the CP Funding Facility with other indebtedness, and any required sale of all or portion of the collateral securing the CP Funding Facility, could have a material adverse impact on our business, financial condition and results of operations.

Equity Offerings

        On April 28, 2008, we completed a transferable rights offering, issuing 24,228,030 shares at a subscription price of $11.0016 per share, less dealer manager fees of $0.22 per share. Net proceeds after deducting the dealer manager fees and estimated offering expenses were approximately $259.8 million. Ares Investments LLC ("Ares Investments"), an affiliate of the investment adviser, purchased 1,643,215 shares in the rights offering, bringing its total shares owned to 2,859,882 shares of common stock, representing approximately 2.9% of our total shares outstanding as of December 31, 2008.

        The following table summarizes the total shares issued and proceeds we received net of underwriter, dealer manager and offering costs for the years ended December 31, 2008, 2007 and 2006 (in millions, except per share data):

 
  Shares
issued
  Offering
price per
share
  Proceeds net of
underwriting and
offering costs
 

2008

                   

April 2008 public offering

    24.2   $ 11.00   $ 259.8  
                 
 

Total for the year ended December 31, 2008

    24.2         $ 259.8  

2007

                   

August 2007 public offering

    2.6   $ 16.30   $ 42.3  

April 2007 public offering

    15.5   $ 17.97     267.2  

February 2007 public offering

    1.4   $ 19.95     27.2  

Underwriters over-allotment option related to December 2006 public offering

    0.4   $ 18.50     7.5  
                 
 

Total for the year ended December 31, 2007

    19.9         $ 344.2  

2006

                   

December 2006 public offering

    2.7   $ 18.50   $ 49.8  

July 2006 public offering

    10.8   $ 15.67     162.0  
                 
 

Total for the year ended December 31, 2006

    13.5         $ 211.8  

        Part of the proceeds from our public offerings in 2008, 2007 and 2006 were used to repay outstanding indebtedness. The remaining unused portions of the proceeds from our public offerings were used to fund investments in portfolio companies in accordance with our investment objective and strategies and market conditions.

        As of December 31, 2008, total market capitalization for the Company was $0.6 billion compared to $1.1 billion as of December 31, 2007.

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Debt Capital Activities

        Our debt obligations consisted of the following as of December 31, 2008 and 2007 (in millions):

 
  As of
December 31,
2008
  As of
December 31,
2007
 

Revolving Credit Facility

  $ 480.5   $ 282.5  

CP Funding Facility

    114.3     85.0  

Debt Securitization

    314.0     314.0  
           

  $ 908.8   $ 681.5  
           

        The weighted average interest rate and weighted average maturity of all our outstanding borrowings as of December 31, 2008 were 3.03% and 4.9 years, respectively.

        The weighted average interest rate and weighted average maturity of all our outstanding borrowings as of December 31, 2007 were 5.66% and 6.9 years, respectively.

        The ratio of total debt outstanding to stockholders' equity as of December 31, 2008 was 0.83:1.00 compared to 0.60:1.00 as of December 31, 2007.

        A summary of our contractual payment obligations as of December 31, 2008 are as follows (in millions):

 
  Payments Due by Period  
 
  Total   Less than
1 year
  1-3 years   4-5 years   After
5 years
 

Revolving Credit Facility

  $ 480.5   $   $ 480.5   $   $  

CP Funding Facility

    114.3     114.3              

Debt Securitization

    314.0                 314.0  
                       
 

Total Debt

  $ 908.8   $ 114.3   $ 480.5   $   $ 314.0  
                       

        In accordance with the Investment Company Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the Investment Company Act, is at least 200% after such borrowing. As of December 31, 2008, our asset coverage for borrowed amounts was 220%.

        In October 2004, we formed Ares Capital CP Funding LLC ("Ares Capital CP"), a wholly owned subsidiary of the Company, through which we established a revolving facility, referred to as the "CP Funding Facility," that, as amended, allows Ares Capital CP to issue up to $350.0 million of variable funding certificates. As of December 31, 2008, there was $114.3 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.

        On July 22, 2008, we entered into an amendment to the CP Funding Facility to, among other things, extend its maturity, decrease the availability and advance rates applicable to certain types of eligible loans and make certain provisions of the facility more restrictive. The Company paid a renewal fee of 0.786% of the total amount available for borrowing, or $2.75 million. On December 5, 2008, we entered into an amendment to the CP Funding Facility to, among other things, modify the net worth test applicable to the Company, decrease the advance rates applicable to certain types of eligible loans and add an asset coverage requirement with respect to the Company consistent with regulatory requirements.

65


        The CP Funding Facility is scheduled to expire on July 21, 2009. The CP Funding Facility is secured by all of the assets held by Ares Capital CP, which as of December 31, 2008 consisted of 45 investments. See Note 8 to our consolidated financial statements for more detail on the CP Funding Facility.

        In December 2005, we entered into a senior secured revolving credit facility, referred to as the Revolving Credit Facility, under which, as amended, the lenders have agreed to extend credit to the Company in an aggregate principal amount not exceeding $525.0 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 December 31, 2008 consisted of 170 investments.

        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 $765.0 million under certain circumstances. On January 21, 2009, we partially exercised the accordion feature of the Revolving Credit Facility, increasing the total amount available for borrowing from $510.0 million to $525.0 million. As of December 31, 2008, there was $480.5 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. See Note 8 to our consolidated financial statements for more detail on the Revolving Credit Facility.

        In July 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 $50.0 million of revolving notes, all of which were drawn down as of December 31, 2008) (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 December 31, 2008 consolidated balance sheet. We retained approximately $86.0 million of aggregate principal amount of certain BBB and non-rated securities in the Debt Securitization (the "Retained Notes"). As of December 31, 2008, there were 67 investments securing the CLO Notes.

        The CLO Notes mature on December 20, 2019. As of December 31, 2008, there was $314.0 million outstanding under the Debt Securitization (excluding the Retained Notes). See Note 8 to our consolidated financial statements for more detail on the Debt Securitization. In February 2009, we purchased, in open market transactions, a total of $27.0 million of our outstanding debt securities under the Debt Securitization for $6.6 million.

        In addition, as of December 31, 2008, we had a long-term issuer rating of Baa3 from Moody's Investor Service and a long-term counterparty credit rating from Standard & Poor's Ratings Service of BBB.

PORTFOLIO VALUATION

        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 typically valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available (i.e., substantially all of our investments) are valued at fair value as

66



determined in good faith by our board of directors, based on the input of our management and audit committee and independent valuation firms that have been engaged at the direction of the board to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing 12 month period and under a valuation policy and a consistently applied valuation process. The valuation process is conducted at the end of each fiscal quarter, with approximately 50% (based on value) of our valuations of portfolio companies without readily available market quotations subject to review by an independent valuation firm.

        As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company's debt and equity), 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, a comparison of the portfolio company's securities to publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future 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 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 of directors, based on the input of our management and audit committee and independent valuation firms 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 fluctuate from period to period. Additionally, 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 may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have recorded it.

        In addition, changes in the market environment, such as inflation, and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned. See "Risk Factors—Risks Relating to our Investments—Price declines and illiquidity in the corporate debt markets have adversely affected, and may continue to adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation."

        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:

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        Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"), which expands the application of fair value accounting for investments (see Note 9 to the consolidated financial statements).

OFF BALANCE SHEET ARRANGEMENTS

        As of December 31, 2008, the Company had the following commitments to fund various revolving senior secured and subordinated loans (in millions):

 
  As of
December 31,
2008
  As of
December 31,
2007
 

Total revolving commitments

  $ 419.0   $ 323.6  
 

Less: funded commitments

    (139.6 )   (79.2 )
           

Total unfunded commitments

    279.4     244.4  
 

Less: commitments substantially at discretion of the Company

    (32.4 )    
 

Less: unavailable commitments due to borrowing base or other covenant restriction

    (64.5 )   (15.4 )
           

Total net adjusted unfunded revolving commitments

  $ 182.5   $ 229.0  
           

        Of the total commitments as of December 31, 2008, $342.9 million extend beyond the maturity date for our Revolving Credit Facility. Included within the total commitments as of December 31, 2008 are commitments to issue up to $15.8 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 parties if the portfolio companies were to default on their related payment obligations. As of December 31, 2008, the Company had $12.5 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, $0.2 million expire on January 31, 2009, $3.7 million expire on February 28, 2009, $8.1 million expire on September 30, 2009 and $0.5 million expire on August 31, 2010.

        As of December 31, 2008 and 2007, the Company was subject to subscription agreements to fund equity investments in private equity investment partnerships, substantially all at the discretion of the Company as follows (in millions):

 
  December 31,
2008
  December 31,
2007
 

Total private equity commitments

  $ 428.3   $ 111.8  

Total unfunded private equity commitments

  $ 423.6   $ 110.5  

RECENT DEVELOPMENTS

        As of February 27, 2009, we had made $9.6 million of investments since December 31, 2008. Of these investments, substantially all were senior subordinated debt. Of these investments, 14% have stated interest at floating rates and 81% have stated interest at fixed rates with a weighted average stated rate of 16.5%. As of February 27, 2009, we exited $21.7 million of investments since December 31, 2008. Of these investments, 56% were senior secured debt and 44% were senior subordinated debt. Of these investments, 98% bore interest at fixed rates with a weighted average stated rate of 13.0%.

        In January 2009, we increased the size of the Revolving Credit Facility by $15.0 million by exercising the "accordion" feature, bringing the total aggregate principal amount available for borrowing under the Revolving Credit Facility to $525.0 million.

68


        In February 2009, we purchased, in open market transactions, a total of $27.0 million of our outstanding debt securities under the Debt Securitization for a purchase price of $6.6 million.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

        Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the spread between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

        As of December 31, 2008, approximately 57% of the investments at fair value in our portfolio were at fixed rates while approximately 32% were at variable rates and 11% were non-interest earning. The Debt Securitization, the CP Funding Facility and the Revolving Credit Facility all feature variable rates.

        We regularly measure our exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates.

        In October 2008, we entered into a two-year interest rate swap agreement for a total notional amount of $75 million. Under the interest rate swap agreement, we will pay a fixed interest rate of 2.985% and receive a floating rate based on the prevailing three-month LIBOR. We believe that this agreement will enable us to mitigate interest rate risk and remain match funded.

        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.

        Based on our December 31, 2008 balance sheet, the following table shows the impact on net income of base rate changes in interest rates assuming no changes in our investment and borrowing structure and reflecting the effect of our interest rate swap agreement described above and in Note 10 of the consolidated financial statements (in millions):

Basis Point Change
  Interest
Income
  Interest
Expense
  Net
Income
 

Up 300 basis points

  $ 21.4   $ 25.0   $ (3.6 )

Up 200 basis points

  $ 14.2   $ 16.7   $ (2.5 )

Up 100 basis points

  $ 7.1   $ 8.3   $ (1.2 )

Down 100 basis points

  $ (6.2 ) $ (8.3 ) $ 2.1  

Down 200 basis points

  $ (11.2 ) $ (15.1 ) $ 3.9  

Down 300 basis points

  $ (14.7 ) $ (17.0 ) $ 2.3  

69


        Based on our December 31, 2007 balance sheet, the following table shows the impact on net income of base rate changes in interest rates assuming no changes in our investment and borrowing structure (in millions):

Basis Point Change
  Interest
Income
  Interest
Expense
  Net
Income
 

Up 300 basis points

  $ 24.4   $ 20.4   $ 4.0  

Up 200 basis points

  $ 16.3   $ 13.6   $ 2.7  

Up 100 basis points

  $ 8.1   $ 6.8   $ 1.3  

Down 100 basis points

  $ (8.1 ) $ (6.8 ) $ (1.3 )

Down 200 basis points

  $ (16.3 ) $ (13.6 ) $ (2.7 )

Down 300 basis points

  $ (24.4 ) $ (20.4 ) $ (4.0 )

Item 8.    Financial Statements And Supplementary Data

        See the Index to Consolidated Financial Statements.

Item 9.    Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

        None.

Item 9A.    Controls And Procedures

        (a)    Evaluation of Disclosure Controls and Procedures.    The Company's management, with the participation of the Company's President and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, the Company's President and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of December 31, 2008, to provide assurance that information that is required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures, include without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

        (b)    Management's Report on Internal Controls over Financial Reporting.    The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Under the supervision and with the participation of management, including the President and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company's evaluation under the framework in Internal Control—Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2008. The Company's internal control over financial reporting as of December 31, 2008, has been audited by our independent registered public accounting firm, KPMG LLP, as stated in its report titled "Report of Independent Registered Public Accounting Firm" on page F-2.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

70


        (c)    Attestation Report of the Registered Public Accounting Firm.    Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on the Company's internal control over financial reporting, which is set forth under the heading "Report of Independent Registered Public Accounting Firm" on page F-2.

        (d)    Changes in Internal Control over Financial Reporting.    There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information

        None.

71



PART III

Item 10.    Directors, Executive Officers and Corporate Governance

        The information required by this item will be contained in the Company's definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2008, and is incorporated herein by reference.

Item 11.    Executive Compensation

        The information required by this item will be contained in the Company's definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2008, and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The information required by this item will be contained in the Company's definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2008, and is incorporated herein by reference.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

        The information required by this item will be contained in the Company's definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2008, and is incorporated herein by reference.

Item 14.    Principal Accountant Fees and Services

        The information required by this item will be contained in the Company's definitive Proxy Statement for its 2009 Annual Stockholder Meeting, to be filed with the SEC within 120 days after December 31, 2008, and is incorporated herein by reference.

72



PART IV

Item 15.    Exhibits And Financial Statement Schedules

        The following documents are filed as part of this Annual Report:

Number   Description
  3.1   Articles of Amendment and Restatement, as amended(1)

 

3.2

 

Second Amended and Restated Bylaws(2)

 

4.1

 

Form of Stock Certificate(3)

 

10.1

 

Dividend Reinvestment Plan, effective until April 29, 2009(4)

 

10.2

 

Dividend Reinvestment Plan, effective as of April 30, 2009(2)

 

10.3

 

Amended and Restated Investment Advisory and Management Agreement, dated as of June 1, 2006, between Ares Capital Corporation and Ares Capital Management LLC(5)

 

10.4

 

Custodian Agreement between the Company and U.S. Bank National Association(3)

 

10.5

 

Amended and Restated Administration Agreement, dated as of June 1, 2007, between Ares Capital Corporation and Ares Operations LLC(6)

 

10.6

 

Trademark License Agreement between Ares Capital Corporation and Ares Management LLC(4)

 

10.7

 

Form of Indemnification Agreement between Ares Capital Corporation and directors and certain officers(3)

 

10.8

 

Form of Indemnification Agreement between Ares Capital Corporation and the members of the Ares Capital Management LLC investment committee(3)

 

10.9

 

Purchase and Sale Agreement, dated as of November 3, 2004, by and between Ares Capital Corporation and Ares Capital CP Funding LLC(7)

 

10.10

 

Sale and Servicing Agreement, dated as of November 3, 2004, among Ares Capital CP Funding LLC, as borrower, Ares Capital Corporation, as servicer, certain conduits and institutional lenders agented by Wachovia Capital Markets, LLC, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(7)

 

10.11

 

Amendment No. 1 to Sale and Servicing Agreement, dated as of December 30, 2004, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the conduit purchasers and institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer*

73


Number   Description
  10.12   Amendment No. 2 to Sale and Servicing Agreement, dated as of April 8, 2005, among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the Conduit Purchasers and Institutional Purchasers from time to time party thereto, each of the Purchaser Agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(8)

 

10.13

 

Amendment No. 3 to Sale and Servicing Agreement, dated as of October 31, 2005, among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the Conduit Purchasers and Institutional Purchasers from time to time party thereto, each of the Purchaser Agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(9)

 

10.14

 

Amendment No. 4 to Sale and Servicing Agreement, dated as of November 14, 2005, among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the Conduit Purchasers and Institutional Purchasers from time to time party thereto, each of the Purchaser Agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(10)

 

10.15

 

Amendment No. 5 to Sale and Servicing Agreement, dated as of December 28, 2005, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the conduit purchasers and institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer*

 

10.16

 

Amendment No. 6 to Sale and Servicing Agreement, dated as of November 1, 2006, among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the Conduit Purchasers and Institutional Purchasers from time to time party thereto, each of the Purchaser Agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(11)

 

10.17

 

Amendment No. 7 to Sale and Servicing Agreement, dated as of March 8, 2007, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the conduit purchasers and institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as the backup servicer*

 

10.18

 

Amendment No. 8 to Sale and Servicing Agreement, dated as of August 6, 2007, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the conduit purchasers and institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (d/b/a U.S. Bank Portfolio Services), as the backup servicer*

74


Number   Description
  10.19   Amendment No. 9 to Sale and Servicing Agreement, dated as of October 18, 2007, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the Conduit Purchasers and Institutional Purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent and purchaser agent with respect to Variable Funding Capital Company LLC as conduit purchaser, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(12)

 

10.20

 

Amendment No. 10 to Sale and Servicing Agreement, dated as of July 22, 2008, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the conduit purchasers and institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent and purchaser agent with respect to Variable Funding Capital Company LLC as conduit purchaser, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(13)

 

10.21

 

Amendment No. 11 to Sale and Servicing Agreement, dated as of September 8, 2008, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the conduit purchasers and institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent and purchaser agent with respect to Variable Funding Capital Company LLC as conduit purchaser, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(14)

 

10.22

 

Amendment No. 12 to Sale and Servicing Agreement, dated as of December 5, 2008, by and among Ares Capital CP Funding LLC, Ares Capital Corporation, each of the conduit purchasers and institutional purchasers from time to time party thereto, each of the purchaser agents from time to time party thereto, Wachovia Capital Markets, LLC, as administrative agent and purchaser agent with respect to Variable Funding Capital Company LLC, as conduit purchaser, U.S. Bank National Association, as trustee, and Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as the backup servicer(15)

 

10.23

 

Master Participation Agreement, dated as of July 7, 2006, between Ares Capital CP Funding LLC and Ares Capital Corporation(16)

 

10.24

 

Senior Secured Revolving Credit Agreement, dated as of December 28, 2005, among Ares Capital Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent(17)

 

10.25

 

First Amendment Agreement and Waiver, dated as of November 13, 2007, between Ares Capital Corporation as borrower, Ares Capital FL Holdings LLC, ARCC CIC Flex Corp., ARCC Imperial Corporation and ARCC Imperial LLC as subsidiary guarantors and BMO Capital Markets Financing, Inc., Merrill Lynch Capital Corporation, SunTrust Bank, Commerzbank AG, New York and Grand Cayman Branches, UBS Loan Finance LLC, JPMorgan Chase Bank, N.A., Wachovia Bank, National Association and KBC Bank N.V. as Lenders(18)

 

10.26

 

Sale and Servicing Agreement, dated as of July 7, 2006, among ARCC Commercial Loan Trust 2006, as issuer, ARCC CLO 2006 LLC, as trust depositor, Ares Capital Corporation, as originator and as servicer, U.S. Bank National Association, as trustee and as collateral administrator, Lyon Financial Services, Inc. (D/B/A U.S. Bank Portfolio Services), as backup servicer, and Wilmington Trust Company, as owner trustee(16)

75


Number   Description
  10.27   Commercial Loan Sale Agreement, dated as of July 7, 2006, between Ares Capital Corporation and ARCC CLO 2006 LLC(16)

 

10.28

 

Indenture, dated as of July 7, 2006, between ARCC Commercial Loan Trust 2006 and U.S. Bank National Association(16)

 

10.29

 

Amended and Restated Trust Agreement, dated as of July 7, 2006, among ARCC CLO 2006 LLC, Wilmington Trust Company and U.S. Bank National Association(16)

 

10.30

 

Collateral Administration Agreement, dated as of July 7, 2006, among ARCC Commercial Loan Trust 2006, Ares Capital Corporation and U.S. Bank National Association(16)

 

10.31

 

Class A-1A VFN Purchase Agreement, dated as of July 7, 2006, among ARCC Commercial Loan Trust 2006, U.S. Bank National Association and other Class A-1A VFN noteholders party thereto(16)

 

11.1

 

Statement of Computation of Per Share Earnings(19)

 

14.1

 

Code of Conduct of Ares Capital Corporation, as amended*

 

21.1

 

Subsidiaries of the Company*

 

31.1

 

Certification by President pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

31.2

 

Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

 

32.1

 

Certification by President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*
Filed herewith

(1)
Incorporated by reference to Exhibit (a) to the Company's pre-effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2 (File No. 333-149109), filed on March 14, 2008.

(2)
Incorporated by reference to Exhibits 3.1 and 10.1, as applicable, to the Company's Form 8-K (File No. 814-00663) filed on February 27, 2009.

(3)
Incorporated by reference to Exhibits (d), (j), (k)(4) and (k)(5), as applicable, to the Company's pre-effective Amendment No. 2 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2 (File No. 333-114656), filed on September 28, 2004.

(4)
Incorporated by reference to Exhibits (e) and (k)(3), as applicable, to the Company's pre-effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933, as amended, on Form N-2 (File No. 333-114656), filed on September 17, 2004.

(5)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on June 5, 2006.

(6)
Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q (File No. 814-00663) for the quarter ended June 30, 2007 filed on August 9, 2007.

(7)
Incorporated by reference to Exhibits 10.1 and 10.2, as applicable, to the Company's Form 8-K (File No. 814-00663) filed on November 8, 2004.

(8)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on April 12, 2005.

76


(9)
Incorporated by reference to Exhibit 10.12 to the Company's Form 10-K (File No. 814-00663) for the year ended December 31, 2005 filed on February 28, 2006.

(10)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on November 14, 2005.

(11)
Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q (File No. 814-00663) for the quarter ended September 30, 2006 filed on November 8, 2006.

(12)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on October 23, 2007.

(13)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on July 24, 2008.

(14)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on September 10, 2008.

(15)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on December 9, 2008.

(16)
Incorporated by reference to Exhibits 10.2 through 10.8, as applicable, to the Company's Form 10-Q (File No. 814-00663) for the quarter ended June 30, 2006 filed on August 9, 2006.

(17)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on December 30, 2005.

(18)
Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K (File No. 814-00663) filed on November 14, 2007.

(19)
Included in Note 4 to the Company's Notes to Consolidated Financial Statements filed herewith.

77



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm

  F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007

  F-4

Consolidated Statement of Operations for the years ended December 31, 2008, 2007 and 2006

  F-5

Consolidated Schedules of Investments as of December 31, 2008 and 2007

  F-6

Consolidated Statement of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006

  F-31

Consolidated Statement of Cash Flows for the years ended December 31, 2008, 2007 and 2006

  F-32

Notes to Consolidated Financial Statements

  F-33

F-1



Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Ares Capital Corporation:

        We have audited the accompanying consolidated balance sheets of Ares Capital Corporation (and subsidiaries) (the Company) as of December 31, 2008 and 2007, including the consolidated schedule of investments as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2008. We also have audited the Company's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's report on internal controls over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ares Capital Corporation (and subsidiaries) as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Ares Capital Corporation (and

F-2



subsidiaries) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

        As explained in note 5, the accompanying consolidated financial statements include investments valued at $ 1.97 billion (180 percent of net assets), whose fair values have been estimated by the Board of Directors and management in the absence of readily determinable fair values. Such estimates are based on financial and other information provided by management of its portfolio companies, pertinent market and industry data, as well as input from independent valuation firms. These investments are valued in accordance with Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), which requires the Company to assume that the portfolio investments are sold in a principal market to market participants. The Company has considered its principal market as the market in which the Company exits it portfolio investments with the greatest volume and level of activity. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to these valuation techniques are observable or unobservable. $1.86 billion of investments at December 31, 2008 are valued based on unobservable inputs. Because such valuations, and particularly valuations of private investments and private companies, are inherently uncertain, they may fluctuate significantly over short periods of time. These determinations of fair value could differ materially from the values that would have been utilized had a ready market for these investments existed.

LOGO

Los Angeles, California
March 2, 2009

F-3



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except per share data)

 
  As of  
 
  December 31, 2008   December 31, 2007  

ASSETS

             

Investments at fair value (amortized cost of $2,267,593 and $1,795,621, respectively)

             
 

Non-controlled/non-affiliate investments

  $ 1,477,492   $ 1,167,200  
 

Non-controlled affiliate company investments

    329,326     430,371  
 

Controlled affiliate company investments

    166,159     176,631  
           
 

Total investments at fair value

    1,972,977     1,774,202  

Cash and cash equivalents

    89,383     21,142  

Receivable for open trades

    3     1,343  

Interest receivable

    17,547     23,730  

Other assets

    11,423     8,988  
           

Total assets

  $ 2,091,333   $ 1,829,405  
           

LIABILITIES

             

Debt

  $ 908,786   $ 681,528  

Dividend payable

    40,804      

Management and incentive fees payable

    32,989     13,041  

Accounts payable and other liabilities

    10,006     5,516  

Interest and facility fees payable

    3,869     4,769  
           

Total liabilities

    996,454     704,854  
           

Commitments and contingencies (Note 7)

             

STOCKHOLDERS' EQUITY

             

Common stock, par value $.001 per share, 200,000,000 and 100,000,000 common shares authorized, respectively, 97,152,820 and 72,684,090 common shares issued and outstanding, respectively

    97     73  

Capital in excess of par value

    1,395,958     1,136,599  

Accumulated undistributed net investment income

    (7,637 )   7,005  

Accumulated net realized gain on sale of investments

    (124 )   1,471  

Net unrealized (depreciation) appreciation on investments

    (293,415 )   (20,597 )
           

Total stockholders' equity

    1,094,879     1,124,551  
           

Total liabilities and stockholders' equity

  $ 2,091,333   $ 1,829,405  
           

NET ASSETS PER SHARE

  $ 11.27   $ 15.47  
           

See accompanying notes to consolidated financial statements.

F-4



ARES CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(dollar amounts in thousands, except per share data)

 
  For the
Year Ended
December 31,
2008
  For the
Year Ended
December 31,
2007
  For the
Year Ended
December 31,
2006
 

INVESTMENT INCOME:

                   
 

From non-controlled/non-affiliate company investments:

                   
 

Interest from investments

  $ 169,519   $ 135,145   $ 85,642  
 

Capital structuring service fees

    16,421     12,474     14,634  
 

Interest from cash & cash equivalents

    1,625     2,946     2,420  
 

Dividend income

    1,621     1,880     2,228  
 

Other income

    3,244     1,054     552  
               
   

Total investment income from non-controlled/non-affiliate company investments

    192,430     153,499     105,476  
 

From non-controlled affiliate company investments:

                   
 

Interest from investments

    28,532     21,413     11,230  
 

Capital structuring service fees

    1,821     2,635     1,384  
 

Dividend income

    825     1,224      
 

Management fees

    750     750      
 

Other income

    847     381     230  
               
   

Total investment income from non-controlled affiliate company investments

    32,775     26,403     12,844  
 

From controlled affiliate company investments:

                   
 

Interest from investments

    10,420     5,876     1,459  
 

Capital structuring service fees

    3,000     2,899      
 

Dividend income

    133     121     242  
 

Management fees

    1,628     45      
 

Other income

    75     30      
               
   

Total investment income from controlled affiliate company investments

    15,256     8,971     1,701  
               
 

Total investment income

    240,461     188,873     120,021  
               

EXPENSES:

                   
 

Interest and credit facility fees

    36,515     36,889     18,584  
 

Base management fees

    30,463     23,531     13,646  
 

Incentive management fees

    31,748     23,522     19,516  
 

Professional fees

    5,990     4,907     3,016  
 

Insurance

    1,271     1,081     866  
 

Administrative

    2,701     997     953  
 

Depreciation

    503     410     259  
 

Directors fees

    337     280     250  
 

Interest to the Investment Adviser

            26  
 

Other

    3,693     3,133     1,342  
               
 

Total expenses

    113,221     94,750     58,458  

NET INVESTMENT INCOME BEFORE INCOME TAXES

    127,240     94,123     61,563  
               

Income tax expense, including excise tax

    248     (826 )   4,931  
               

NET INVESTMENT INCOME

    126,992     94,949     56,632  
               

REALIZED AND UNREALIZED NET GAINS (LOSSES) ON INVESTMENTS AND FOREIGN CURRENCIES:

                   
 

Net realized gains (losses):

                   
 

Non-controlled/non-affiliate company investments

    5,200     2,754     27,569  
 

Non-controlled affiliate company investments

    1,357         47  
 

Controlled affiliate company investment

        3,808      
 

Foreign currency transactions

    (186 )   (18 )    
               
   

Net realized gains

    6,371     6,544     27,616  
 

Net unrealized gains (losses):

                   
 

Non-controlled/non-affiliate company investments

    (168,570 )   (3,388 )   (15,554 )
 

Non-controlled affiliate company investments

    (82,457 )   (34,497 )   1,001  
 

Controlled affiliate company investments

    (21,797 )   27,231      
 

Foreign currency transactions

    6     (7 )    
               
   

Net unrealized losses

    (272,818 )   (10,661 )   (14,553 )
   

Net realized and unrealized gains (losses) from investments and foreign currencies

    (266,447 )   (4,117 )   13,063  
               

NET (DECREASE) INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS

  $ (139,455 ) $ 90,832   $ 69,695  
               

BASIC AND DILUTED EARNINGS PER COMMON SHARE (see Note 4)

  $ (1.56 ) $ 1.34   $ 1.58  
               

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING (see Note 4)

    89,666,243     67,676,498     43,978,853  
               

See accompanying notes to consolidated financial statements.

F-5



ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2008
(dollar amounts in thousands, except per unit data)

 
Company(1)
  Investment   Interest(10)   Initial
Acquisition
Date
  Amortized
Cost
  Fair Value   Fair Value
Per Unit
  Percentage
of Net
Assets
 
  Healthcare—Services                                        
  American Renal Associates, Inc.   Senior secured loan ($1,443 par due 12/2010)   4.72% (Libor + 3.25%/Q)     12/14/2005   $ 1,443   $ 1,399   $ 0.97 (3)      
      Senior secured loan ($180 par due 12/2010)   5.00% (Base Rate + 1.75%/D)     12/14/2005     180     175   $ 0.97 (3)      
      Senior secured loan ($5,705 par due 12/2011)   4.72% (Libor + 3.25%/Q)     12/14/2005     5,705     5,534   $ 0.97 (3)      
      Senior secured loan ($34 par due 12/2011)   5.00% (Base Rate + 1.75%/D)     12/14/2005     34     33   $ 0.97 (3)      
      Senior secured loan ($262 par due 12/2011)   4.72% (Libor + 3.25%/Q)     12/14/2005     262     254   $ 0.97 (3)      
      Senior secured loan ($2,620 par due 12/2011)   7.30% (Libor + 3.25% /Q)     12/14/2005     2,620     2,541   $ 0.97 (3)      

 

Capella Healthcare, Inc.

 

Junior secured loan ($70,000 par due 2/2016)

 

13.00%

 

 

2/29/2008

 

 

70,000

 

 

63,000

 

$

0.90

 

 

 

 
      Junior secured loan ($25,000 par due 2/2016)   13.00%     2/29/2008     25,000     22,500   $ 0.90 (2)      

 

CT Technologies Intermediate Holdings, Inc. and CT Technologies Holdings, LLC(6)

 

Preferred stock (7,427 shares)

 

14.00% PIK

 

 

6/15/2007

 

 

7,427

 

 

7,427

 

$

1,000.00

(4)

 

 

 
      Common stock (9,679 shares)         6/15/2007     4,000     5,382   $ 556.05 (5)      
      Common stock (1,546 shares)         6/15/2007           $ (5)      

 

DSI Renal, Inc.

 

Senior subordinated note ($29,589 par due 4/2014)

 

12.00% Cash,
2.00% PIK

 

 

4/4/2006

 

 

29,658

 

 

21,896

 

$

0.74

(4)

 

 

 
      Senior subordinated note ($26,927 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     26,971     19,847   $ 0.73 (2)(4)      
      Senior subordinated note ($12,211 par due 4/2014)   12.00% Cash,
2.00% PIK
    4/4/2006     12,231     9,036   $ 0.74 (3)(4)      
      Senior secured revolving loan ($142 par due 3/2013)   6.25% (Base Rate + 3.00%/D)     4/4/2006     142     127   $ 0.89        
      Senior secured revolving loan ($3,520 par due 3/2013)   3.47% (Libor + 3.00%/M)     4/4/2006     3,520     3,168   $ 0.90        
      Senior secured revolving loan ($1,120 par due 3/2013)   3.47% (Libor + 3.00%/M)     4/4/2006     1,120     1,008   $ 0.90        
      Senior secured revolving loan ($1,152 par due 3/2013)   4.50% (Libor + 3.00%/Q)     4/4/2006     1,152     1,037   $ 0.90        
      Senior secured revolving loan ($1,600 par due 3/2013)   4.50% (Libor + 3.00%/Q)     4/4/2006     1,600     1,440   $ 0.90        

 

GG Merger Sub I, Inc.

 

Senior secured loan ($23,330 par due 12/2014)

 

7.09% (Libor + 4.00%/S)

 

 

12/14/2007

 

 

22,426

 

 

18,938

 

$

0.81

 

 

 

 

 

HCP Acquisition Holdings, LLC(7)

 

Class A units (8,566,824 units)

 

 

 

 

6/26/2008

 

 

8,567

 

 

6,500

 

$

0.76

(5)

 

 

 

 

Heartland Dental Care, Inc.

 

Senior subordinated note ($40,217 par due 8/2013)

 

11.00% Cash,
3.25% PIK

 

 

7/31/2008

 

 

40,217

 

 

40,217

 

$

1.00

(4)

 

 

 

 

MPBP Holdings, Inc., Cohr Holdings, Inc. and MPBP Acquisition Co., Inc.

 

Junior secured loan ($20,000 par due 1/2014)

 

9.19% (Libor + 6.25%/S)

 

 

1/31/2007

 

 

20,000

 

 

7,000

 

$

0.35

 

 

 

 
      Junior secured loan ($12,000 par due 1/2014)   9.19% (Libor + 6.25%/S)     1/31/2007     12,000     4,200   $ 0.35 (3)      
      Common stock (50,000 shares)         1/31/2007     5,000       $ (5)      

 

MWD Acquisition Sub, Inc.

 

Junior secured loan ($5,000 par due 5/2012)

 

8.13% (Libor + 6.25%/M)

 

 

5/3/2007

 

 

5,000

 

 

4,250

 

$

0.85

(3)

 

 

 

F-6



 

OnCURE Medical Corp.

 

Senior subordinated note ($32,176 par due 8/2013)

 

11.00% Cash,
1.50% PIK

 

 

8/18/2006

 

 

32,176

 

 

28,935

 

$

0.90

(4)

 

 

 
      Senior secured loan ($3,083 par due 8/2009)   4.75% (Libor + 3.50%/M)     8/18/2006     3,083     3,000   $ 0.97 (3)      
      Common stock (857,143 shares)         8/18/2006     3,000     2,713   $ 3.17 (5)      

 

Passport Health Communications, Inc., Passport

 

Senior secured loan ($12,935 par due 5/2014)

 

10.50% (Libor + 7.50%/S)

 

 

5/9/2008

 

 

12,935

 

 

12,671

 

$

0.98

 

 

 

 
  Holding Corp. and Prism Holding Corp.   Senior secured loan ($11,940 par due 5/2014)   10.50% (Libor + 7.50%/S)     5/9/2008     11,940     11,701   $ 0.98 (3)      
      Series A preferred stock (1,594,457 shares)         7/30/2008     9,900     9,902   $ 6.21 (5)      
      Common stock (16,106 shares)         7/30/2008     100     100   $ 6.21 (5)      

 

PG Mergersub, Inc.

 

Senior subordinated loan ($5,000 par due 3/2016)

 

12.50%

 

 

3/12/2008

 

 

4,901

 

 

4,750

 

$

0.95

 

 

 

 
      Preferred stock (333 shares)         3/12/2008     333     333   $ 1,000.00 (5)      
      Common stock (16,667 shares)         3/12/2008     167     167   $ 10.00 (5)      

 

The Schumacher Group of Delaware, Inc.

 

Senior subordinated loan ($35,849 par due 7/2012)

 

11.00% Cash,
2.50% PIK

 

 

7/18/2008

 

 

35,849

 

 

35,849

 

$

1.00

(4)

 

 

 

 

Triad Laboratory Alliance, LLC

 

Senior subordinated note ($15,354 par due 12/2012)

 

12.00% Cash,
1.75% PIK

 

 

12/21/2005

 

 

15,354

 

 

14,894

 

$

0.97

(4)

 

 

 
      Senior secured loan ($2,473 par due 12/2011)   4.71% (Libor + 3.25%/Q)     12/21/2005     2,473     2,201   $ 0.89 (3)      

 

VOTC Acquisition Corp.

 

Senior secured loan ($3,068 par due 7/2012)

 

11.00% Cash,
2.00% PIK

 

 

6/30/2008

 

 

3,068

 

 

3,068

 

$

1.00

(4)

 

 

 
      Senior secured loan ($14,000 par due 7/2012)   11.00% Cash,
2.00% PIK
    6/30/2008     14,000     14,000   $ 1.00 (4)      
      Series E preferred shares (3,888,222 shares)         7/14/2008     8,749     6,561   $ 1.69 (5)      
                                       
                      464,303     397,754           36.33 %
                                       

 

Beverage, Food and Tobacco

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  3091779 Nova Scotia Inc.(8)   Junior secured loan (Cdn$14,058 par due 11/2012)   11.50% Cash,
1.50% PIK
    11/2/2007     14,904     10,961   $ 0.74 (4)(12)      
      Warrants to purchase 57,545 shares                     $ (5)      

 

Apple & Eve, LLC and US Juice Partners, LLC(6)

 

Senior secured revolving loan ($8,000 par due 10/2013)

 

7.90% (Libor + 6.00%/M)

 

 

10/5/2007

 

 

8,000

 

 

6,400

 

$

0.80

 

 

 

 
      Senior secured loan ($10,637 par due 10/2013)   6.47% (Libor + 6.00%/M)     10/5/2007     10,637     8,509   $ 0.80        
      Senior secured loan ($19,976 par due 10/2013)   6.47% (Libor + 6.00%/M)     10/5/2007     19,976     15,981   $ 0.80 (2)      
      Senior secured loan ($10,805 par due 10/2013)   6.47% (Libor + 6.00%/M)     10/5/2007     10,805     8,644   $ 0.80 (3)      
      Senior units (50,000 units)         10/5/2007     5,000     2,500   $ 50.00 (5)      

 

Best Brands Corporation

 

Senior secured loan ($10,971 par due 12/2012)

 

10.43% (Libor + 4.50% Cash,
4.50% PIK/M)

 

 

2/15/2008

 

 

9,501

 

 

9,326

 

$

0.86

(4)

 

 

 
      Junior secured loan ($4,319 par due 6/2013)   10.00% Cash,
8.00% PIK
    12/14/2006     4,307     3,883   $ 0.90 (4)      
      Junior secured loan ($26,400 par due 6/2013)   10.00% Cash,
8.00% PIK
    12/14/2006     26,308     23,729   $ 0.90 (2)(4)      
      Junior secured loan ($12,201 par due 6/2013)   10.00% Cash,
8.00% PIK
    12/14/2006     12,164     10,969   $ 0.90 (3)(4)      

 

Bumble Bee Foods, LLC and BB Co-Invest LP

 

Senior subordinated loan ($40,706 par due 11/2018)

 

16.25% (12.00% Cash, 4.25% Optional PIK)

 

 

11/18/2008

 

 

40,706

 

 

40,706

 

$

1.00

(4)

 

 

 
      Common stock (4,000 shares)         11/18/2008     4,000     4,000   $ 1,000.00 (5)      

 

Charter Baking Company, Inc.

 

Senior subordinated note ($5,547 par due 2/2013)

 

12.00% PIK

 

 

2/6/2008

 

 

5,547

 

 

5,547

 

$

1.00

(2)(4)

 

 

 
      Preferred stock (6,258 shares)         9/1/2006     2,500     2,500   $ 399.49 (5)      

F-7



 

OTG Management, Inc.

 

Junior secured loan ($15,312 par due 6/2013)

 

18.00% (Libor + 11.00% Cash,
4.00% PIK/M)

 

 

6/19/2008

 

 

15,312

 

 

15,312

 

$

1.00

(4)

 

 

 
      Warrants to purchase up to 9 shares of common stock                     $ (5)      

 

Vistar Corporation and Wellspring Distribution Corp.

 

Senior subordinated loan ($48,625 par due 5/2015)

 

13.50%

 

 

5/23/2008

 

 

48,625

 

 

46,680

 

$

0.96

 

 

 

 
      Senior subordinated loan ($25,000 par due 5/2015)   13.50%     5/23/2008     25,000     24,000   $ 0.96 (2)      
      Class A non-voting common stock (1,366,120 shares)         5/23/2008     7,500     3,500   $ 2.56 (5)      
                                       
                      270,792     243,147           22.21 %
                                       

 

Education

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Campus Management Corp. and Campus Management Acquisition Corp.(6)   Senior secured revolving loan ($2,309 par due 8/2013)   13.00%     2/8/2008     2,309     2,309   $ 1.00        
      Senior secured loan ($19,924 par due 8/2013)   13.00%     2/8/2008     19,924     19,924   $ 1.00        
      Senior secured loan ($25,108 par due 8/2013)   13.00%     2/8/2008     25,108     25,108   $ 1.00 (2)      
      Senior secured loan ($12,019 par due 8/2013)   13.00%     2/8/2008     12,019     12,019   $ 1.00        
      Preferred stock (493,147 shares)   8.00% PIK     2/8/2008     8,952     12,000   $ 24.33 (4)      

 

ELC Acquisition Corporation

 

Senior secured loan ($242 par due 11/2012)

 

5.45% (Libor + 3.25%/Q)

 

 

11/30/2006

 

 

243

 

 

219

 

$

0.90

(3)

 

 

 
      Junior secured loan ($8,333 par due 11/2013)   7.47% (Libor + 7.00%/M)     11/30/2006     8,333     7,500   $ 0.90 (3)      

 

Instituto de Banca y Comercio, Inc.(8)

 

Senior secured revolving loan ($1,643 par due 3/2014)

 

5.00% (Libor + 3.00%/Q)

 

 

3/15/2007

 

 

1,643

 

 

1,643

 

$

1.00

 

 

 

 
      Senior secured loan ($7,500 par due 3/2014)   8.42% (Libor + 5.00%/Q)     3/15/2007     7,500     7,500   $ 1.00        
      Senior secured loan ($7,266 par due 3/2014)   8.42% (Libor + 5.00%/Q)     3/15/2007     7,266     7,266   $ 1.00        
      Senior secured loan ($4,987 par due 3/2014)   8.42% (Libor + 5.00%/Q)     3/15/2007     4,987     4,987   $ 1.00 (2)      
      Senior secured loan ($11,820 par due 3/2014)   8.42% (Libor + 5.00%/Q)     3/15/2007     11,820     11,820   $ 1.00 (3)      
      Senior subordinated loan ($19,641 par due 6/2014)   10.50% Cash,
3.50% PIK
    6/4/2008     19,641     19,641   $ 1.00 (4)      
      Promissory note ($429 par due 9/2015)   6.00%     6/4/2008     429     1,714   $ 4.00        
      Preferred stock (214,286 shares)         6/4/2008     1,018     4,072   $ 19.00 (5)      
      Common stock (214,286 shares)         6/4/2008     54     214   $ 1.00 (5)      

 

Lakeland Finance, LLC

 

Senior secured note ($18,000 par due 12/2012)

 

11.50%

 

 

12/13/2005

 

 

18,000

 

 

16,920

 

$

0.94

 

 

 

 
      Senior secured note ($15,000 par due 12/2012)   11.50%     12/13/2005     15,000     14,100   $ 0.94 (2)      

F-8



 

R3 Education, Inc. (formerly known as Equinox EIC Partners, LLC and MUA Management Company, Ltd.)(7)(8)

 

Senior secured revolving loan ($3,850 par due 12/2012)

 

8.25% (Base Rate + 5.00%/D)

 

 

4/3/2007

 

 

3,850

 

 

3,773

 

$

0.98

 

 

 

 
      Senior secured revolving loan ($1,250 par due 12/2012)   8.25% (Base Rate + 5.00%/D)     4/3/2007     1,250     1,225   $ 0.98        
      Senior secured loan ($3,024 par due 12/2012)   6.46% (Libor + 6.00%/M)     4/3/2007     3,024     2,963   $ 0.98 (2)      
      Senior secured loan ($14,113 par due 12/2012)   6.46% (Libor + 6.00%/M)     9/21/2007     14,113     13,830   $ 0.98 (2)      
      Senior secured loan ($7,350 par due 12/2012)   9.09% (Libor + 6.00%/S)     4/3/2007     7,350     7,203   $ 0.98 (3)      
      Common membership interest (26.27% interest)         9/21/2007     15,800     20,785       (5)      
      Preferred stock (800 shares)               200     200   $ 250.00 (5)      
                                       
                      209,833     218,935           20.00 %
                                       

 

Services—Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  American Residential Services, LLC   Junior secured loan ($20,201 par due 4/2015)   10.00% Cash,
2.00% PIK
    4/17/2007     20,201     18,180   $ 0.90 (2)(4)      

 

Diversified Collection Services, Inc.

 

Senior secured loan ($11,809 par due 8/2011)

 

8.50% (Libor + 5.75%/M)

 

 

2/2/2005

 

 

9,715

 

 

11,219

 

$

0.95

 

 

 

 
      Senior secured loan ($4,203 par due 8/2011)   8.50% (Libor + 5.75%/M)     2/2/2005     4,209     3,993   $ 0.95 (3)      
      Senior secured loan ($1,837 par due 2/2011)   11.25% (Libor + 8.50%/M)     2/2/2005     1,837     1,653   $ 0.90 (2)      
      Senior secured loan ($7,125 par due 8/2011)   11.25% (Libor + 8.50%/M)     2/2/2005     7,125     6,412   $ 0.90 (3)      
      Preferred stock (14,927 shares)         5/18/2006     169     109   $ 7.30 (5)      
      Common stock (114,004 shares)         2/2/2005     295     414   $ 3.63 (5)      

 

GCA Services Group, Inc.

 

Senior secured loan ($25,000 par due 12/2011)

 

12.00%

 

 

12/15/2006

 

 

25,000

 

 

25,000

 

$

1.00

(2)

 

 

 
      Senior secured loan ($2,965 par due 12/2011)   12.00%     12/15/2006     2,965     2,965   $ 1.00        
      Senior secured loan ($11,186 par due 12/2011)   12.00%     12/15/2006     11,186     11,186   $ 1.00 (3)      

 

Growing Family, Inc. and GFH Holdings, LLC

 

Senior secured revolving loan ($1,513 par due 8/2011)

 

11.34% (Libor + 3.00% Cash,
4.00% PIK/Q)

 

 

3/16/2007

 

 

1,513

 

 

756

 

$

0.50

(4)

 

 

 
      Senior secured loan ($11,188 par due 8/2011)   13.84% (Libor + 3.50% Cash,
6.00% PIK/Q)
    3/16/2007     11,188     5,594   $ 0.50 (4)      
      Senior secured loan ($372 par due 8/2011)   5.25% (Libor + 3.50% Cash,
6.00% PIK/Q)
    3/16/2007     372     186   $ 0.50        
      Senior secured loan ($3,575 par due 8/2011)   16.34% (Libor + 6.00% Cash,
6.00% PIK/Q)
    3/16/2007     3,575     1,788   $ 0.50 (4)      
      Senior secured loan ($147 par due 8/2011)   15.50% (Libor + 6.00% Cash,
6.00% PIK/Q)
    3/16/2007     147     74   $ 0.50 (4)      
      Common stock (552,430 shares)         3/16/2007     872       $ (5)      

 

NPA Acquisition, LLC

 

Junior secured loan ($12,000 par due 2/2013)

 

8.58% (Libor + 6.75%/M)

 

 

8/23/2006

 

 

12,000

 

 

12,000

 

$

1.00

(3)

 

 

 
      Common units (1,709 shares)         8/23/2006     1,000     2,300   $ 1,345.82 (5)      

 

Web Services Company, LLC

 

Senior subordinated loan ($17,764 par due 8/2016)

 

11.50% Cash,
2.50% PIK

 

 

8/29/2008

 

 

17,764

 

 

17,231

 

$

0.97

(4)

 

 

 
      Senior subordinated loan ($25,160 par due 8/2016)   11.50% Cash,
2.50% PIK
    8/29/2008     25,160     24,330   $ 0.97 (2)(4)      
                                       
                      156,293     145,390           13.28 %
                                       

F-9



 

Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Carador PLC(6)(8)(9)   Ordinary shares (7,110,525 shares)         12/15/2006     9,033     4,266   $ 0.60 (5)      

 

CIC Flex, LP(9)

 

Limited partnership units
(1 unit)

 

 

 

 

9/7/2007

 

 

28

 

 

28

 

$

28,000.00

(5)

 

 

 

 

Covestia Capital Partners, LP(9)

 

Limited partnership interest (47% interest)

 

 

 

 

6/17/2008

 

 

1,059

 

 

1,059

 

 

 

(5)

 

 

 

 

Firstlight Financial Corporation(6)(9)

 

Senior subordinated loan ($69,910 par due 12/2016)

 

10.00% PIK

 

 

12/31/2006

 

 

69,910

 

 

62,919

 

$

0.90

(4)

 

 

 
      Common stock (10,000 shares)         12/31/2006     10,000     0   $ (5)      
      Common stock (30,000 shares)         12/31/2006     30,000     0   $ (5)      

 

Ivy Hill Middle Market Credit Fund, Ltd.(7)(8)(9)

 

Class B deferrable interest notes ($40,000 par due 11/2018)

 

8.15% (Libor + 6.00%/Q)

 

 

11/20/2007

 

 

40,000

 

 

36,000

 

$

0.90

 

 

 

 
      Subordinated notes ($16,000 par due 11/2018)         11/20/2007     16,000     14,400   $ 0.90 (5)      

 

Imperial Capital Group, LLC and Imperial Capital Private Opportunities, LP(6)(9)

 

Limited partnership interest (80% interest)

 

 

 

 

5/10/2007

 

 

584

 

 

584

 

$

1.00

(5)

 

 

 
      Common units (7,710 units)         5/10/2007     14,997     14,997   $ 1,945.14 (5)      
      Common units (2,526 units)         5/10/2007     3     3   $ 1.19 (5)      
      Common units (315 units)         5/10/2007           $ (5)      

 

Partnership Capital Growth Fund I, LP(9)

 

Limited partnership interest (25% interest)

 

 

 

 

6/16/2006

 

 

2,384

 

 

2,384

 

 

 

(5)

 

 

 

 

Trivergance Capital Partners, LP(9)

 

Limited partnership interest (100% interest)

 

 

 

 

6/5/2008

 

 

723

 

 

723

 

 

 

(5)

 

 

 

 

VSC Investors LLC(9)

 

Membership interest (4.63% interest)

 

 

 

 

1/24/2008

 

 

302

 

 

302

 

 

 

(5)

 

 

 
                                       
                      195,023     137,665           12.57 %
                                       

 

Business Services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Booz Allen Hamilton, Inc.   Senior secured loan ($748 par due 7/2015)   7.50% (Libor + 4.50%/S)     7/31/2008     733     658   $ 0.88 (3)      
      Senior subordinated loan ($22,400 par due 7/2016)   11.00% Cash,
2.00% PIK
    7/31/2008     22,177     19,040   $ 0.85 (2)(4)      

 

Investor Group Services, LLC(6)

 

Senior secured revolving loan ($750 par due 6/2011)

 

6.97% (Libor + 5.50%/Q)

 

 

6/22/2006

 

 

750

 

 

750

 

$

1.00

 

 

 

 
      Limited liability company membership interest (10.00% interest)         6/22/2006         500   $ 5,000.00 (5)      

 

Pillar Holdings LLC and PHL Holding Co.(6)

 

Senior secured revolving loan ($375 par due 11/2013)

 

7.53% (Libor + 5.50%/B)

 

 

11/20/2007

 

 

375

 

 

375

 

$

1.00

 

 

 

 
      Senior secured revolving loan ($938 par due 11/2013)   7.53% (Libor + 5.50%/B)     11/20/2007     938     938   $ 1.00        
      Senior secured loan ($7,375 par due 5/2014)   14.50%     7/31/2008     7,375     7,375   $ 1.00