Subject to Completion
Preliminary Prospectus Supplement dated February 5, 2007
The information in this prospectus supplement is not complete and may be changed. A registration statement relating to these securities has been filed with and declared effective by the Securities and Exchange Commission. This prospectus supplement is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Filed pursuant to Rule 497
Registration No. 333-134077
PROSPECTUS SUPPLEMENT
(To prospectus dated June 23, 2006)
1,165,000 Shares
Common Stock
Ares Capital Corporation is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the Investment Company Act of 1940. We were founded in April 2004 and completed our initial public offering on October 8, 2004. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments, in private middle market companies.
We are managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, an independent Los Angeles based firm that currently manages investment funds that have approximately $12.0 billion of committed capital. Ares Technical Administration LLC provides the administrative services necessary for us to operate.
Our common stock is quoted on The NASDAQ Global Select Market under the symbol "ARCC." On February 1, 2007, the last reported sales price of our common stock on The NASDAQ Global Select Market was $20.09 per share.
Investing in our common stock involves risks that are described in the "Risk Factors" section beginning on page 15 of the accompanying prospectus.
This prospectus supplement and the accompanying prospectus concisely provide important information you should know before investing in our
common
stock. Please read this prospectus supplement and the accompanying prospectus before you invest and keep both for future reference. Our Internet address is
http://www.arescapitalcorporation.com. We
make available free of charge on our website our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange Commission. The SEC also maintains a website at http://www.sec.gov that contains
such information.
|
Per Share |
Total |
||
---|---|---|---|---|
Public offering price | $ | $ | ||
Underwriting discount (sales load) | $ | $ | ||
Proceeds, before expenses, to Ares Capital Corporation(1) | $ | $ |
The underwriter may also purchase up to an additional 174,750 shares from us at the public offering price, less the underwriting discounts, within 30 days from the date of this prospectus supplement to cover overallotments. If the underwriter exercises this option in full, the total public offering price will be $ , the total underwriting discount (sales load) paid by us will be $ , and the total proceeds, before expenses, will be $ .
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement and the accompanying prospectus are truthful or complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about , 2007.
Merrill Lynch & Co.
The date of this prospectus supplement is , 2007.
You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus supplement and the accompanying prospectus is accurate only as of the date on the front cover of this prospectus supplement or such prospectus, as applicable. Our business, financial condition, results of operations and prospects may have changed since that date.
Prospectus Supplement
TABLE OF CONTENTS
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Page |
|
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Forward-Looking Statements | S-1 | |
The Company | S-2 | |
Fees and Expenses | S-5 | |
Recent Developments | S-8 | |
Selected Financial and Other Data | S-9 | |
Use of Proceeds | S-12 | |
Price Range of Common Stock | S-13 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | S-14 | |
Capitalization | S-24 | |
Underwriting | S-25 | |
Legal Matters | S-27 | |
Financial Statements | S-28 |
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Page |
|
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Prospectus Summary | 1 | |
The Company | 1 | |
Offerings | 8 | |
Fees and Expenses | 10 | |
Selected Financial and Other Data | 13 | |
Risk Factors | 15 | |
Forward-Looking Statements | 32 | |
Use of Proceeds | 33 | |
Price Range of Common Stock and Distributions | 34 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 36 | |
Senior Securities | 51 | |
Business | 52 | |
Portfolio Companies | 64 | |
Management | 69 | |
Certain Relationships | 87 | |
Control Persons and Principal Stockholders | 88 | |
Determination of Net Asset Value | 90 | |
Dividend Reinvestment Plan | 91 | |
Material U.S. Federal Income Tax Considerations | 92 | |
Description of our Stock | 100 | |
Regulation | 107 | |
Custodian, Transfer and Dividend Paying Agent and Registrar | 114 | |
Brokerage Allocation and Other Practices | 114 | |
Plan of Distribution | 115 | |
Legal Matters | 116 | |
Independent Registered Public Accountants | 116 | |
Available Information | 116 | |
Financial Statements | F-1 |
i
Some of the statements in this prospectus supplement and the accompanying prospectus constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this prospectus supplement and the accompanying prospectus involve risks and uncertainties, including statements as to:
We use words such as "anticipates," "believes," "expects," "intends" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in "Risk Factors" in the accompanying prospectus and elsewhere in this prospectus supplement or the accompanying prospectus.
We have based the forward-looking statements included in this prospectus supplement and the accompanying prospectus on information available to us on the respective dates of this prospectus supplement and the accompanying prospectus, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward- looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
You should understand that under Section 27A(b)(2)(B) of the Securities Act of 1933 (the "Securities Act") and Section 21E(b)(2)(B) of the Exchange Act, the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in connection with this offering.
S-1
This summary highlights some of the information contained elsewhere in this prospectus supplement and the accompanying prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under "Risk Factors" and the other information included in this prospectus supplement and the accompanying prospectus. Except where the context suggests otherwise, the terms "we," "us," "our," "the Company" and "Ares Capital" refer to Ares Capital Corporation and its subsidiaries; "Ares Capital Management," "investment adviser" or "Investment Adviser" refers to Ares Capital Management LLC; "Ares Administration" refers to Ares Technical Administration LLC; and "Ares" refers to Ares Partners Management Company LLC and its affiliated companies, including Ares Management LLC.
Ares Capital is a specialty finance company that is a closed-end, non-diversified management investment company, regulated as a business development company, or a "BDC," under the Investment Company Act of 1940, or the "1940 Act." We were founded in April 2004, completed our initial public offering on October 8, 2004 and completed four additional equity offerings in March 2005, October 2005, July 2006 and December 2006. Ares Capital's investment objective is to generate both current income and capital appreciation through debt and equity investments. We primarily invest in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive.
We primarily invest in first and second lien senior loans and long-term mezzanine debt. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt is subordinated to senior loans and is generally unsecured. In some cases, we may also receive warrants or options in connection with our debt instruments. Our investments have generally ranged between $10 million and $50 million each, although the investment sizes may be more or less than the targeted range and are expected to grow with our capital availability. We also, to a lesser extent, make equity investments in private middle market companies. These investments have generally been less than $10 million each but may grow with our capital availability and are usually made in conjunction with loans we make to these companies. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In this prospectus supplement, we generally use the term "middle market" to refer to companies with annual EBITDA between $5 million and $50 million. EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization.
The first and second lien senior loans generally have stated terms of three to ten years and the mezzanine debt investments generally have stated terms of up to ten years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The debt that we invest in typically is not initially rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's or lower than "BBB-" by Standard & Poor's). We may invest without limit in debt of any rating, including securities that have not been rated by any nationally recognized statistical rating organization.
We believe that our investment adviser, Ares Capital Management, is able to leverage Ares' current investment platform, resources and existing relationships with financial sponsors, financial institutions, hedge funds and other investment firms to provide us with attractive investments. In addition to deal flow, the Ares investment platform assists our investment adviser in analyzing, structuring and monitoring investments. Ares' senior principals have worked together for many years
S-2
and have substantial experience in investing in senior loans, high yield bonds, mezzanine debt and private equity. The Company has access to the Ares staff of approximately 66 investment professionals and to the 50 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance and investor relations.
While our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity securities of private companies, we also may invest up to 30% of the portfolio in opportunistic investments. Such investments may include investments in high-yield bonds, debt and equity securities in collateralized debt obligation vehicles and distressed debt or equity securities of public companies. We expect that these public companies generally will have debt that is non-investment grade. As part of this 30% of the portfolio, we may also invest in debt of middle market companies located outside of the United States, which investments are not anticipated to be in excess of 10% of the portfolio at the time such investments are made.
Ares is an independent firm with approximately $12.0 billion of total committed capital and over 150 employees. Ares was founded in 1997 by a group of highly experienced investment professionals.
Ares specializes in originating and managing assets in both the leveraged finance and private equity markets. Ares' leveraged finance activities include the acquisition and management of senior loans, high yield bonds, mezzanine and special situation investments. Ares' private equity activities focus on providing flexible, junior capital to middle market companies. Ares has the ability to invest across a capital structure, from senior secured floating rate debt to common equity.
Ares is comprised of the following groups:
Ares' senior principals have been working together as a group for many years and have an average of over 20 years of experience in leveraged finance, private equity, distressed debt, investment banking and capital markets. They are backed by a large team of highly-disciplined professionals. Ares' rigorous investment approach is based upon an intensive, independent financial analysis, with a focus on preservation of capital, diversification and active portfolio management. These fundamentals underlie Ares' investment strategy and have resulted in large pension funds, banks, insurance companies, endowments and high net worth individuals investing in Ares funds.
S-3
Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of 19 investment professionals, including our President, Michael J. Arougheti, which team is augmented by Ares' additional investment professionals, primarily its 31 member Capital Markets Group. Ares Capital Management's investment committee has 5 members, including Mr. Arougheti and 4 founding members of Ares. In addition, Ares Capital Management leverages off of Ares' entire investment platform and benefits from the Ares investment professionals' significant capital markets, trading and research expertise developed through Ares industry analysts. Ares funds have made investments in over 1,100 companies in over 30 different industries and currently hold over 450 investments in over 30 different industries.
Our administrative offices are located at 1999 Avenue of the Stars, Suite 1900, Los Angeles, California, 90067, telephone number (310) 201-4200, and our executive offices are located at 280 Park Avenue, 22nd Floor, Building East, New York, New York 10017, telephone number (212) 750-7300.
S-4
The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus supplement contains a reference to fees or expenses paid by "you," "us" or "Ares Capital," or that "we" will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Ares Capital.
Stockholder transaction expenses (as a percentage of offering price): | |||
Sales load paid by us | 2.00% | (1) | |
Offering expenses borne by us | 1.04% | (2) | |
Dividend reinvestment plan expenses | None | (3) | |
Total stockholder transaction expenses paid by us | 3.04% | ||
Estimated annual expenses (as a percentage of consolidated net assets attributable to common stock)(4): |
|||
Management fees | 2.21% | (5) | |
Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee net investment income, subject to certain limitations) | 2.38% | (6) | |
Interest payments on borrowed funds | 2.00% | (7) | |
Other expenses | 0.74% | (8) | |
Total annual expenses (estimated) | 7.33% | (9) | |
The
incentive fee consists of two parts:
The first part, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment
S-5
income
(including interest that is accrued but not yet received in cash), subject to a 2.00% quarterly (8% annualized) hurdle rate and a "catch-up" provision measured as of the end
of each calendar quarter. Under this provision, in any calendar quarter, our investment adviser receives no incentive fee until our net investment income equals the hurdle rate of 2.00% but then
receives, as a "catch-up," 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any,
that exceeds the hurdle rate but is less than 2.50%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.50% in any calendar quarter, our investment
adviser will receive 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply.
The
second part, payable annually in arrears for each calendar year ending on or after December 31, 2004, equals 20% of our realized capital gains on a cumulative basis from inception through
the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain
incentive fees.
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) is less than 8% of our net assets
at the beginning of such period. These calculations will be adjusted for any share issuances or repurchases.
See "ManagementInvestment Advisory and Management Agreement" in the accompanying prospectus.
S-6
The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage, that none of our assets are cash or cash equivalents, and that our annual operating expenses would remain at the levels set forth in the table above.
|
1 year |
3 years |
5 years |
10 years |
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You would pay the following expenses on a $1,000 investment, assuming a 5% annual return(1) | $ | 80 | $ | 178 | $ | 227 | $ | 484 |
The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the investment advisory and management agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan who have not otherwise elected to receive cash will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See "Dividend Reinvestment Plan" in the accompanying prospectus for additional information regarding our dividend reinvestment plan.
This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.
S-7
As of September 30, 2006, the year to date net realized capital gains on our investments were approximately $26 million, for which we currently estimate we will owe taxes of approximately $4.4 million. Gross originations during the quarter ended September 30, 2006 were $273.7 million. During the same quarter, we realized certain investments, bringing net investments for the quarter to $154.5 million. In addition, during the quarter ended September 30, 2006, we made commitments in excess of our final investments and syndicated a portion of these commitments to third parties. As a result of this activity, during the same quarter, we generated in excess of $1.1 million of structuring fee income.
During the quarter ended December 31, 2006, we originated approximately $364.5 million of new investments across 12 portfolio companies (8 new borrowers and 4 existing borrowers). Of the $364.5 million of new investments during the quarter, approximately 42%, 19%, 26% and 13% were made in first lien senior secured debt, second lien senior secured debt, senior subordinated debt and equity/other securities, respectively. Of these investments, 54% were floating rate. During the same period approximately $149.2 million of investments were repaid or sold of which 66%, 33% and 1% were first lien senior secured debt, senior subordinated debt and equity securities, respectively.
As of February 1, 2007, in addition to the $69.1 million of additional investments that we have made since December 31, 2006, we have outstanding commitments to fund an aggregate of approximately $250 million of investments. We expect to syndicate a portion of these commitments to third parties. In addition, as of February 1, 2007, we have a pipeline of approximately $345 million. The consummation of any of the investments in this backlog and pipeline depends upon, among other things, one or more of the following: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment, the execution and delivery of satisfactory documentation and the receipt of any necessary consents. We cannot assure you that we will make any of these investments. As of February 1, 2007, we have had no significant repayments or sales since December 31, 2006.
On December 29, 2006, we paid a quarterly dividend of $0.40 per share and an additional dividend of $0.10 per share to stockholders of record as of the close of business on December 15, 2006.
We expect to file a $600 million shelf registration statement with the SEC in the near future that would permit us to, after it is declared effective by the SEC, raise capital through the sale of equity securities from time to time. See "Risk FactorsSale of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock" in the accompanying prospectus.
S-8
SELECTED FINANCIAL AND OTHER DATA
The following selected financial and other data for the period from June 23, 2004 (inception) through December 31, 2004 and the year ended December 31, 2005, are derived from our consolidated financial statements that have been audited by KPMG LLP, an independent registered public accounting firm whose report thereon is included within the accompanying prospectus. The selected financial and other data for the nine months ended September 30, 2006 and 2005 and other quarterly financial information is derived from our unaudited financial statements, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results at and for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The data should be read in conjunction with our unaudited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this prospectus supplement and our audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the accompanying prospectus.
S-9
ARES CAPITAL CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
Nine Months Ended September 30, 2006 and 2005
Year Ended December 31, 2005 and
Period June 23, 2004 (inception) Through
December 31, 2004
|
Nine Months Ended September 30, 2006 |
Nine Months Ended September 30, 2005 |
Year Ended December 31, 2005 |
For the Period June 23, 2004 (inception) Through December 31, 2004 |
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Total Investment Income | $ | 82,512,850 | $ | 26,960,196 | $ | 41,850,477 | $ | 4,380,848 | |||||||
Net Realized and Unrealized Gain on Investments | 10,364,410 | 10,445,811 | 14,727,276 | 475,393 | |||||||||||
Total Expenses | (39,272,954 | ) | (11,417,954 | ) | (14,726,677 | ) | (1,665,753 | ) | |||||||
Net Increase in Stockholders' Equity Resulting from Operations | $ | 48,676,835 | $ | 25,988,053 | $ | 41,851,076 | $ | 3,190,488 | |||||||
Per Share Data: | |||||||||||||||
Net Increase in Stockholder's Equity Resulting from Operations: | |||||||||||||||
Basic: | $ | 1.19 | $ | 1.33 | $ | 1.78 | $ | 0.29 | |||||||
Diluted: | $ | 1.19 | $ | 1.33 | $ | 1.78 | $ | 0.29 | |||||||
Cash Dividend Declared: | $ | 1.14 | $ | 0.96 | $ | 1.30 | $ | 0.30 | |||||||
Total Assets |
$ |
1,122,556,065 |
$ |
444,927,588 |
$ |
613,645,144 |
$ |
220,455,614 |
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Total Debt | $ | 366,000,000 | $ | 82,000,000 | $ | 18,000,000 | $ | 55,500,000 | |||||||
Total Stockholders' Equity | $ | 739,268,870 | $ | 353,109,493 | $ | 569,612,199 | $ | 159,708,305 | |||||||
Other Data: |
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Number of Portfolio Companies at Period End | 56 | 30 | 38 | 20 | |||||||||||
Principal Amount of Investments Purchased(1) | $ | 738,828,000 | $ | 333,160,000 | $ | 504,299,000 | $ | 234,102,000 | |||||||
Principal Amount of Investments Sold and Repayments(2) | $ | 280,838,000 | $ | 93,672,000 | $ | 108,415,000 | $ | 52,272,000 | |||||||
Total Return Based on Market Value(3) | 15.49 | % | (11.27 | )% | (10.60 | )% | 31.53 | % | |||||||
Total Return Based on Net Asset Value(4) | 7.89 | % | 8.97 | % | 12.04 | % | (1.80 | )% | |||||||
Weighted Average Yield of Income Producing Equity Securities and Debt(5): | 12.27 | % | 11.28 | % | 11.25 | % | 12.36 | % |
S-10
declared dividend of $0.32 per share for holders of record on June 30, 2005 and the declared dividend of $0.30 per share for holders of record on March 7, 2005, divided by the market value at December 31, 2004. Total return based on market value 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. The Company's performance changes over time and currently may be different than that shown. Past performance is no guarantee of future results.
SELECTED QUARTERLY DATA (Unaudited)
|
2006 |
2005 |
2004 |
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|
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
Q4(1) |
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Total investment income | $ | 31,831,794 | $ | 30,489,751 | $ | 20,191,305 | $ | 14,890,281 | $ | 11,607,989 | $ | 9,601,615 | $ | 5,750,592 | $ | 4,380,848 | ||||||||
Net investment income before net realized and unrealized gain on investments and incentive compensation | $ | 21,792,136 | $ | 16,233,294 | $ | 14,614,419 | $ | 11,071,081 | $ | 8,887,631 | $ | 7,567,053 | $ | 3,800,113 | $ | 3,009,749 | ||||||||
Incentive compensation | $ | 4,464,141 | $ | 6,940,399 | $ | 2,922,884 | $ | (510,478 | ) | $ | 2,643,353 | $ | 1,798,919 | $ | 270,284 | $ | 95,471 | |||||||
Net investment income before net realized and unrealized gain on investments | $ | 17,327,995 | $ | 9,292,895 | $ | 11,691,535 | $ | 11,581,559 | $ | 6,244,278 | $ | 5,768,134 | $ | 3,529,829 | $ | 2,914,278 | ||||||||
Net realized and unrealized gain on investments | $ | 813,127 | $ | 7,399,785 | $ | 2,151,498 | $ | 4,281,465 | $ | 3,637,612 | $ | 1,834,122 | $ | 4,974,077 | $ | 475,393 | ||||||||
Net increase in stockholders' equity resulting from operations | $ | 18,141,122 | $ | 16,692,680 | $ | 13,843,033 | $ | 15,863,024 | $ | 9,881,890 | $ | 7,602,256 | $ | 8,503,906 | $ | 3,389,671 | ||||||||
Basic and diluted earnings per common share | $ | 0.39 | $ | 0.44 | $ | 0.36 | $ | 0.45 | $ | 0.42 | $ | 0.33 | $ | 0.69 | $ | 0.34 | ||||||||
Net asset value per share as of the end of the quarter | $ | 15.06 | $ | 15.10 | $ | 15.03 | $ | 15.03 | $ | 15.08 | $ | 14.97 | $ | 14.96 | $ | 14.43 |
S-11
We estimate that the net proceeds we will receive from the sale of 1,165,000 shares of our common stock in this offering will be approximately $22.7 million (or approximately $26.1 million if the underwriter fully exercises its overallotment option), in each case assuming a public offering price of $20.09 per share, after deducting the underwriting discount of approximately $470,000 (or approximately $540,000 if the underwriter fully exercises its overallotment option) payable by us and estimated offering expenses of approximately $240,000 payable by us. The amount of net proceeds may be more or less than the amount described in this prospectus supplement depending on the public offering price of the common stock and the actual number of shares of common stock we will sell in the offering, both of which will be determined at pricing.
We expect to use approximately all of the net proceeds of this offering to repay outstanding indebtedness under our Revolving Credit Facility. We expect such repayment will occur within 5 business days after the closing of this offering. The interest charged on the indebtedness incurred under the Revolving Credit Facility is based on LIBOR (one, two, three or six months) plus 1.00%, generally. As of February 1, 2007, the one, two, three and six month LIBOR were 5.32%, 5.35%, 5.36% and 5.40, respectively. The Revolving Credit Facility expires on December 28, 2010. We intend to use any remaining net proceeds for general corporate purposes.
S-12
Our common stock is quoted on The NASDAQ Global Select Market under the symbol "ARCC." We completed our initial public offering in October 2004 at the price of $15.00 per share. Prior to such date there was no public market for our common stock. Our common stock continues to trade in excess of net asset value. There can be no assurance, however, that our shares will continue to trade at a premium to our net asset value.
The following table sets forth the range of high and low closing prices of our common stock as reported on The NASDAQ Global Select Market and the dividends declared by us for each fiscal quarter since our initial public offering. The stock quotations are interdealer quotations and do not include markups, markdowns or commissions and may not necessarily represent actual transactions.
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Price Range |
Premium/ Discount of High Sales Price to NAV |
Premium/ Discount of Low Sales Price to NAV |
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Cash Dividend Per Share(2) |
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NAV(1) |
High |
Low |
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Fiscal 2004 | ||||||||||||||||||
Fourth quarter | $ | 14.43 | $ | 19.75 | $ | 15.00 | 136.9 | % | 104.1 | % | $ | 0.30 | ||||||
Fiscal 2005 |
||||||||||||||||||
First quarter | $ | 14.96 | $ | 18.74 | $ | 15.57 | 125.3 | % | 104.0 | % | $ | 0.30 | ||||||
Second quarter | $ | 14.97 | $ | 18.14 | $ | 15.96 | 121.2 | % | 106.6 | % | $ | 0.32 | ||||||
Third quarter | $ | 15.08 | $ | 19.25 | $ | 16.18 | 127.7 | % | 107.3 | % | $ | 0.34 | ||||||
Fourth quarter | $ | 15.03 | $ | 16.73 | $ | 15.08 | 111.3 | % | 100.3 | % | $ | 0.34 | ||||||
Fiscal 2006 |
||||||||||||||||||
First quarter | $ | 15.03 | $ | 17.97 | $ | 16.23 | 119.6 | % | 108.0 | % | $ | 0.36 | ||||||
Second quarter | $ | 15.10 | $ | 17.50 | $ | 16.36 | 115.9 | % | 108.3 | % | $ | 0.38 | ||||||
Third quarter | $ | 15.06 | $ | 17.51 | $ | 15.67 | 116.3 | % | 104.1 | % | $ | 0.40 | ||||||
Fourth quarter | $ | * | $ | 19.31 | $ | 17.39 | * | * | $ | 0.50 | (3) | |||||||
Fiscal 2007 |
||||||||||||||||||
First quarter (through February 1, 2007) |
* | $ | 20.09 | $ | 19.13 | * | * | (4) |
On February 1, 2007, the last reported sales price of our common stock on The NASDAQ Global Select Market was $20.09 per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in this section should be read in conjunction with the Selected Financial and Other Data and our financial statements and notes thereto appearing elsewhere in this prospectus supplement.
We are a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the 1940 Act. We were founded on April 16, 2004, were initially funded on June 23, 2004 and on October 8, 2004 completed our initial public offering (the "IPO").
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and long-term mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments in private U.S. middle market companies.
We are externally managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, an independent Los Angeles based firm that manages investment funds. Ares Technical Administration LLC, an affiliate of Ares Management LLC, provides the administrative services necessary for us to operate.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.
We have elected to be treated as a regulated investment company, or a RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. Pursuant to these elections, we generally will not have to pay corporate-level taxes on any income that we distribute to our stockholders.
PORTFOLIO AND INVESTMENT ACTIVITY
For the three months ended September 30, 2006, we issued 13 new commitments in an aggregate amount of $273.7 million ($204.0 million to new portfolio companies and $69.7 million to existing portfolio companies) where the average commitment amount was approximately $21.1 million and the weighted average commitment terms were approximately 73 months, compared to six new commitments in an aggregate amount of $180.1 million ($166.6 million to new portfolio companies and $13.5 million to existing portfolio companies) where the average commitment amount was approximately $30.0 million and the weighted average commitment terms were approximately 67 months for the three months ended September 30, 2005. During the three months ended September 30, 2006, we funded $260.1 million of such commitments ($196.6 million to new portfolio companies and $63.5 million to existing portfolio companies) compared to $166.1 million of commitments ($152.6 million to new portfolio companies and $13.5 million to existing portfolio companies) for the three months ended September 30, 2005. Also during the three months ended September 30, 2006, we had $119.2 million in exits and repayments of commitments resulting in net commitments of $154.5 million for the period. For the three months ended September 30, 2005, we had $45.2 million in exits and repayments of commitments resulting in net commitments of $120.9 million for the period. We have remaining contractual obligations for $13.6 million with respect to commitments funded as of September 30, 2006. The weighted average yield of new income producing equity securities and debt funded in connection with investments purchased during the three months
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ended September 30, 2006 and September 30, 2005 was approximately 11.81% and 10.55%, respectively (computed as (a) annual stated interest rate yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt divided by (b) total income producing equity securities and debt at fair value).
For the nine months ended September 30, 2006, we issued 42 new commitments in an aggregate amount of $745.6 million ($591.6 million to new portfolio companies and $154.0 million to existing portfolio companies) where the average commitment amount was approximately $17.8 million and the weighted average commitment terms were approximately 68 months, compared to 20 new commitments in an aggregate amount of $352.3 million ($329.6 million to new portfolio companies and $22.7 million to existing portfolio companies) where the average commitment amount was approximately $17.6 million and the weighted average commitment terms were approximately 76 months for the nine months ended September 30, 2005. During the nine months ended September 30, 2006, we funded $698.2 million of such commitments ($543.2 million to new portfolio companies and $155.0 million to existing portfolio companies) compared to $333.2 million of commitments ($310.5 million to new portfolio companies and $22.7 million to existing portfolio companies) for the nine months ended September 30, 2005. Also during the nine months ended September 30, 2006, we had $256.7 million in exits and repayments of commitments resulting in net commitments of $488.9 million for the period. For the nine months ended September 30, 2005, we had $91.9 million in exits and repayments of commitments resulting in net commitments of $260.4 million for the period. The weighted average yield of new income producing equity securities and debt funded in connection with investments purchased during the nine months ended September 30, 2006 and September 30, 2005 was approximately 12.04% and 10.29%, respectively (computed as (a) annual stated interest rate yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt divided by (b) total income producing equity securities and debt at fair value).
For the three months ended September 30, 2006, the Company purchased (A) $192.0 million aggregate principal amount of senior term debt, (B) $76.1 million aggregate principal amount of senior subordinated debt and (C) $20.2 million of investments in equity securities. For the three months ended September 30, 2005, the Company purchased (1) $78.8 million aggregate principal amount of senior term debt, (2) $32.5 million aggregate principal amount of senior subordinated debt, and (3) $54.8 million of investments in equity securities.
For the nine months ended September 30, 2006, the Company purchased (A) $495.8 million aggregate principal amount of senior term debt, (B) $179.7 million aggregate principal amount of senior subordinated debt and (C) $63.3 million of investments in equity securities. For the nine months ended September 30, 2005, the Company purchased (1) $196.9 million aggregate principal amount of senior term debt, (2) $58.0 million aggregate principal amount of senior subordinated debt, (3) $60.3 million of investments in equity securities, and (4) $18.0 million aggregate principal amount of collateralized debt obligations and senior notes.
During the three months ended September 30, 2006, (A) $83.0 million aggregate principal amount of senior term debt and (B) $15.1 million aggregate principal amount of senior subordinated debt was redeemed. Additionally, (i) $19.0 million aggregate principal amount of senior term debt, (ii) $17.0 million aggregate principal amount of senior subordinated debt and (iii) $590,000 of investments in equity securities were sold. As of September 30, 2006, the Company held investments in 56 portfolio companies as compared to 38 portfolio companies as of December 31, 2005. During the three months ended September 30, 2005, (1) $1.1 million aggregate principal amount of senior term debt and (2) $19.9 million aggregate principal amount of senior subordinated debt was redeemed. Additionally, (a) $14.0 million aggregate principal amount of senior notes, (b) $10.0 million aggregate principal amount of senior term debt and (c) $200,000 of investments in equity securities were sold.
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During the nine months ended September 30, 2006, (A) $132.2 million aggregate principal amount of senior term debt, (B) $33.0 million aggregate principal amount of senior subordinated debt and (C) $9.0 million collateralized debt obligations were redeemed. Additionally, (i) $25.1 million aggregate principal amount of senior term debt, (ii) $17.0 million aggregate principal amount of senior subordinated debt and (iii) $64.0 million of investments in equity securities were sold. During the nine months ended September 30, 2005, (1) $35.7 million aggregate principal amount of senior term debt and (2) $27.2 million aggregate principal amount of senior subordinated debt was redeemed. Additionally, (a) $14.0 million aggregate principal amount of senior notes, (b) $13.0 million aggregate principal amount of senior term debt and (c) $3.5 million of investments in equity securities were sold.
The Investment Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, we grade all loans on a scale of 1 to 4 no less frequently than quarterly. This system is intended to reflect the performance of the borrower's business, the collateral coverage of the loans and other factors considered relevant. Under this system, loans with a grade of 4 involve the least amount of risk in our portfolio. The borrower is performing above expectations and the trends and risk factors are generally favorable. Loans graded 3 involve a level of risk that is similar to the risk at the time of origination. The borrower is performing as expected and the risk factors are neutral to favorable. All new loans are initially graded 3. Loans graded 2 involve a borrower performing below expectations and indicates that the loan's risk has increased materially since origination. The borrower is generally out of compliance with debt covenants, however, loan payments are generally not more than 120 days past due. For loans graded 2, we increase procedures to monitor the borrower. A loan grade of 1 indicates that the borrower is performing materially below expectations and that the loan risk has substantially increased since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans graded 1 are not anticipated to be repaid in full. We believe that as of September 30, 2006, the weighted average investment grade of the debt in our portfolio was 3.0. The weighted average investment grade of the debt in our portfolio as of December 31, 2005 was 3.1. Following is a distribution of the grades of our portfolio companies as of September 30, 2006 and December 31, 2005:
|
September 30, 2006 |
December 31, 2005 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Fair Value |
Number of Companies |
Fair Value |
Number of Companies |
||||||
Grade 1 | $ | 1,000,000 | 1 | $ | | | ||||
Grade 2 | 33,595,521 | 2 | 29,789,133 | 2 | ||||||
Grade 3 | 943,842,629 | 49 | 463,428,666 | 32 | ||||||
Grade 4 | 54,549,138 | 4 | 92,750,576 | 4 | ||||||
$ | 1,032,987,288 | 56 | $ | 585,968,375 | 38 | |||||
As of September 30, 2006, the weighted average yield of the debt and income producing equity securities in our portfolio was approximately 12.27% (computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on accruing debt, divided by (b) total income producing equity securities and debt at fair value). As of September 30, 2006, the weighted average yield on our entire portfolio was 11.36%. The weighted average yield on our senior term debt, senior subordinated debt and income producing equity securities was 11.55%, 14.06% and 10.54%, respectively. Of the senior term debt, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 11.32% and 11.91%, respectively.
As of December 31, 2005, the weighted average yield of the debt and income producing equity securities in our portfolio was approximately 11.25% (computed as (a) annual stated interest rate or yield earned plus the net annual amortization of original issue discount and market discount earned on
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accruing debt, divided by (b) total income producing equity securities and debt at fair value). As of December 31, 2005, the weighted average yield on our entire portfolio was 10.88%. The weighted average yield on our senior term debt, senior subordinated debt and income producing equity securities was 10.56%, 14.71% and 8.82%, respectively. Of the senior term debt, the weighted average yield attributable to first lien senior term debt and second lien senior term debt was 9.38% and 11.49%, respectively.
For the three and nine months ended September 30, 2006 and September 30, 2005
Operating results for the three and nine months ended September 30, 2006 and September 30, 2005 are as follows:
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2006 |
2005 |
2006 |
2005 |
|||||||||
Total Investment Income | $ | 31,831,794 | $ | 11,607,989 | $ | 82,512,850 | $ | 26,960,196 | |||||
Total Expenses | 14,756,843 | 5,363,711 | 39,272,954 | 11,417,954 | |||||||||
Net Investment Income Before Income Taxes | 17,074,951 | 6,244,278 | 43,239,896 | 15,542,242 | |||||||||
Income Tax Expense, Including Excise Tax |
(253,044 |
) |
|
4,927,471 |
|
||||||||
Net Investment Income | 17,327,995 | 6,244,278 | 38,312,425 | 15,542,242 | |||||||||
Net Realized Gain |
1,611,935 |
3,188,703 |
26,102,809 |
10,343,115 |
|||||||||
Net Unrealized Gain | (798,808 | ) | 448,909 | (15,738,399 | ) | 102,696 | |||||||
Net Increase in Stockholders' Equity Resulting From Operations | $ | 18,141,122 | $ | 9,881,890 | $ | 48,676,835 | $ | 25,988,053 | |||||
For the three months ended September 30, 2006, total investment income increased $20.2 million, or 174%, over the three months ended September 30, 2005. For the three months ended September 30, 2006, total investment income consisted of $26.5 million in interest income from investments, $121,000 in dividend income, $4.1 million in capital structuring service fees, $179,000 in other income and $939,000 in interest income from cash and cash equivalents. Interest income from investments increased $17.0 million, or 177%, to $26.5 million for the three months ended September 30, 2006 from $9.6 million for the comparable period in 2005. The increase in interest income from investments was primarily due to the increase in the size of the portfolio. The average investments, at fair value, for the quarter increased from $361.4 million for the three months ended September 30, 2005 to $926.8 million in the comparable period in 2006. Capital structuring service fees increased $2.4 million, or 146%, to $4.1 million for the three months ended September 30, 2006 from $1.7 million for the comparable period in 2005. The increase in capital structuring service fees was primarily due to the increased number of originations. The number of commitments increased from six during the three months ended September 30, 2005 to 13 during the comparable period in 2006.
For the nine months ended September 30, 2006, total investment income increased $55.6 million, or 206%, over the nine months ended September 30, 2005. For the nine months ended September 30, 2006, total investment income consisted of $67.5 million in interest income from investments, $11.7 million in capital structuring service fees, $633,000 in other income and $1.4 million in interest income from cash and cash equivalents. Interest income from investments increased $46.0 million, or 214%, to $67.5 million for the nine months ended September 30, 2006 from $21.5 million for the comparable period in 2005. The increase in interest income from investments was primarily due to the increase in the size of the portfolio. The average investments, at fair value, for the
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period increased from $273.7 million in the nine months ended September 30, 2005 to $794.2 million in the comparable period in 2006. Capital structuring service fees increased $8.2 million, or 238%, to $11.7 million for the nine months ended September 30, 2006 from $3.5 million for the comparable period in 2005. The increase in capital structuring service fees was primarily due to the increased number of originations. The number of commitments increased from 20 during the nine months ended September 30, 2005 to 42 during the comparable period in 2006.
For the three months ended September 30, 2006, total expenses increased $9.4 million, or 175%, over the three months ended September 30, 2005. Base management fees increased $2.3 million, or 165%, to $3.7 million for the three months ended September 30, 2006 from $1.4 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $2.6 million, or 145%, to $4.4 million for the three months ended September 30, 2006 from $1.8 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Incentive fees related to realized gains decreased $760,000, or 88%, to $106,000 for the three months ended September 30, 2006 from $866,000 for the comparable period in 2005, primarily due to lower net realized gains and higher gross unrealized depreciation recognized during the three months ended September 30, 2006 as compared to the three months ended September 30, 2005. Net realized gains decreased from $3.2 million during the three months ended September 30, 2005 to $1.6 million during the three months ended September 30, 2006. Gross unrealized depreciation increased from $120,000 during the three months ended September 30, 2005 to $2.3 million during the three months ended September 30, 2006. Interest expense and credit facility fees increased $4.1 million, or 1,318%, to $4.4 million for the three months ended September 30, 2006 from $310,000 for the comparable period in 2005, primarily due to the significant increase in the borrowings outstanding. The average outstanding borrowings during the three months ended September 30, 2005 was $7.9 million compared to average outstanding borrowings of $291.1 million in the comparable period in 2006. Amortization of debt issuance costs increased $413,000, or 487%, to $498,000 for the three months ended September 30, 2006 from $85,000 for the comparable period in 2005, primarily due to the additional debt issuance costs capitalized during the end of 2005 as a result of entering into a senior secured revolving credit facility ("the Revolving Credit Facility") and increasing the borrowing capacity of our revolving credit facility ("the CP Funding Facility") entered into through our wholly owned subsidiary, Ares Capital CP Funding LLC, and also the additional debt issuance costs capitalized during the three months ended September 30, 2006 related to the Debt Securitization (as defined below).
For the nine months ended September 30, 2006, total expenses increased $27.9 million, or 244%, over the nine months ended September 30, 2005. Base management fees increased $6.1 million, or 189%, to $9.3 million for the nine months ended September 30, 2006 from $3.2 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio. Incentive fees related to pre-incentive fee net investment income increased $8.7 million, or 329%, to $11.4 million for the nine months ended September 30, 2006 from $2.6 million for the comparable period in 2005, primarily due to the increase in the size of the portfolio and the related increase in net investment income. Incentive fees related to realized gains increased $898,000, or 44%, to $3.0 million for the nine months ended September 30, 2006 from $2.1 million for the comparable period in 2005, primarily due to higher net realized gains recognized during the nine months ended September 30, 2006 as compared to the nine months ended September 30, 2005. Interest expense and credit facility fees increased $9.3 million, or 1,247%, to $10.1 million for the nine months ended September 30, 2006 from $749,000 for the comparable period in 2005, primarily due to the significant increase in the borrowings outstanding. The average outstanding borrowings during the nine months ended September 30, 2005 were $21.6 million compared to average outstanding borrowings of $211.9 million in the comparable period in 2006. Amortization of debt issuance costs increased $1.1 million, or 509%, to $1.3 million for
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the nine months ended September 30, 2006 from $216,000 for the comparable period in 2005, primarily due to the additional debt issuance costs capitalized during the end of 2005 as a result of entering into the Revolving Credit Facility and increasing the borrowing capacity of the CP Funding Facility, and also the additional debt issuance costs capitalized during the three months ended September 30, 2006 related to the Debt Securitization.
Income Tax Expense, Including Excise Tax
The Company has qualified and elected and intends to continue to qualify and elect for the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as amended, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from Federal income taxes.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and nine months ended September 30, 2006, a benefit or provision of approximately $(253,000) and $571,000, respectively, was recorded for Federal excise tax.
Our wholly owned subsidiaries ARCC Cervantes Corporation ("ACC") and ARCC Cervantes LLC ("ACLLC") are subject to Federal and state income taxes. For the three months ended September 30, 2006, we recorded no tax provision for these subsidiaries. For the nine months ended September 30, 2006, we recorded a tax provision of approximately $4.4 million for these subsidiaries.
Net Unrealized Gain/Loss on Investments
For the three months ended September 30, 2006, the Company's investments had a decrease in net unrealized gain/loss of $798,000 which was comprised of $1.8 million in unrealized appreciation, $2.3 million in unrealized depreciation and $373,000 relating to the reversal of prior period unrealized net depreciation. The most significant changes in net unrealized depreciation were unrealized depreciation of $2.3 million for the investment in Berkline/Benchcraft Holdings LLC ("Berkline"), offset by the unrealized appreciation in Universal Trailer Corporation ("Universal") of $1.5 million.
For the three months ended September 30, 2005, the Company's investments had an increase in net unrealized gain/loss of $449,000 which was comprised of $100,000 in unrealized appreciation, $120,000 in unrealized depreciation and $469,000 relating to the reversal of prior period unrealized depreciation. The reversal of the prior period unrealized depreciation was primarily due to the reversal of the depreciation of $1.2 million for the investment in Esselte, Inc. ("Esselte") offset by the reversal of the appreciation of $739,000 for the investment in Mechanical Dynamics and Analysis, Inc. ("MDA"), which were both realized during the period.
For the nine months ended September 30, 2006, the Company's investments had a decrease in net unrealized gain/loss of $15.7 million, which was comprised of $6.8 million in unrealized appreciation, $8.4 million in unrealized depreciation and $14.2 million relating to the reversal of prior period unrealized appreciation/depreciation. The reversal of the prior period unrealized appreciation was primarily related to the reversal of the appreciation of $13.3 million for the investment in CICQ, LP ("CICQ"), which was realized during the period. The most significant changes in unrealized appreciation for the period were the unrealized appreciation of $4.0 million for CICQ, $1.5 million for Universal and $1.0 million for Varel Holdings, Inc. The most significant changes in unrealized depreciation for the period were unrealized depreciation of $6.0 million for Berkline and $2.4 million for Making Memories Wholesale, Inc.
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For the nine months ended September 30, 2005, the Company's investments had an increase in net unrealized appreciation of $103,000, which was comprised of $5.7 million in unrealized appreciation, $1.3 million in unrealized depreciation and $4.3 million relating to the reversal of prior period appreciation. The most significant changes in unrealized appreciation and depreciation were unrealized appreciation of $4.8 million for Reef Holdings, Inc. ("Reef"), unrealized appreciation of $739,000 for MDA and unrealized depreciation of $934,000 for Esselte. The reversal of the prior period appreciation was primarily due to the reversal of the appreciation of $4.8 million for the investment in Reef.
During the three months ended September 30, 2006, the Company had $136.5 million of sales and repayments resulting in $1.6 million of net realized gains. Net realized gains were comprised of $1.6 million of gross realized gains and no gross realized losses. The most significant realized gains during the three months ended September 30, 2006 were as a result of the repayments of the investments in OnCURE Medical Corp. ("OnCURE"), Singer Sewing Company ("Singer"), WCA Waste Systems, Inc. and Extensity of $452,000, $443,000, $250,000 and $200,000, respectively. During the three months ended September 30, 2005, the Company had $48.4 million of sales and repayments resulting in $3.2 million of net realized gains. Net realized gains were comprised of $3.3 million of gross realized gains and $78,000 of gross realized losses. The most significant realized gains during the period were as a result of the sales of the investments in Esselte and MDA of $2.4 million and $654,000, respectively.
During the nine months ended September 30, 2006, the Company had $306.9 million of sales and repayments resulting in $26.1 million of net realized gains. Net realized gains were comprised of $26.1 million of gross realized gains and $50,000 of gross realized losses. The most significant realized gains during the period were as a result of the sales of the investments in CICQ and United Site Services, Inc. of $18.6 million and $4.7 million, respectively, and the repayments of the investments in MINCS-Glace Bay, Ltd., OnCURE and Singer of $483,000, $452,000 and $443,000, respectively. During the nine months ended September 30, 2005, the Company had $104.1 million of sales and repayments resulting in $10.3 million of net realized gains. Net realized gains were comprised of $10.5 million of gross realized gains and $144,000 of gross realized losses. The most significant realized gains during the period were as a result of the sales of the investments in Reef, Billing Concepts, Inc., Esselte and MDA of $4.8 million, $1.9 million, $2.4 million and $654,000, respectively.
Net Increase in Stockholders' Equity Resulting From Operations
Net increase in stockholders' equity resulting from operations for the three and nine months ended September 30, 2006 was approximately $18.1 million and $48.7 million, respectively. Based on the weighted average shares outstanding during the three and nine months ended September 30, 2006, our net increase in stockholders' equity resulting from operations per common share was $0.39 and $1.19, respectively.
Net increase in stockholders' equity resulting from operations for the three and nine months ended September 30, 2005 was approximately $9.9 million and $26.0 million, respectively. Based on the weighted average shares outstanding during the three and nine months ended September 30, 2005, our net increase in stockholders' equity resulting from operations per common share was $0.42 and $1.33, respectively.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources were generated primarily from the remaining net proceeds of its initial public offering and subsequent add-on public offerings, the Debt Securitization (as defined below), advances from the CP Funding Facility and the Revolving Credit Facility, as well as
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cash flows from operations. We received approximately $156.4 million in proceeds net of underwriting and offering costs (net of $2.5 million in underwriting costs originally paid by the Investment Adviser and subsequently reimbursed by the Company in 2006) from our October 8, 2004 initial public offering, approximately $183.9 million in proceeds net of underwriting and offering costs from our March 23, 2005 add-on public offering, $213.5 million in proceeds net of underwriting and offering costs from our October 18, 2005 add-on public offering and $162.0 million in proceeds net of underwriting and offering costs from our July 18, 2006 add-on public offering. As of September 30, 2006, total market capitalization for the Company was $855.2 million compared to $609.2 million as of December 31, 2005.
On July 7, 2006, through our newly formed, wholly owned Delaware subsidiary, ARCC CLO 2006 LLC ("ARCC CLO"), we completed a $400.0 million debt securitization (the "Debt Securitization") where approximately $314.0 million principal amount of asset-backed notes (including $50.0 million revolving notes that were not drawn down as of September 30, 2006) (the "CLO Notes") were issued to third parties and secured by a pool of middle market loans that have been purchased or originated by the Company. We retained approximately $86.0 million of certain BBB and non-rated securities in the debt securitization. The blended pricing of the CLO Notes, excluding fees, is approximately 3-month LIBOR plus 34 basis points. The Debt Securitization is an on-balance-sheet financing for the Company. As of September 30, 2006, there were $264.0 million in outstanding notes. The CLO Notes mature on December 20, 2019.
A portion of the proceeds from our public offerings and the Debt Securitization were used to repay outstanding indebtedness under the CP Funding Facility and the Revolving Credit Facility. The remaining unused portion of the proceeds from our public offerings was used to fund investments in portfolio companies in accordance with our investment objectives and strategies.
The weighted average interest rate and weighted average maturity of all our outstanding borrowings as of September 30, 2006 were 6.44% and 10.4 years, respectively. As of September 30, 2006 and December 31, 2005, the fair value of investments and cash and cash equivalents, and the outstanding borrowings under the Debt Securitization, CP Funding Facility and the Revolving Credit Facility were as follows:
|
September 30, 2006 |
December 31, 2005 |
||||
---|---|---|---|---|---|---|
Cash and cash equivalents | $ | 67,610,129 | $ | 16,613,334 | ||
Senior term debt | 659,218,764 | 338,467,061 | ||||
Senior notes | 10,000,000 | 10,000,000 | ||||
Senior subordinated debt | 278,590,942 | 130,042,698 | ||||
Collateralized debt obligations | 7,343,166 | 17,386,561 | ||||
Equity securities | 77,834,416 | 90,072,055 | ||||
Total | $ | 1,100,597,417 | $ | 602,581,709 | ||
Outstanding borrowings | $ | 366,000,000 | $ | 18,000,000 | ||
The available amount for borrowing under the CP Funding Facility is $350.0 million (see Note 7 to the consolidated financial statements for more detail of the CP Funding Facility arrangement). As of September 30, 2006, there was $15.0 million outstanding under the CP Funding Facility. The CP Funding Facility expires on October 31, 2007 unless extended prior to such date with the consent of the lenders. The available amount for borrowing under the Revolving Credit Facility is $250 million (see Note 7 to the consolidated financial statements for more detail of the Revolving Credit Facility arrangement). As of September 30, 2006, there was $87.0 million outstanding under the Revolving Credit Facility. The Revolving Credit Facility expires on December 28, 2010.
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For the nine months ended September 30, 2006, average total assets was $856.3 million. The ratio of total debt outstanding to stockholders' equity as of September 30, 2006 was 0.50:1.00 compared to 0.03:1.00 as of December 31, 2005.
OFF BALANCE SHEET ARRANGEMENTS
As of September 30, 2006, the Company had committed to make a total of approximately $90.6 million of investments in various revolving senior secured loans. As of September 30, 2006, $50.2 million was unfunded. Included within the $90.6 million commitment in revolving secured loans is a commitment to issue up to $3.8 million in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. As of September 30, 2006, the Company had $2.7 million in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability. Of these letters of credit, $2.2 million expire on September 30, 2007 and $500,000 expire on July 31, 2007. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company's option until the revolving line of credit, under which the letters of credit were issued, matures on September 30, 2011.
As of September 30, 2006, the Company was subject to a subscription agreement to fund up to $10.0 million of equity commitments in a private equity investment partnership. As of September 30, 2006, $202,000 was funded to this partnership.
As of December 31, 2005, the Company had committed to make a total of approximately $43.0 million of investments in various revolving senior secured loans. As of December 31, 2005, $28.8 million was unfunded. Included within the $43.0 million commitment in revolving secured loans is a commitment to issue up to $3.2 million in standby letters of credit through a financial intermediary on behalf of a portfolio company. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio company was to default on its related payment obligations. As of December 31, 2005, the Company had $2.2 million in standby letters of credit issued and outstanding on behalf of the portfolio company, of which no amounts were recorded as a liability.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio.
As of September 30, 2006, approximately 38% of the investments at fair value in our portfolio were at fixed rates while approximately 54% were at variable rates. In addition, the Debt Securitization, the CP Funding Facility and the Revolving Credit Facility all feature variable rates.
To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our September 30, 2006 balance sheet and assuming no changes in our investment and borrowing structure. Under this analysis, a 100 basis point increase in the various base rates would result in an increase in interest income of approximately $6,704,465 and an increase in interest expense of $3,660,000 over the next 12 months. A 100 basis point decrease in the various base rates would result in a decrease in interest income of approximately $6,704,465 and a decrease in interest expense of $3,660,000 over the next 12 months.
On January 7, 2005, we entered into a costless collar agreement in order to manage the exposure to changing interest rates related to the Company's fixed rate investments. The costless collar agreement was for a notional amount of $20 million, has a cap of 6.5%, a floor of 2.72% and matures in 2008. The costless collar agreement allows us to receive an interest payment when the 3-month LIBOR exceeds 6.5% and obligates us to pay an interest payment when the 3-month LIBOR is less
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than 2.72%. The costless collar resets quarterly based on the 3-month LIBOR. As of September 30, 2006, the 3-month LIBOR was 5.37%. As of September 30, 2006, these derivatives had no fair value.
While hedging activities may mitigate our exposure to adverse fluctuations in interest rates, certain hedging transactions that we may enter into in the future, such as interest rate swap agreements, may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio investments.
Investments for which market quotations are readily available are valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. In addition, the board of directors currently receives input from independent valuation firms that have been engaged at the direction of the board to value each portfolio security at least once during a trailing 12 month period. The valuation process is conducted at the end of each fiscal quarter, with approximately a quarter of our portfolio companies subject to valuation by the independent valuation firm each quarter. The types of factors that the board may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our private equity valuation. Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments, and the differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.
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The following table sets forth (1) our actual capitalization at September 30, 2006 and (2) our capitalization as adjusted to reflect the effects of the sale of our common stock in this offering (assuming no exercise of the underwriter's overallotment option) at the public offering price of $20.09 per share, after deducting the underwriting discount and offering expenses payable by us. The adjusted information below is illustrative only and our capitalization following the completion of the offering is subject to adjustment based on the actual public offering price of our common stock and the actual number of shares we sell in the offering, both of which will be determined at pricing. You should read this table together with "Use of Proceeds" and our balance sheet included elsewhere in this prospectus supplement.
|
As of September 30, 2006 |
||||||
---|---|---|---|---|---|---|---|
|
Actual |
As Adjusted(2) |
|||||
Cash and cash equivalents | $ | 67,610,129 | $ | 68,424,580 | |||
Debt |
|||||||
Debt | $ | 366,000,000 | 343,307,364 | (1) | |||
Stockholders' Equity |
|||||||
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 49,091,195 and 50,304,357 common shares issued and outstanding, respectively(3) | $ | 49,092 | $ | 50,304,357 | |||
Capital in excess of par value | 727,920,560 | 751,426,435 | |||||
Accumulated net realized gain on sale of investments | 22,421,107 | 22,421,107 | |||||
Net unrealized (depreciation) appreciation on investments | (11,121,889 | ) | (11,121,889 | ) | |||
Total stockholders' equity | $ | 739,268,870 | $ | 762,775,957 | |||
Total capitalization | $ | 1,105,268,870 | $ | 1,106,083,321 | |||
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We intend to offer the shares through Merrill Lynch, Pierce, Fenner & Smith Incorporated. Subject to the terms and conditions described in a purchase agreement among us and the underwriter, we have agreed to sell to the underwriter, and the underwriter has agreed to purchase from us, shares of our common stock.
The underwriter has agreed that it must purchase all of the shares sold under the purchase agreement if it purchases any of them. However, the underwriter is not required to take or pay for the shares covered by the underwriter's overallotment option described below.
We have agreed to indemnify the underwriter against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriter may be required to make in respect of those liabilities.
The underwriter is offering the shares, subject to prior sale, when, as and if issued to and accepted by it, subject to approval of legal matters by its counsel, including the validity of the shares, and other conditions contained in the purchase agreement, such as the receipt by the underwriter of officer's certificates and legal opinions. The underwriter reserves the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
The underwriter has advised us that it proposes initially to offer the shares to the public at the public offering price on the cover page of this prospectus supplement and to dealers at that price less a concession not in excess of $ per share. After the public offering, the public offering price may be changed.
The following table shows the per share and total underwriting discount we will pay to the underwriter assuming both no exercise and full exercise of the underwriter's overallotment option to purchase up to an additional 174,750 shares, based upon the public offering price set forth on the cover page of this prospectus supplement.
|
No exercise |
Full exercise |
||
---|---|---|---|---|
Per share | $ | $ | ||
Total | $ | $ |
The maximum commission or discount to be received by any member of the National Association of Securities Dealers, Inc. ("NASD") in connection with this and any other offering of securities registered by the Company pursuant to Rule 415 will not exceed 8%.
We estimate that the total expenses of the offering payable by us, not including the underwriting discount, will be approximately $244,117.
We have granted an option to the underwriter to purchase up to 174,750 additional shares at the public offering price less the underwriting discount. The underwriter may exercise this option for 30 days from the date of this prospectus supplement solely to cover any overallotments.
No Sales of Similar Securities
We have agreed, with exceptions, not to sell or transfer any common stock for 30 days after the date of this prospectus supplement without first obtaining the consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Our executive officers and directors and Ares Capital Management have agreed, with exceptions, not to sell or transfer any common stock for 90 days after the date of this prospectus
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supplement without first obtaining the written consent of the underwriter. Specifically, we and these other individuals and entities have agreed not to directly or indirectly:
This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.
Quotation on The NASDAQ Global Select Market
Our common stock is quoted on The NASDAQ Global Select Market under the symbol "ARCC."
Price Stabilization and Short Positions
Until the distribution of the shares is completed, SEC rules may limit the underwriter from bidding for and purchasing our common stock. However, the underwriter may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.
If the underwriter creates a short position in the common stock in connection with the offering, i.e., if it sells more shares than are listed on the cover of this prospectus supplement, the underwriter may reduce that short position by purchasing shares in the open market. The underwriter may also elect to reduce any short position by exercising all or part of the overallotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases.
Neither we nor the underwriter makes any representation or prediction or magnitude of any effect that the transaction described above may have the price of the common stock. In addition, neither we nor the underwriter makes any representation that the underwriter will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
The underwriter may make prospectuses available in electronic (PDF) format. A prospectus in electronic (PDF) format may be made available on a web site maintained by the underwriter, and the underwriter may distribute such prospectuses electronically. The underwriter intends to allocate a limited number of shares for sale to its online brokerage customers.
The underwriter and its affiliates have provided in the past to Ares and may provide from time to time in the future in the ordinary course of their business certain commercial banking, financial advisory, investment banking or other services to Ares, Ares Capital or our portfolio companies for which it has received or will be entitled to receive separate fees. In particular, the underwriter or its
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affiliates may execute transactions with Ares Capital or on behalf of Ares Capital, Ares or any of our portfolio companies. In addition, the underwriter or its affiliates may act as arrangers, underwriters or placement agents for companies whose securities are sold to or whose loans are syndicated to Ares, Ares Capital or Ares Capital Management.
Affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated are limited partners of Ares Corporate Opportunities Fund, L.P.
The underwriter or its affiliates may also trade in our securities, securities of our portfolio companies or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to Ares, Ares Capital, Ares Capital Management or any of the portfolio companies.
We may purchase securities of third parties from the underwriter or its affiliates after the offering. However, we have not entered into any agreement or arrangement regarding the acquisition of any such securities, and we may not purchase any such securities. We would only purchase any such securities ifamong other thingswe identified securities that satisfied our investment needs and completed our due diligence review of such securities.
After the date of this prospectus supplement, the underwriter and its affiliates may from time to time obtain information regarding specific portfolio companies or us that may not be available to the general public. Any such information is obtained by the underwriter and its affiliates in the ordinary course of their business and not in connection with the offering of the common stock. In addition, after the offering period for the sale of our common stock, the underwriter or its affiliates may develop analyses or opinions related to Ares, Ares Capital or our portfolio companies and buy or sell interests in one or more of our portfolio companies on behalf of their proprietary or client accounts and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding any portfolio company or regarding Ares Capital to our stockholders.
Merrill Lynch, Pierce, Fenner & Smith Incorporated was an underwriter of our October 2004 initial public offering and our March 2005, October 2005, July 2006 and December 2006 common stock offerings, for which it received customary fees. Merrill Lynch Capital Corporation is a syndication agent and lender under the Revolving Credit Facility.
Affiliates of the underwriter will receive part of the proceeds of the offering by reason of the repayment of amounts outstanding under the Revolving Credit Facility. Because more than 10% of the net proceeds of the offering may be paid to members or affiliates of members of the NASD participating in the offering, the offering will be conducted in accordance with NASD Conduct Rule 2710(h).
The principal business address of the underwriter is 4 World Financial Center, New York, New York 10080.
Certain legal matters regarding the securities offered by this prospectus supplement will be passed upon for Ares Capital by Proskauer Rose LLP, New York, New York, Sutherland Asbill & Brennan LLP, Washington, D.C., and Venable LLP, Baltimore, Maryland. Proskauer Rose LLP has from time to time represented the underwriter, Ares and Ares Capital Management on unrelated matters. Certain legal matters in connection with the offering will be passed upon for the underwriter by Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York.
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ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
As of |
|||||||
---|---|---|---|---|---|---|---|---|
|
September 30, 2006 |
December 31, 2005 |
||||||
|
(unaudited) |
|
||||||
ASSETS | ||||||||
Investments at fair value (amortized cost of $1,044,109,177 and $581,351,865, respectively): |
||||||||
Non-control/Non-affiliate investments | $ | 859,503,669 | $ | 515,184,991 | ||||
Affiliate investments | 173,483,619 | 70,783,384 | ||||||
Total investments at fair value | 1,032,987,288 | 585,968,375 | ||||||
Cash and cash equivalents | 67,610,129 | 16,613,334 | ||||||
Receivable for open trades | 1,676,990 | 1,581,752 | ||||||
Interest receivable | 10,931,480 | 5,828,098 | ||||||
Other assets | 9,350,178 | 3,653,585 | ||||||
Total assets | $ | 1,122,556,065 | $ | 613,645,144 | ||||
LIABILITIES |
||||||||
Debt |
$ |
366,000,000 |
$ |
18,000,000 |
||||
Reimbursed underwriting costs payable to the Investment Adviser | | 2,475,000 | ||||||
Dividend payable | | 12,889,225 | ||||||
Payable for open trades | | 5,500,000 | ||||||
Accounts payable and accrued expenses | 2,234,296 | 1,222,678 | ||||||
Management and incentive fees payable | 10,981,600 | 3,478,034 | ||||||
Interest and facility fees payable | 4,071,299 | 313,930 | ||||||
Interest payable to the Investment Adviser | | 154,078 | ||||||
Total liabilities | 383,287,195 | 44,032,945 | ||||||
Commitments and contingencies (Note 6) | ||||||||
STOCKHOLDERS' EQUITY |
||||||||
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 49,091,195 and 37,909,484 common shares issued and outstanding, respectively |
49,092 |
37,910 |
||||||
Capital in excess of par value | 727,920,560 | 559,192,554 | ||||||
Accumulated net realized gain on sale of investments | 22,421,107 | 5,765,225 | ||||||
Net unrealized (depreciation) appreciation on investments | (11,121,889 | ) | 4,616,510 | |||||
Total stockholders' equity | 739,268,870 | 569,612,199 | ||||||
Total liabilities and stockholders' equity | $ | 1,122,556,065 | $ | 613,645,144 | ||||
NET ASSETS PER SHARE | $ | 15.06 | $ | 15.03 | ||||
See accompanying notes to consolidated financial statements.
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ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of September 30, 2006 (unaudited)
Company(1) |
Industry |
Investment |
Interest(15) |
Initial Acquisition Date |
Amortized Cost |
Fair Value |
Fair Value Per Unit |
Percentage of Net Assets |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
HealthcareServices | ||||||||||||||||||||
American Renal Associates, Inc. | Dialysis provider | Senior secured loan ($3,049,180 par due 12/2010) | 9.57% (Libor+ 4.00%/S) | 12/14/05 | $ | 3,049,180 | $ | 3,049,180 | $ | 1.00 | (3) | |||||||||
Senior secured loan ($196,721 par due 12/2010) | 10.75% (Base Rate + 2.50%/D) | 12/14/05 | 196,721 | 196,721 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($5,836,066 par due 12/2011) | 10.07% (Libor + 4.50%/S) | 12/14/05 | 5,836,066 | 5,836,066 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($36,066 par due 12/2011) | 11.25% (Base Rate + 3.00%/D) | 12/14/05 | 36,066 | 36,066 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($393,741 par due 12/2011) | 12.57% (Libor + 7.00%/Q) | 12/14/05 | 393,741 | 393,741 | 1.00 | |||||||||||||||
Senior secured loan ($261,997 par due 12/2011) | 12.57 (Libor + 7.00%/Q) | 12/14/05 | 261,997 | 261,997 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($3,937,406 par due 12/2011) | 14.25% (Base Rate + 6.00%/D) | 12/14/05 | 3,937,406 | 3,937,406 | 1.00 | |||||||||||||||
Senior secured loan ($2,619,971 par due 12/2011) | 14.25% (Base Rate + 6.00%/D) | 12/14/05 | 2,619,971 | 2,619,971 | 1.00 | (3) | ||||||||||||||
Capella Healthcare, Inc. | Acute care hospital | Junior secured loan ($19,000,000 par due 11/2013) | 11.37% (Libor +6.00%/Q) | 12/1/05 | 19,000,000 | 19,000,000 | 1.00 | |||||||||||||
operator | Junior secured loan ($12,000,000 par due 11/2013) | 11.37% (Libor + 6.00%/Q) | 12/1/05 | 12,000,000 | 12,000,000 | 1.00 | (3) | |||||||||||||
DSI Renal, Inc. | Dialysis provider | Senior subordinated note ($60,637,680 par due 4/2014) | 12.00% Cash, 2.00% PIK | 4/4/06 | 60,637,680 | 60,637,680 | 1.00 | (4) | ||||||||||||
Senior subordinated note ($5,025,000 par due 4/2014) | 12.00% Cash, 2.00% PIK | 4/4/06 | 5,025,000 | 5,025,000 | 1.00 | (4)(3) | ||||||||||||||
Senior secured loan ($3,200,000 par due 3/2013) | 8.50% (Libor + 3.00%/Q) | 4/4/06 | 3,200,000 | 3,200,000 | 1.00 | |||||||||||||||
Senior secured loan ($960,000 par due 3/2013) | 8.44% (Libor + 3.00%/Q) | 4/4/06 | 960,000 | 960,000 | 1.00 | |||||||||||||||
Senior secured loan ($1,600,000 par due 3/2013) | 8.38% (Libor + 3.00%/M) | 4/4/06 | 1,600,000 | 1,600,000 | 1.00 | |||||||||||||||
Senior secured loan ($1,440,000 par due 3/2013) | 10.75% (Base Rate + 2.50%/D) | 4/4/06 | 1,440,000 | 1,440,000 | 1.00 | |||||||||||||||
OnCURE Medical Corp. | Radiation oncology care | Senior subordinated note ($23,230,012 par due 8/2012) | 11.00% cash, 1.50% PIK | 8/16/06 | 23,230,012 | 23,230,012 | 1.00 | (4) | ||||||||||||
provider | Senior secured loan ($3,489,063 par due 8/2011) | 8.94% (Libor + 3.50%/S) | 8/23/06 | 3,489,063 | 3,489,063 | 1.00 | ||||||||||||||
Senior secured loan ($10,938 par due 8/2011) | 8.94% (Libor + 3.50%/Q) | 8/23/06 | 10,938 | 10,938 | 1.00 | |||||||||||||||
Common stock (857,143 shares) | 8/16/06 | 3,000,000 | 3,000,000 | 3.50 | (5) | |||||||||||||||
PHNS, Inc. | Information technology and business process outsourcing | Senior subordinated loan ($16,000,000 par due 11/2011) | 13.50% cash, 2.50% PIK | 10/29/04 | 15,804,452 | 16,320,000 | 1.02 | (4) | ||||||||||||
Triad Laboratory Alliance, LLC | Laboratory services | Senior subordinated note ($14,762,865 par due 12/2012) | 12.00% cash, 1.75% PIK | 12/21/05 | 14,762,865 | 14,762,865 | 1.00 | (4) | ||||||||||||
Senior secured loan ($6,947,500 par due 12/2011) | 8.62% (Libor + 3.25%/Q) | 12/21/05 | 6,947,500 | 6,947,500 | 1.00 | |||||||||||||||
Senior secured loan ($2,977,500 par due 12/2011) | 8.62% (Libor + 3.25%/Q) | 12/21/05 | 2,977,500 | 2,977,500 | 1.00 | (3) | ||||||||||||||
190,416,158 | 190,931,706 | 25.83 | % | |||||||||||||||||
Printing, Publishing and Broadcasting | ||||||||||||||||||||
Canon Communications | Print publications | Junior secured loan ($7,525,000 par due 11/2011) | 12.37% (Libor + 6.75%/S) | 5/25/05 | 7,525,000 | 7,525,000 | 1.00 | |||||||||||||
LLC | services | Junior secured loan ($4,250,000 par due 11/2011) | 12.37% (Libor + 6.75%/S) | 5/25/05 | 4,250,000 | 4,250,000 | 1.00 | (2) | ||||||||||||
Junior secured loan ($12,000,000 par due 11/2011) | 12.37% (Libor + 6.75%/S) | 5/25/05 | 12,000,000 | 12,000,000 | 1.00 | (3) |
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Daily Candy, Inc.(11) | Internet publication | Senior secured loan ($19,200,000 par due 5/2009) | 10.62% (Libor + 5.00%/S) | 5/25/06 | 19,494,406 | 19,200,000 | 0.98 | |||||||||||||
provider | Senior secured loan ($4,800,000 par due 5/2009) | 10.62% (Libor + 5.00%/S) | 5/25/06 | 4,873,601 | 4,800,000 | 0.98 | (3) | |||||||||||||
Senior secured loan ($700,000 par due 5/2009) | 10.37% (Libor + 5.00%/Q) | 5/25/06 | 700,000 | 700,000 | 1.00 | |||||||||||||||
Senior secured loan ($175,000 par due 5/2009) | 10.37% (Libor + 5.00%/Q) | 5/25/06 | 175,000 | 175,000 | 1.00 | (3) | ||||||||||||||
Common stock (1,250,000 shares) | 5/25/06 | 2,375,000 | 2,375,000 | 1.90 | (5) | |||||||||||||||
Warrants to purchase (1,381,578 shares) | 5/25/06 | 2,624,998 | 2,624,998 | 1.90 | (5) | |||||||||||||||
National Print Group, Inc. | Printing management | Senior secured revolving loan ($1,338,451 par due 3/2012) | 10.75% (Base Rate + 2.50%/D) | 3/2/06 | 1,338,451 | 1,338,451 | 1.00 | |||||||||||||
services | Senior secured loan ($11,047,826 par due 3/2012) | 8.87% (Libor + 3.50%/Q) | 3/2/06 | 11,047,826 | 11,047,826 | 1.00 | (3) | |||||||||||||
Senior secured loan ($182,609 par due 3/2012) | 10.75% (Base Rate + 2.50%/D) | 3/2/06 | 182,609 | 182,609 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($2,319,367 par due 3/2012) | 12.32% (Libor + 7.00%/S) | 3/2/06 | 2,319,368 | 2,319,368 | 1.00 | |||||||||||||||
Senior secured loan ($419,763 par due 8/2012) | 12.32% (Libor + 7.00%/S) | 3/2/06 | 419,763 | 419,763 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($1,932,806 par due 8/2012) | 12.49% (Libor + 7.00%/Q) | 3/2/06 | 1,932,806 | 1,932,806 | 1.00 | |||||||||||||||
Senior secured loan ($349,802 par due 8/2012) | 12.49% (Libor + 7.00%/Q) | 3/2/06 | 349,802 | 349,802 | 1.00 | (3) | ||||||||||||||
Preferred stock (9,344 shares) | 3/2/06 | 2,000,000 | 2,000,000 | 214.04 | (5) | |||||||||||||||
The Teaching Company, LLC |
Education publications | Senior secured revolving loan ($1,000,000 par due 9/2011) | 12.25% (Base Rate + 4.00%/D) | 9/28/06 | 1,000,000 | 1,000,000 | 1.00 | |||||||||||||
and The Teaching Company | provider | Senior secured loan ($6,250,000 par due 9/2012) | 12.25% (Base Rate + 4.00%/D) | 9/28/06 | 6,250,000 | 6,250,000 | 1.00 | |||||||||||||
Holdings, Inc. | Senior secured loan ($28,000,000 par due 9/2012) | 10.50%(16) | 9/28/06 | 28,000,000 | 28,000,000 | 1.00 | ||||||||||||||
Senior secured loan ($12,000,000 par due 9/2012) | 10.50%(16) | 9/28/06 | 12,000,000 | 12,000,000 | 1.00 | (3) | ||||||||||||||
Preferred stock (29,969 shares) | 9/28/06 | 2,996,921 | 2,996,921 | 100.00 | (5) | |||||||||||||||
Common stock (3,079 shares) | 9/28/06 | 3,079 | 3,079 | 1.00 | (5) | |||||||||||||||
123,858,630 | 123,490,623 | 16.70 | % | |||||||||||||||||
Manufacturing | ||||||||||||||||||||
Arrow Group Industries, Inc. | Residential and outdoor shed manufacturer | Senior secured loan ($6,000,000 par due 4/2010) | 10.37% (Libor + 5.00%/Q) | 3/28/05 | 6,038,785 | 6,000,000 | 1.00 | (3) | ||||||||||||
Emerald Performance |
Polymers and performance | Senior secured loan ($10,473,684 par due 5/2011) | 9.58% (Libor + 4.25%/M) | 5/16/06 | 10,473,684 | 10,473,684 | 1.00 | |||||||||||||
Materials, LLC | materials manufacturer | Senior secured loan ($5,263,158 par due 5/2011) | 11.33% (Libor + 6.00%/M) | 5/16/06 | 5,263,158 | 5,263,158 | 1.00 | |||||||||||||
Senior secured loan ($4,210,526 par due 5/2011) | 13.00% | 5/16/06 | 4,210,526 | 4,210,526 | 1.00 | |||||||||||||||
Qualitor, Inc. | Automotive aftermarket | Senior secured loan ($1,965,000 par due 12/2011) | 9.62% (Libor +4.25%/Q) | 12/29/04 | 1,965,000 | 1,965,000 | 1.00 | (3) | ||||||||||||
components supplier | Junior secured loan ($5,000,000 par due 6/2012) | 12.62% (Libor + 7.25%/Q) | 12/29/04 | 5,000,000 | 5,000,000 | 1.00 | (3) | |||||||||||||
Professional Paint, Inc. | Paint manufacturer | Junior secured loan ($16,500,000 par due 5/2013) | 11.38% (Libor + 5.75%/S) | 5/25/06 | 16,500,000 | 16,500,000 | 1.00 | |||||||||||||
Reflexite Corporation(10) | Developer and manufacturer of | Senior subordinated loan ($10,537,043 par due 12/2011) | 11.00% cash, 3.00% PIK | 12/30/04 | 10,537,043 | 10,537,043 | 1.00 | (2)(4) | ||||||||||||
high visibility reflective products | Common Stock (1,729,627 shares) | 3/28/06 | 25,682,891 | 25,682,891 | 14.85 | (5) | ||||||||||||||
Universal Trailer | Livestock and | Common stock (50,000 shares) | 10/8/04 | 6,424,645 | 4,154,665 | 83.09 | (5) | |||||||||||||
Corporation(6) | specialty trailer manufacturer | Warrants to purchase 22,208 shares | 10/8/04 | 1,505,776 | 1,845,336 | 83.09 | (5) | |||||||||||||
Varel Holdings, Inc. | Drill bit manufacturer | Senior secured loan ($8,578,759 par due 12/2010) | 9.49% (Libor + 4.00%/Q) | 5/18/05 | 8,578,759 | 8,578,759 | 1.00 | (3) |
S-30
Senior secured loan ($3,333,333 par due 12/2011) | 13.33% (Libor + 8.00%/M) | 5/18/05 | 3,333,333 | 3,333,333 | 1.00 | (3) | ||||||||||||||
Senior secured revolving loan ($500,000 par due 10/2010) | 10.50% (Base Rate + 2.25%/D) | 5/18/05 | 500,000 | 500,000 | 1.00 | |||||||||||||||
Preferred stock (33,884 shares) | 5/18/05 | 1,109,363 | 1,109,363 | 32.74 | (5) | |||||||||||||||
Common stock (30,451 shares) | 5/18/05 | 3,045 | 1,011,569 | 33.22 | (5) | |||||||||||||||
107,126,008 | 106,165,327 | 14.36 | % | |||||||||||||||||
ServicesOther | ||||||||||||||||||||
Diversified Collection |
Collections services | Senior secured loan ($5,242,026 par due 2/2011) | 9.57% (Libor +4.25%/M) | 2/2/05 | 5,242,026 | 5,242,026 | 1.00 | (3) | ||||||||||||
Services, Inc. | Senior secured loan ($1,742,026 par due 8/2011) | 11.37% (Libor + 6.00%/M) | 2/2/05 | 1,742,026 | 1,742,026 | 1.00 | (2) | |||||||||||||
Senior secured loan ($6,757,974 par due 8/2011) | 11.37% (Libor + 6.00%/M) | 2/2/05 | 6,757,974 | 6,757,974 | 1.00 | (3) | ||||||||||||||
Preferred stock (14,927 shares) | 5/18/06 | 169,123 | 169,123 | 11.33 | (5) | |||||||||||||||
Common stock (114,004 shares) | 2/2/05 | 295,270 | 295,270 | 2.59 | (5) | |||||||||||||||
Event Rentals, Inc. | Party rental services | Senior secured loan ($2,277,902 par due 11/2011) | 10.77% (Libor+ 5.25%/S) | 11/17/05 | 2,277,902 | 2,277,902 | 1.00 | (3) | ||||||||||||
Senior secured loan ($5,005,581 par due 11/2011) | 10.69% (Libor + 5.25%/S) | 11/17/05 | 5,005,581 | 5,005,581 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($1,244,489 par due 11/2011) | 10.74% (Libor + 5.25%/S) | 11/17/05 | 1,244,489 | 1,244,489 | 1.00 | |||||||||||||||
Senior secured loan ($2,466,518 par due 11/2011) | 10.74% (Libor + 5.25%/S) | 11/17/05 | 2,466,518 | 2,466,518 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($15,354 par due 11/2011) | 12.50% (Base Rate + 4.25%/D) | 11/17/05 | 15,354 | 15,354 | 1.00 | |||||||||||||||
Senior secured loan ($5,952 par due 11/2011) | 12.50% (Base Rate + 4.25%/D) | 11/17/05 | 5,952 | 5,952 | 1.00 | (3) | ||||||||||||||
Senior secured loan ($5,742,560 par due 11/2011) | 10.77% (Libor + 5.25%/S) | 11/17/05 | 5,742,560 | 5,742,560 | 1.00 | |||||||||||||||
Senior secured loan ($2,226,190 par due 11/2011) | 10.77% (Libor + 5.25%/S) | 11/17/05 | 2,226,190 | 2,226,190 | 1.00 | (3) | ||||||||||||||
GCA Services Group, Inc. | Custodial services | Senior subordinated loan ($33,486,024 par due 1/2010) | 12.00% cash, 3.00% PIK | 7/25/05 | 33,486,024 | 33,486,024 | 1.00 | (4) | ||||||||||||
NPA Acquisition, LLC | Powersport vehicle auction | Senior secured loan ($5,000,000 par due 8/2012) | 8.64% (Libor +3.25%/Q) | 8/23/06 | 5,000,000 | 5,000,000 | 1.00 | |||||||||||||
operator | Junior secured loan ($14,000,000 par due 2/2013) | 12.12% (Libor + 6.75%/Q) | 8/23/06 | 14,000,000 | 14,000,000 | 1.00 | ||||||||||||||
Common stock (1,709 shares) | 8/23/06 | 1,000,000 | 1,000,000 | 585.14 | (5) | |||||||||||||||
86,676,989 | 86,676,989 | 11.72 | % | |||||||||||||||||
Retail | ||||||||||||||||||||
Savers, Inc and SAI Acquisition | For-profit thrift retailer | Senior subordinated note ($28,077,778 par due 8/2014) | 10.00% cash, 2.00% PIK | 8/8/06 | 28,077,778 | 28,077,778 | 1.00 | (4) | ||||||||||||
Corporation | Common stock (1,170,182 shares) | 8/8/06 | 4,500,000 | 4,500,000 | 3.85 | (5) | ||||||||||||||
Things Remembered, Inc. and TRM | Personalized gifts retailer | Senior secured revolving loan ($357,143 par due 9/2012) | 12.00% (Base Rate + 3.75%/D)(17) | 9/28/06 | 357,143 | 357,143 | 1.00 | |||||||||||||
Holdings Corporation | Senior secured loan ($4,800,000 par due 9/2012) | 12.00% (Base Rate + 3.75%/D) | 9/28/06 | 4,800,000 | 4,800,000 | 1.00 | (3) | |||||||||||||
Senior secured loan ($28,000,000 par due 9/2013) | 13.25% (Base Rate + 5.00%/D) | 9/28/06 | 28,000,000 | 28,000,000 | 1.00 | |||||||||||||||
Senior secured loan ($7,200,000 par due 9/2013) | 13.25% (Base Rate + 5.00%/D) | 9/28/06 | 7,200,000 | 7,200,000 | 1.00 | (3) | ||||||||||||||
Preferred stock (80 shares) | 9/28/06 | 1,800,000 | 1,800,000 | 22,500.00 | (5) | |||||||||||||||
Common stock (800 shares) | 9/28/06 | 200,000 | 200,000 | 250.00 | (5) | |||||||||||||||
74,934,921 | 74,934,921 | 10.14 | % | |||||||||||||||||
ContainersPackaging | ||||||||||||||||||||
Captive Plastics, Inc. | Plastics container | Junior secured loan ($4,000,000 par due 2/2012) | 12.76% (Libor + 7.25%/Q) | 12/19/05 | 4,000,000 | 4,000,000 | 1.00 | |||||||||||||
manufacturer | Junior secured loan ($12,000,000 par due 2/2012) | 12.76% (Libor + 7.25%/Q) | 12/19/05 | 12,000,000 | 12,000,000 | 1.00 | (3) |
S-31
Industrial Container Services, LLC(8) | Industrial container | Senior secured loan ($96,250 par due 9/2011) | 13.25% (Base Rate + 5.00%/D) | 9/30/05 | 96,250 | 96,250 | 1.00 | |||||||||||||
manufacturer, reconditioner | Senior secured loan ($30,227 par due 9/2011) | 13.25% (Base Rate + 5.00%/D) | 9/30/05 | 30,227 | 30,227 | 1.00 | (3) | |||||||||||||
and servicer | Senior secured loan ($11,939,547 par due 9/2011) | 11.94% (Libor + 6.50%/S) | 9/30/05 | 11,939,547 | 11,939,547 | 1.00 | (3) | |||||||||||||
Senior secured loan ($16,450,281 par due 9/2011) | 11.94% (Libor + 6.50%/S) | 6/21/06 | 16,450,281 | 16,450,281 | 1.00 | |||||||||||||||
Senior secured revolving loan ($25,000 par due 9/2011) | 11.89% (Libor + 6.50%/Q) | 9/30/05 | 25,000 | 25,000 | 1.00 | |||||||||||||||
Senior secured revolving loan ($9,950,000 par due 9/2011) | 11.94% (Libor + 6.50.%/S) | 9/30/05 | 9,950,000 | 9,950,000 | 1.00 | |||||||||||||||
Senior secured revolving loan ($4,130,435 par due 9/2011) | 10.02% (Libor + 4.50%/Q) | 9/30/05 | 4,130,435 | 4,130,435 | 1.00 | |||||||||||||||
Senior secured revolving loan ($826,087 par due 9/2011) | 9.82% (Libor + 4.50%/D) | 9/30/05 | 826,087 | 826,087 | 1.00 | |||||||||||||||
Senior secured revolving loan ($826,087 par due 9/2011) | 9.83% (Libor + 4.50%/D) | 9/30/05 | 826,087 | 826,087 | 1.00 | |||||||||||||||
Senior secured revolving loan ($1,156,522 par due 9/2011) | 11.25% (Base Rate + 3.00%/D) | 9/30/05 | 1,156,522 | 1,156,522 | 1.00 | |||||||||||||||
Common stock (1,800,000 shares) | 9/29/05 | 1,800,000 | 1,800,000 | 1.00 | (5) | |||||||||||||||
LabelCorp Holdings, Inc. | Consumer product labels manufacturer | Senior subordinated notes ($9,250,088 par due 9/2012) | 12.00% cash, 3.00% PIK | 3/16/06 | 9,250,088 | 9,250,088 | 1.00 | (4) | ||||||||||||
72,480,524 | 72,480,524 | 9.80 | % | |||||||||||||||||
Consumer ProductsNon-Durable | ||||||||||||||||||||
Making Memories Wholesale, Inc.(7) | Scrapbooking branded | Senior secured loan ($7,916,667 par due 3/2011) | 9.875% (Libor + 4.50%/Q) | 5/5/05 | 7,916,667 | 7,916,667 | 1.00 | (3) | ||||||||||||
products manufacturer | Senior subordinated loan ($10,152,435 par due 5/2012) | 12.50% cash, 2.00% PIK | 5/5/05 | 10,152,435 | 10,152,435 | 1.00 | (4) | |||||||||||||
Preferred stock (3,500 shares) | 5/5/05 | 3,758,800 | 1,320,000 | 351.25 | (4) | |||||||||||||||
Shoes for Crews, LLC | Safety footwear and slip-related | Senior secured loan ($1,370,173 par due 7/2010) | 8.87% (Libor +3.25%/S) | 10/8/04 | 1,378,236 | 1,378,236 | 1.00 | (3) | ||||||||||||
mats | Senior secured revolving loan ($3,333,333 par due 7/2010) | 10.25% (Base Rate + 2.00%/D) | 6/16/06 | 3,333,333 | 3,333,333 | 1.00 | ||||||||||||||
Tumi Holdings, Inc. | Branded luggage |
Senior secured loan ($2,500,000 par due 12/2012) | 8.11% (Libor + 2.75%/Q) | 5/24/05 | 2,500,000 | 2,500,000 | 1.00 | (3) | ||||||||||||
designer, marketer and | Senior secured loan ($5,000,000 par due 12/2013) | 8.62% (Libor + 3.25%/Q) | 3/14/05 | 5,000,000 | 5,000,000 | 1.00 | (3) | |||||||||||||
distributor | Senior subordinated loan ($13,510,171 par due 12/2014) | 16.37% (Libor + 6.00% cash, 5.00% PIK/Q) | 3/14/05 | 13,510,171 | 13,510,171 | 1.00 | (2)(4) | |||||||||||||
UCG Paper Crafts, Inc. | Scrapbooking materials | Senior secured loan ($1,990,000 par due 2/2013) | 8.58% (Libor +3.25%/M) | 2/23/06 | 1,990,000 | 1,990,000 | 1.00 | (3) | ||||||||||||
manufacturer | Junior secured loan ($2,960,063 par due 2/2013) | 12.83% (Libor + 7.50%/M) | 2/23/06 | 2,960,063 | 2,960,063 | 1.00 | ||||||||||||||
Junior secured loan ($9,974,937 par due 2/2013) | 12.83% (Libor + 7.50%/M) | 2/23/06 | 9,974,937 | 9,974,937 | 1.00 | (3) | ||||||||||||||
62,474,642 | 60,035,842 | 8.12 | % | |||||||||||||||||
Education | ||||||||||||||||||||
Equinox SMU partners |
Medical school operator | Senior secured revolving loan ($1,550,000 par due 12/2010) | 13.25% (Base Rate + 5.00%/Q) | 1/26/06 | 1,550,000 | 1,550,000 | 1.00 | |||||||||||||
LLC and SMU Acquisition |
Senior secured revolving loan ($2,032,342 par due 12/2010) | 11.06% (Libor + 6.00%/S) | 1/26/06 | 2,032,342 | 2,032,342 | 1.00 | ||||||||||||||
Corp.(9)(13) | Senior secured loan ($10,162,500 par due 12/2010) | 11.39% (Libor + 6.00%/Q) | 1/26/06 | 10,162,500 | 10,162,500 | 1.00 | (3) | |||||||||||||
Senior secured loan ($1,500,000 par due 12/2010) | 11.39% (Libor + 6.00%/Q) | 1/26/06 | 1,500,000 | 1,500,000 | 1.00 | |||||||||||||||
Senior secured loan ($1,500,000 par due 12/2010) | 11.39% (Libor + 6.00%/Q) | 1/26/06 | 1,500,000 | 1,500,000 | 1.00 | (3) | ||||||||||||||
Limited liability company membership interest (17.39% interest) | 1/25/06 | 4,000,000 | 4,000,000 | (5) |
S-32
Lakeland Finance, LLC | Private school operator | Senior secured note ($33,000,000 par due 12/2012) | 11.50% | 12/13/05 | 33,000,000 | 33,000,000 | 1.00 | |||||||||||||
53,744,842 | 53,744,842 | 7.27 | % | |||||||||||||||||
Business Services | ||||||||||||||||||||
Investor Group Services, LLC | Financial services | Senior secured loan ($1,500,000 par due 6/2011) | 12.00% | 6/22/06 | 1,500,000 | 1,500,000 | 1.00 | (3) | ||||||||||||
Senior secured loan ($500,000 par due 6/2011) | 11.04% (Libor + 5.50%/S) | 6/22/06 | 500,000 | 500,000 | 1.00 | |||||||||||||||
Senior secured loan ($150,000 par due 6/2011) | 12.75% (Base Rate + 4.50%/D) | 6/22/06 | 150,000 | 150,000 | 1.00 | |||||||||||||||
Limited liability company membership interest (10.00% interest) | 6/22/06 | | | (5) | ||||||||||||||||
Miller Heiman, Inc. | Sales consulting services | Senior secured loan ($3,173,113 par due 6/2010) | 8.83% (Libor + 3.50%/M) | 6/20/05 | 3,173,113 | 3,173,113 | 1.00 | (3) | ||||||||||||
Senior secured loan ($4,027,788 par due 6/2012) | 9.37% (Libor + 4.00%/Q) | 6/20/05 | 4,027,788 | 4,027,788 | 1.00 | (3) | ||||||||||||||
MR Processing Holding Corp. | Bankruptcy and foreclosure | Senior subordinated note ($20,202,733 par due 2/2013) | 12.00% Cash, 2.00% PIK | 3/23/06 | 20,202,733 | 20,202,733 | 1.00 | (4) | ||||||||||||
processing services | Senior secured loan ($1,990,000 par due 2/2012) | 9.02% (Libor + 3.50%/S) | 3/28/06 | 1,990,000 | 1,990,000 | 1.00 | ||||||||||||||
Preferred stock (30,000 shares) | 4/11/06 | 3,000,000 | 3,000,000 | 100.00 | (5) | |||||||||||||||
Primis Marketing Group, Inc. and | Database marketing | Senior secured loan ($10,024,306 par due 2/2013) | 11.00% Cash, 2.50% PIK | 8/24/06 | 10,024,306 | 10,024,306 | 1.00 | (4) | ||||||||||||
Primis Holdings, | services | Preferred stock (4,000 shares) | 8/24/06 | 3,600,000 | 3,600,000 | 9.00 | (5) | |||||||||||||
LLC(12) | Common stock (4,000,000 shares) | 8/24/06 | 400,000 | 400,000 | 0.10 | (5) | ||||||||||||||
48,567,940 | 48,567,940 | 6.57 | % | |||||||||||||||||
Restaurants | ||||||||||||||||||||
ADF Capital, Inc. & ADF Restaurant | Restaurant owner and | Senior secured revolving loan ($1,700,000 par due 6/2013) | 13.75% (Base Rate + 5.50%/D) | 6/1/06 | 1,700,000 | 1,700,000 | 1.00 | |||||||||||||
Group, LLC | operator | Senior secured loan ($5,970,000 par due 6/2013) | 13.75% (Base Rate + 5.50%/D) | 6/1/06 | 5,970,000 | 5,970,000 | 1.00 | |||||||||||||
Senior secured loan ($11,940,000 par due 6/2013) | 13.75% (Base Rate + 5.50%/D) | 6/1/06 | 11,940,000 | 11,940,000 | 1.00 | (3) | ||||||||||||||
Warrants to purchase 0.882353 units | 6/1/06 | 2,410,000 | 2,410,000 | (5) | ||||||||||||||||
Encanto Restaurants, Inc.(13) | Restaurant owner and operator | Junior secured loan ($25,104,514 par due 8/2013) | 7.50% Cash, 3.50% PIK | 8/16/06 | 25,104,514 | 25,104,514 | 1.00 | (4) | ||||||||||||
47,124,514 | 47,124,514 | 6.37 | % | |||||||||||||||||
Environmental Services | ||||||||||||||||||||
Mactec, Inc. | Engineering and environmental | Common stock (186 shares) | 11/3/04 | | | 0.00 | (5) | |||||||||||||
Wastequip, Inc. | Waste management | Junior secured loan ($15,000,000 par due 7/2012) | 10.82% (Libor + 5.50%/M) | 8/4/05 | 15,000,000 | 15,000,000 | 1.00 | |||||||||||||
equipment manufacturer | Junior secured loan ($12,000,000 par due 7/2012) | 10.82% (Libor + 5.50%/M) | 8/4/05 | 12,000,000 | 12,000,000 | 1.00 | (3) | |||||||||||||
27,000,000 | 27,000,000 | 3.65 | % | |||||||||||||||||
Aerospace & Defense | ||||||||||||||||||||
ILC Industries, Inc. | Industrial products | Junior secured loan ($12,000,000 par due 8/2012) | 11.50% | 6/27/06 | 12,000,000 | 12,000,000 | 1.00 | (3) | ||||||||||||
provider | Junior secured loan ($3,000,000 par due 8/2012) | 11.50% | 6/27/06 | 3,000,000 | 3,000,000 | 1.00 | ||||||||||||||
Thermal Solutions LLC and TSI | Thermal management | Senior secured loan ($3,233,750 par due 3/2012) | 9.52% (Libor + 4.00%/Q) | 3/28/05 | 3,233,750 | 3,233,750 | 1.00 | (3) | ||||||||||||
Group, Inc. | and electronics packaging | Senior secured loan ($1,657,895 par due 3/2011) | 9.02% (Libor + 3.50%/Q) | 3/28/05 | 1,657,895 | 1,657,895 | 1.00 | (3) | ||||||||||||
manufacturer | Senior subordinated notes ($3,105,314 par due 9/2012) | 11.50% cash, 2.75% PIK | 3/28/05 | 3,114,692 | 3,105,314 | 1.00 | (2)(4) | |||||||||||||
Senior subordinated notes ($2,532,920 par due 3/2013) | 11.50% cash, 2.50% PIK | 3/21/06 | 2,532,920 | 2,532,920 | 1.00 | (2)(4) |
S-33
Preferred stock (53,900 shares) | 3/28/05 | 539,000 | 539,000 | 10.00 | (5) | |||||||||||||||
Common stock (1,100,000 shares) | 3/28/05 | 11,000 | 11,000 | 0.01 | (5) | |||||||||||||||
26,089,257 | 26,079,879 | 3.53 | % | |||||||||||||||||
Broadcasting and Cable | ||||||||||||||||||||
Patriot Media & Communications CNJ, LLC | Cable services | Junior secured loan ($5,000,000 par due 10/2013) | 10.50% (Libor +5.00%/S) | 10/6/05 | 5,000,000 | 5,000,000 | 1.00 | (3) | ||||||||||||
Pappas Telecasting Incorporated | Television broadcasting | Senior secured loan ($12,106,413 par due 2/2010) | 14.29% (Libor + 4.00% cash, 5.00% PIK/Q) | 3/1/06 | 12,106,413 | 12,106,413 | 1.00 | (4)(3) | ||||||||||||
Senior secured loan ($8,413,094 par due 2/2010) | 14.29% (Libor + 4.00% cash, 5.00% PIK/Q) | 3/1/06 | 8,413,094 | 8,413,094 | 1.00 | (4) | ||||||||||||||
Senior secured loan ($51,612 par due 2/2010) | 14.25% (Libor + 4.00% cash, 5.00% PIK/Q) | 3/1/06 | 51,612 | 51,612 | 1.00 | (4)(3) | ||||||||||||||
Senior secured loan ($35,867 par due 2/2010) | 14.25% (Libor + 4.00% cash, 5.00% PIK/Q) | 3/1/06 | 35,867 | 35,867 | 1.00 | (4) | ||||||||||||||
25,606,986 | 25,606,986 | 3.46 | % | |||||||||||||||||
Computers and Electronics | ||||||||||||||||||||
RedPrairie Corporation | Software manufacturer | Junior secured loan ($12,000,000 par due 5/2010) | 11.90% (Libor + 6.50%/Q) | 2/21/06 | 12,000,000 | 12,000,000 | 1.00 | (3) | ||||||||||||
X-rite, Incorporated | Artwork software manufacturer | Junior secured loan ($10,000,000 par due 7/2013) | 10.39% (Libor + 5.00%/Q) | 7/6/06 | 10,000,000 | 10,000,000 | 1.00 | |||||||||||||
22,000,000 | 22,000,000 | 2.98 | % | |||||||||||||||||
Consumer ProductsDurable | ||||||||||||||||||||
AWTP, LLC | Water treatment services | Junior secured loan ($1,600,000 par due 12/2012) | 12.87% (Libor + 7.50%/Q) | 12/21/05 | 1,600,000 | 1,600,000 | 1.00 | |||||||||||||
Junior secured loan ($12,000,000 par due 12/2012) | 12.87% (Libor + 7.50%/Q) | 12/21/05 | 12,000,000 | 12,000,000 | 1.00 | (3) | ||||||||||||||
Berkline/Benchcraft Holdings LLC | Furniture manufacturer | Junior secured loan ($5,000,000 par due 5/2012) | 15.51% (Libor + 10.00%/Q) | 11/3/04 | 5,000,000 | 1,000,000 | 0.20 | (2) | ||||||||||||
and distributor | Preferred stock (2,536 shares) | 10/8/04 | 1,046,343 | | 0.00 | (5) | ||||||||||||||
Warrants to purchase (483,020 shares) | 10/8/04 | 2,752,559 | | 0.00 | (5) | |||||||||||||||
22,398,902 | 14,600,000 | 1.97 | % | |||||||||||||||||
Cargo Transport | ||||||||||||||||||||
The Kenan Advantage Group, | Fuel transportation | Senior subordinated notes ($9,117,466 par due 12/2013) | 9.50% cash, 3.50% PIK | 12/15/05 | 9,117,466 | 9,117,466 | 1.00 | (4) | ||||||||||||
Inc. | provider | Senior secured loan ($2,144,490 par due 12/2011) | 8.37% (Libor + 3.00%/Q) | 12/15/05 | 2,144,490 | 2,144,490 | 1.00 | (3) | ||||||||||||
Senior secured loan ($336,765 par due 12/2011) | 8.37% (Libor + 3.00%/Q) | 12/15/05 | 336,765 | 336,765 | 1.00 | (3) | ||||||||||||||
Preferred stock (10,984 shares) | 12/15/05 | 1,098,400 | 1,098,400 | 100.00 | (5) | |||||||||||||||
Common stock (30,575 shares) | 12/15/05 | 30,575 | 30,575 | 1.00 | (5) | |||||||||||||||
12,727,696 | 12,727,696 | 1.72 | % | |||||||||||||||||
Beverage, Food and Tobacco | ||||||||||||||||||||
Farley's & Sathers Candy Company, Inc. |
Branded candy manufacturer | Junior secured loan ($10,000,000 par due 3/2011) | 11.62%(Libor + 6.00%/S) | 3/23/06 | 10,000,000 | 10,000,000 | 1.00 | (3) | ||||||||||||
Charter Baking Company, Inc. | Baked goods manufacturer | Preferred stock (6,258 shares) | 8/28/06 | 2,500,000 | 2,500,000 | 399.49 | (5) | |||||||||||||
12,500,000 | 12,500,000 | 1.69 | % | |||||||||||||||||
S-34
Farming and Agriculture | ||||||||||||||||||||
The GSI Group, Inc. | Agricultural equipment | Senior notes ($10,000,000 par due 5/2013) | 12.00% | 5/11/05 | 10,000,000 | 10,000,000 | 1.00 | |||||||||||||
manufacturer | Common stock (7,500 shares) | 5/12/05 | 750,000 | 750,000 | 100.00 | (5) | ||||||||||||||
10,750,000 | 10,750,000 | 1.45 | % | |||||||||||||||||
HousingBuilding Materials | ||||||||||||||||||||
HB&G Building Products | Synthetic and wood product | Senior subordinated loan ($8,619,107 par due 3/2011) | 13.00% cash, 2.00% PIK | 10/8/04 | 8,612,509 | 8,619,107 | 1.00 | (2)(4) | ||||||||||||
manufacturer | Common stock (2,743 shares) | 10/8/04 | 752,888 | 752,888 | 274.48 | (5) | ||||||||||||||
Warrants to purchase (4,464 shares) | 10/8/04 | 652,503 | 652,503 | 146.17 | (5) | |||||||||||||||
10,017,900 | 10,024,498 | 1.36 | % | |||||||||||||||||
Financial | ||||||||||||||||||||
Foxe Basin CLO 2003, Ltd.(13) | Collateralized debt obligation | Preference shares (3,000 shares) | 10/8/04 | 2,621,092 | 2,621,092 | 873.70 | (14) | |||||||||||||
Hudson Straits CLO 2004, Ltd.(13) | Collateralized debt obligation | Preference shares (5,750 shares) | 10/8/04 | 4,790,341 | 4,722,074 | 821.23 | (14) | |||||||||||||
Partnership Capital Growth Fund I, L.P. | Investment partnership | Limited partnership interest (25% interest) | 201,835 | 201,835 | (5)(14) | |||||||||||||||
7,613,268 | 7,545,001 | 1.02 | % | |||||||||||||||||
Total | $ | 1,044,109,177 | $ | 1,032,987,288 | ||||||||||||||||
S-35
See accompanying notes to consolidated financial statements.
S-36
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
As of December 31, 2005
Company(1) |
Industry |
Investment |
Interest(10) |
Initial Acquisition Date |
Amortized Cost |
Fair Value |
Fair Value Per Unit |
Percentage of Net Assets |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
HealthcareServices | ||||||||||||||||||||
American Renal Associates, Inc. | Dialysis provider | Senior secured loan ($3,426,230 par due 12/2010) | 8.68% (Libor+ 4.00%/Q) | 12/14/05 | $ | 3,426,230 | $ | 3,426,230 | $ | 1.00 | ||||||||||
Senior secured loan ($180,328 par due 12/2010) | 8.50% (Libor+ 4.00%/Q) | 12/14/05 | 180,328 | 180,328 | 1.00 | |||||||||||||||
Senior secured loan ($5,886,885 par due 12/2011) | 9.18% (Libor + 4.50%/Q) | 12/14/05 | 5,886,885 | 5,886,885 | 1.00 | |||||||||||||||
Senior secured loan ($14,754 par due 12/2011) | 9.00% (Libor+ 4.50%/Q) | 12/14/05 | 14,754 | 14,754 | 1.00 | |||||||||||||||
Senior secured loan ($7,213,115 par due 12/2011) | 11.68% (Libor + 7.00%/Q) | 12/14/05 | 7,213,115 | 7,213,115 | 1.00 | |||||||||||||||
Capella Healthcare, Inc. | Acute care hospital operator | Junior secured loan ($29,000,000 par due 11/2013) | 10.45% (Libor +6.00%/Q) | 12/1/05 | 29,000,000 | 29,000,000 | 1.00 | |||||||||||||
PHNS, Inc. | Information technology and business process outsourcing | Senior subordinated loan ($16,000,000 par due 11/2011) | 13.50% cash, 2.5% PIK | 10/29/04 | 15,785,661 | 16,000,000 | 1.00 | (3) | ||||||||||||
Triad Laboratory Alliance, LLC | Laboratory services | Senior subordinated loan ($9,714,888 par due 12/2012) | 12.00% cash, 1.75% PIK | 12/21/05 | 9,714,888 | 9,714,888 | 1.00 | (3) | ||||||||||||
Senior secured loan ($3,000,000 par due 12/2011) | 7.78% (Libor + 3.25%/Q) | 12/21/05 | 3,000,000 | 3,000,000 | 1.00 | |||||||||||||||
74,221,861 | 74,436,200 | 13.07 | % | |||||||||||||||||
ContainersPackaging | ||||||||||||||||||||
Captive Plastics, Inc. | Plastics container manufacturer | Junior secured loan ($16,000,000 par due 2/2012) | 11.62% (Libor +7.25%/M) | 12/19/05 | 16,000,000 | 16,000,000 | 1.00 | |||||||||||||
Industrial Container Services, LLC(7) | Industrial container | Senior secured loan ($26,728,663 par due 9/2011) | 11.00% (Libor + 6.50%/Q) | 9/30/05 | 26,728,663 | 26,728,663 | 1.00 | |||||||||||||
manufacturer, reconditioner | Senior secured loan ($4,643,479 par due 9/2011) | 8.88% (Libor + 4.50%/M) | 9/30/05 | 4,643,479 | 4,643,479 | 1.00 | ||||||||||||||
and servicer | Senior secured revolving loan ($1,160,870 par due 9/2011) | 10.25% (Base Rate + 3.00%/Q) | 9/30/05 | 1,160,870 | 1,160,870 | 1.00 | ||||||||||||||
Senior secured revolving loan ($541,739 par due 9/2011) | 10.25% (Base Rate + 3.00%/Q) | 9/30/05 | 541,739 | 541,739 | 1.00 | |||||||||||||||
Common stock (1,800,000 shares) | 9/29/05 | 1,800,000 | 1,800,000 | 1.00 | (4) | |||||||||||||||
York Label Holdings, Inc. | Consumer product labels | Senior subordinated loan ($10,368,791 par due 2/2010) | 10.00% cash, 4.00% PIK | 11/3/04 | 10,362,901 | 10,368,791 | 1.00 | (2)(3) | ||||||||||||
manufacturer | Preferred stock (650 shares) | 10.00% | 11/3/04 | 3,742,445 | 3,742,445 | 5,757.61 | (3) | |||||||||||||
Warrants to purchase 156,000 shares | 11/3/04 | 5,320,409 | 5,320,408 | 34.11 | (4) | |||||||||||||||
70,300,506 | 70,306,395 | 12.34 | % | |||||||||||||||||
Environmental Services | ||||||||||||||||||||
Mactec, Inc. | Engineering and environmental consulting services | Common stock (186 shares) | 11/3/04 | | | 0.00 | (4) |
S-37
United Site Services, Inc. | Portable restroom and | Senior secured loan ($5,061,957 par due 8/2011) | 7.37% (Libor +3.00%/M) | 9/14/05 | 5,061,957 | 5,061,957 | 1.00 | |||||||||||||
site services | Senior secured loan ($3,043,478 par due 8/2011) | 7.41% (Libor + 3.00%/Q) | 9/14/05 | 3,043,478 | 3,043,478 | 1.00 | ||||||||||||||
Senior secured loan ($1,869,565 par due 8/2011) | 7.28% (Libor + 3.00%/Q) | 9/14/05 | 1,869,565 | 1,869,565 | 1.00 | |||||||||||||||
Junior secured loan ($13,461,538 par due 6/2010) | 12.44% (Libor + 8.00%/Q) | 12/1/04 | 13,419,063 | 13,461,538 | 1.00 | (2) | ||||||||||||||
Common stock (216,795 shares) | 10/8/04 | 1,353,851 | 1,353,851 | 6.24 | (4) | |||||||||||||||
Wastequip, Inc. | Waste management equipment manufacturer | Junior secured loan ($15,000,000 par due 7/2012) | 10.53% (Libor +6.00%/Q) | 8/4/05 | 15,000,000 | 15,000,000 | 1.00 | |||||||||||||
WCA Waste Systems, Inc. | Waste management services | Junior secured loan ($25,000,000 par due 10/2011) | 10.53% (Libor + 6.00%/Q) | 4/25/05 | 25,000,000 | 25,000,000 | 1.00 | (2) | ||||||||||||
64,747,914 | 64,790,389 | 11.37 | % | |||||||||||||||||
Restaurants | ||||||||||||||||||||
CICQ, LP | Restaurant franchisor, owner and operator | Limited partnership interest (26.5% interest) | 8/15/05 | 53,000,000 | 62,284,540 | |||||||||||||||
53,000,000 | 62,284,540 | 10.93 | % | |||||||||||||||||
ServicesOther | ||||||||||||||||||||
Diversified Collection | Collections services | Senior secured loan ($6,300,000 par due 2/2011) | 8.38% (Libor +4.00%/M) | 2/2/05 | 6,300,000 | 6,300,000 | 1.00 | (2) | ||||||||||||
Services, Inc. | Senior secured loan ($8,500,000 par due 8/2011) | 10.00% (Libor + 6.00%/Q) | 2/2/05 | 8,500,000 | 8,500,000 | 1.00 | (2) | |||||||||||||
Preferred stock (114,004 shares) | 2/2/05 | 295,270 | 295,270 | 2.59(4 | ) | |||||||||||||||
Event Rentals, Inc. | Party rental services | Senior secured loan ($2,676,136 par due 11/2011) | 9.91% (Libor+ 5.25%/S) | 11/17/05 | 2,676,136 | 2,676,136 | 1.00 | |||||||||||||
Senior secured loan ($2,897,727 par due 11/2011) | 9.92% (Libor + 5.25%Q) | 11/17/05 | 2,897,727 | 2,897,727 | 1.00 | |||||||||||||||
Senior secured loan ($170,455 par due 11/2011) | 11.50% (Base Rate + 4.25%/D) | 11/17/05 | 170,455 | 170,455 | 1.00 | |||||||||||||||
Senior secured loan ($8,011,363 par due 11/2011) | 9.91% (Libor + 5.25%/S) | 11/17/05 | 8,011,363 | 8,011,363 | 1.00 | |||||||||||||||
GCA Services, Inc. | Custodial services | Senior subordinated loan ($32,743,750 par due 1/2010) | 12.00% cash, 3.00% PIK | 7/25/05 | 32,743,750 | 32,743,750 | 1.00 | (3) | ||||||||||||
61,594,701 | 61,594,701 | 10.81 | % | |||||||||||||||||
Manufacturing | ||||||||||||||||||||
Arrow Group Industries, Inc. | Residential and outdoor shed | Senior secured loan ($6,000,000 par due 4/2010) | 9.53% (Libor + 5.00%/Q) | 3/28/05 | 6,040,153 | 6,000,000 | 1.00 | |||||||||||||
manufacturer | Senior secured loan ($6,000,000 par due 10/2010) | 14.03% (Libor + 9.50%/Q) | 3/28/05 | 6,000,000 | 6,000,000 | 1.00 | ||||||||||||||
Qualitor, Inc. | Automotive aftermarket | Senior secured loan ($827,059 par due 12/2011) | 8.27% (Libor +4.00%/Q) | 12/29/04 | 827,059 | 827,059 | 1.00 | (2) | ||||||||||||
components supplier | Senior secured loan ($1,152,941 par due 12/2011) | 8.53% (Libor + 4.00%/Q) | 12/29/04 | 1,152,941 | 1,152,941 | $ | 1.00 | (2) | ||||||||||||
Junior secured loan ($5,000,000 par due 6/2012) | 11.53% (Libor + 7.00%/Q) | 12/29/04 | 5,000,000 | 5,000,000 | $ | 1.00 | (2) | |||||||||||||
Reflexite Corporation | Developer and manufacturer of high visibility reflective products | Senior subordinated loan ($10,304,329 par due 12/2011) | 11.00% cash, 3.00% PIK | 12/30/04 | 10,304,329 | 10,304,329 | $ | 1.00 | (2)(3) | |||||||||||
Universal Trailer Corporation(5) | Livestock and specialty trailer | Senior secured loan ($1,048,960 par due 3/2007) | 8.39% (Libor + 4.00%/M) | 10/8/04 | 1,054,725 | 1,054,725 | $ | 1.01 | ||||||||||||
manufacturer | Senior subordinated loan ($7,500,000 par due 9/2008) | 13.50% | 10/8/04 | 7,522,762 | 7,528,881 | $ | 1.00 | |||||||||||||
Common stock (50,000 shares) | 10/8/04 | 6,424,645 | 3,113,351 | $ | 62.27 | (4) | ||||||||||||||
Warrants to purchase 22,208 shares | 10/8/04 | 1,505,776 | 1,382,826 | $ | 62.27 | (4) |
S-38
Varel Holdings, Inc. | Drill bit manufacturer | Senior secured loan ($6,643,750 par due 12/2010) | 8.58% (Libor + 4.00%/S) | 5/18/05 | 6,643,750 | 6,643,750 | $ | 1.00 | (2) | |||||||||||
Senior secured loan ($2,333,333 par due 12/2010) | 8.47% (Libor + 4.00%/Q) | 5/18/05 | 2,333,333 | 2,333,333 | $ | 1.00 | (2) | |||||||||||||
Senior secured loan ($3,333,333 par due 12/2011) | 12.48% (Libor + 8.00%/Q) | 5/18/05 | 3,333,333 | 3,333,333 | $ | 1.00 | (2) | |||||||||||||
Preferred stock (30,451 shares) | 5/18/05 | 1,046,568 | 1,046,568 | $ | 34.37 | (3) | ||||||||||||||
Common stock (30,451 shares) | 5/18/05 | 3,045 | 3,045 | $ | 0.10 | (4) | ||||||||||||||
59,192,419 | 55,724,141 | 9.78 | % | |||||||||||||||||
Consumer ProductsNon-Durable | ||||||||||||||||||||
Making Memories Wholesale, Inc.(6) | Scrapbooking branded | Senior secured loan ($9,143,750 par due 3/2011) | 8.50% (Libor + 4.00%/Q) | 5/5/05 | 9,143,750 | 9,143,750 | $ | 1.00 | (2) | |||||||||||
products manufacturer | Senior subordinated loan ($10,000,000 par due 5/2012) | 12.00% cash, 2.50% PIK | 5/5/05 | 10,000,000 | 10,000,000 | $ | 1.00 | (3) | ||||||||||||
Preferred stock (3,500 shares) | 5/5/05 | 3,685,100 | 3,685,100 | $ | 1,052.89 | (3) | ||||||||||||||
Shoes for Crews, LLC | Safety footwear and slip-related | Senior secured loan ($1,478,167 par due 7/2010) | 9.00% (Base Rate + 1.75%/D) | 10/8/04 | 1,486,865 | 1,486,865 | $ | 1.01 | (2) | |||||||||||
mats manufacturer | Senior secured loan ($47,247 par due 7/2010) | 7.78% (Libor + 3.25%/Q) | 10/8/04 | 47,525 | 47,525 | $ | 1.01 | (2) | ||||||||||||
Tumi Holdings, Inc. | Branded luggage | Senior secured loan ($2,500,000 par due 12/2012) | 7.28% (Libor + 2.75%/Q) | 5/24/05 | 2,500,000 | 2,500,000 | $ | 1.00 | (2) | |||||||||||
designer, marketer and | Senior secured loan ($5,000,000 par due 12/2013) | 7.78% (Libor + 3.25%/Q) | 3/14/05 | 5,000,000 | 5,000,000 | $ | 1.00 | (2) | ||||||||||||
distributor | Senior subordinated loan ($13,008,799 par due 12/2014) | 15.53% (Libor + 6.00% cash, 5.00% PIK/Q) | 3/14/05 | 13,008,799 | 13,008,799 | $ | 1.00 | (2)(3) | ||||||||||||
44,872,039 | 44,872,039 | 7.88 | % | |||||||||||||||||
Education | ||||||||||||||||||||
Lakeland Finance, LLC | Private school operator | Senior secured note ($33,000,000 par due 12/2012) | 11.50% | 12/13/05 | 33,000,000 | 33,000,000 | $ | 1.00 | ||||||||||||
33,000,000 | 33,000,000 | 5.79 | % | |||||||||||||||||
Consumer Products Durable |
||||||||||||||||||||
AWTP, LLC | Water treatment services | Junior secured loan ($13,600,000 par due 12/2012) | 13.50% (Base Rate + 6.25%/Q) | 12/21/05 | 13,600,000 | 13,600,000 | $ | 1.00 | ||||||||||||
Berkline/Benchcraft Holdings LLC | Furniture manufacturer | Junior secured loan ($5,000,000 par due 5/2012) | 14.05% (Libor + 10.00%/Q) | 11/3/04 | 5,000,000 | 4,500,000 | $ | 0.90 | (2) | |||||||||||
and distributor | Preferred stock (2,536 shares) | 10/8/04 | 1,046,343 | 677,643 | $ | 267.21 | (4) | |||||||||||||
Warrants to purchase 483,020 shares | 10/8/04 | 2,752,559 | 1,782,640 | $ | 3.69 | (4) | ||||||||||||||
22,398,902 | 20,560,283 | 3.61 | % | |||||||||||||||||
Financial | ||||||||||||||||||||
Foxe Basin CLO 2003, Ltd. | Collateralized debt obligation | Preference shares (3,000 shares) | 10/8/04 | 2,743,440 | 2,743,440 | $ | 914.48 | (8)(9) | ||||||||||||
Hudson Straits CLO 2004, Ltd. | Collateralized debt obligation | Preference shares (5,750 shares) | 10/8/04 | 5,217,331 | 5,143,121 | $ | 894.46 | (8)(9) | ||||||||||||
MINCS-Glace Bay, Ltd. | Collateralized debt obligation | Secured notes ($9,500,000 par due 7/2014) | 7.79% (Libor + 3.60%/Q) | 10/8/04 | 9,019,819 | 9,500,000 | $ | 1.00 | (8)(9) | |||||||||||
16,980,590 | 17,386,561 | 3.05 | % | |||||||||||||||||
Printing, Publishing and Broadcasting | ||||||||||||||||||||
Canon Communications LLC | Print publications services | Junior secured loan ($16,250,000 par due 11/2011) | 12.03% (Libor + 7.50%/Q) | 5/25/05 | 16,250,000 | 16,250,000 | $ | 1.00 | (2) | |||||||||||
16,250,000 | 16,250,000 | 2.85 | % | |||||||||||||||||
Aerospace & Defense | ||||||||||||||||||||
ILC Industries, Inc. | Industrial products provider | Junior secured loan ($6,500,000 par due 8/2012) | 10.28% (Libor + 5.75%/Q) | 8/30/05 | 6,529,232 | 6,500,000 | $ | 1.00 |
S-39
Thermal Solutions LLC | Thermal management | Senior secured loan ($5,973,529 par due 3/2011) | 9.71% (Libor + 5.25%/Q) | 3/28/05 | 5,973,529 | 5,973,529 | $ | 1.00 | (2) | |||||||||||
and electronics packaging | Senior subordinated loan ($3,062,766 par due 3/2012) | 11.50% cash, 2.75% PIK | 3/28/05 | 3,067,225 | 3,062,766 | $ | 1.00 | (2)(3) | ||||||||||||
manufacturer | Preferred stock (29,400 shares) | 3/28/05 | 294,000 | 294,000 | $ | 10.00 | (4) | |||||||||||||
Common stock (600,000 shares) | 3/28/05 | 6,000 | 6,000 | $ | 0.01 | (4) | ||||||||||||||
15,869,986 | 15,836,295 | 2.78 | % | |||||||||||||||||
Cargo Transport | ||||||||||||||||||||
Kenan Advantage Group, Inc. | Fuel transportation | Senior subordinated loan ($8,870,968 par due 12/2013) | 13.00% | 12/15/05 | 8,870,968 | 8,870,968 | $ | 1.00 | ||||||||||||
provider | Senior secured loan ($2,500,000 par due 12/2011) | 7.50% (Libor + 3.00%/Q) | 12/15/05 | 2,500,000 | 2,500,000 | $ | 1.00 | |||||||||||||
Preferred stock (10,984 shares) | 12/15/05 | 1,098,400 | 1,098,400 | $ | 100.00 | (4) | ||||||||||||||
Common stock (30,575 shares) | 12/15/05 | 30,575 | 30,575 | $ | 1.00 | (4) | ||||||||||||||
12,499,943 | 12,499,943 | 2.19 | % | |||||||||||||||||
Farming and Agriculture | ||||||||||||||||||||
The GSI Group, Inc. | Agricultural equipment | Senior notes ($10,000,000 par due 5/2013) | 12.00% | 5/11/05 | 10,000,000 | 10,000,000 | $ | 1.00 | ||||||||||||
manufacturer | Common stock (7,500 shares) | 5/12/05 | 750,000 | 750,000 | $ | 100.00 | (4) | |||||||||||||
10,750,000 | 10,750,000 | 1.89 | % | |||||||||||||||||
HousingBuilding Materials | ||||||||||||||||||||
HB&G Building Products | Synthetic and wood product | Senior subordinated loan ($8,439,529 par due 3/2011) | 13.00% cash, 4.00% PIK | 10/8/04 | 8,435,645 | 8,439,529 | $ | 1.00 | (2)(3) | |||||||||||
manufacturer | Common stock (2,743 shares) | 10/8/04 | 752,888 | 752,888 | $ | 274.48 | (4) | |||||||||||||
Warrants to purchase 4,464 shares | 10/8/04 | 652,503 | 652,503 | $ | 146.17 | (4) | ||||||||||||||
9,841,036 | 9,844,920 | 1.73 | % | |||||||||||||||||
Business Services | ||||||||||||||||||||
Miller Heiman, Inc. | Sales consulting services | Senior secured loan ($4,521,687 par due 6/2010) | 8.14% (Libor + 3.75%/M) | 6/20/05 | 4,521,687 | 4,521,687 | $ | 1.00 | (2) | |||||||||||
Senior secured loan ($4,058,379 par due 6/2012) | 8.78% (Libor + 4.25%/Q) | 6/20/05 | 4,058,379 | 4,058,379 | $ | 1.00 | (2) | |||||||||||||
8,580,066 | 8,580,066 | 1.51 | % | |||||||||||||||||
Cable Television | ||||||||||||||||||||
Patriot Media & Communications CNJ, LLC | Cable services | Junior secured loan ($5,000,000 par due 10/2013) | 9.50% (Libor + 5.00%/Q) | 10/6/05 | 5,000,000 | 5,000,000 | $ | 1.00 | ||||||||||||
5,000,000 | 5,000,000 | 0.88 | % | |||||||||||||||||
HealthcareMedical Products | ||||||||||||||||||||
Aircast, Inc. | Manufacturer of orthopedic | Senior secured loan ($1,251,902 par due 12/2010) | 7.20% (Libor + 2.75%/Q) | 12/2/04 | 1,251,902 | 1,251,902 | $ | 1.00 | (2) | |||||||||||
braces, supports and vascular systems | Junior secured loan ($1,000,000 par due 6/2011) | 11.45% (Libor + 7.00%/Q) | 12/2/04 | 1,000,000 | 1,000,000 | $ | 1.00 | (2) | ||||||||||||
2,251,902 | 2,251,902 | 0.40 | % | |||||||||||||||||
Total | $ | 581,351,865 | $ | 585,968,375 | ||||||||||||||||
S-40
See accompanying notes to consolidated financial statements.
S-41
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
|
For the Three Months Ended September 30, 2006 |
For the Three Months Ended September 30, 2005 |
For the Nine Months Ended September 30, 2006 |
For the Nine Months Ended September 30, 2005 |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(unaudited) |
(unaudited) |
(unaudited) |
(unaudited) |
||||||||||||
INVESTMENT INCOME: | ||||||||||||||||
From non-control/non-affiliate investments: | ||||||||||||||||
Interest from investments | $ | 22,894,133 | $ | 8,700,840 | $ | 58,682,492 | $ | 19,648,671 | ||||||||
Interest from cash & cash equivalents | 938,670 | 282,092 | 1,369,847 | 877,860 | ||||||||||||
Dividend income | | | 1,170,000 | 744,818 | ||||||||||||
Capital structuring service fees | 3,888,145 | 759,615 | 10,304,843 | 1,694,698 | ||||||||||||
Other income | 154,962 | 91,637 | 441,972 | 213,797 | ||||||||||||
Total investment income from non-control/non-affiliate investments | 27,875,910 | 9,834,184 | 71,969,154 | 23,179,844 | ||||||||||||
From affiliate investments: | ||||||||||||||||
Interest from investments | 3,611,098 | 853,666 | 8,848,228 | 1,865,130 | ||||||||||||
Dividend income | 121,074 | | 121,074 | | ||||||||||||
Capital structuring service fees | 200,000 | 901,250 | 1,383,810 | 1,763,750 | ||||||||||||
Other income | 23,712 | 18,889 | 190,584 | 151,472 | ||||||||||||
Total investment income from affiliate investments | 3,955,884 | 1,773,805 | 10,543,696 | 3,780,352 | ||||||||||||
Total investment income | 31,831,794 | 11,607,989 | 82,512,850 | 26,960,196 | ||||||||||||
EXPENSES: | ||||||||||||||||
Base management fees | 3,660,997 | 1,380,863 | 9,311,853 | 3,222,709 | ||||||||||||
Incentive management fees | 4,464,141 | 2,643,353 | 14,327,424 | 4,712,556 | ||||||||||||
Administrative | 201,763 | 195,360 | 567,787 | 684,747 | ||||||||||||
Professional fees | 618,059 | 368,146 | 1,766,147 | 853,940 | ||||||||||||
Directors fees | 52,750 | 74,995 | 189,919 | 232,803 | ||||||||||||
Insurance | 205,670 | 151,019 | 592,202 | 438,232 | ||||||||||||
Interest and credit facility fees | 4,403,465 | 310,463 | 10,087,681 | 748,732 | ||||||||||||
Interest to the Investment Adviser | | 32,167 | 25,879 | 115,706 | ||||||||||||
Amortization of debt issuance costs | 498,182 | 84,855 | 1,317,329 | 216,281 | ||||||||||||
Depreciation | 99,595 | | 148,896 | | ||||||||||||
Other | 552,221 | 122,490 | 937,837 | 192,248 | ||||||||||||
Total expenses | 14,756,843 | 5,363,711 | 39,272,954 | 11,417,954 | ||||||||||||
NET INVESTMENT INCOME BEFORE INCOME TAXES | 17,074,951 | 6,244,278 | 43,239,896 | 15,542,242 | ||||||||||||
Income tax expense, including excise tax | (253,044 | ) | | 4,927,471 | | |||||||||||
NET INVESTMENT INCOME | 17,327,995 | 6,244,278 | 38,312,425 | 15,542,242 | ||||||||||||
REALIZED AND UNREALIZED NET GAINS ON INVESTMENTS: | ||||||||||||||||
Net realized gains (losses): | ||||||||||||||||
Net realized gains from non-control/non-affiliate investment transactions | 1,611,935 | 3,189,827 | 26,055,526 | 10,346,269 | ||||||||||||
Net realized gains (losses) from affiliate investment transactions | | (1,124 | ) | 47,283 | (3,154 | ) | ||||||||||
Net realized gains from investment transactions | 1,611,935 | 3,188,703 | 26,102,809 | 10,343,115 | ||||||||||||
Net unrealized gains (losses): | ||||||||||||||||
Investment transactions from non-control/non-affiliate investments | (2,302,632 | ) | 447,617 | (14,797,305 | ) | 103,824 | ||||||||||
Investment transactions from affiliate investments | 1,503,824 | 1,292 | (941,094 | ) | (1,128 | ) | ||||||||||
Net unrealized gains (losses) from investment transactions | (798,808 | ) | 448,909 | (15,738,399 | ) | 102,696 | ||||||||||
Net realized and unrealized gains on investments | 813,127 | 3,637,612 | 10,364,410 | 10,445,811 | ||||||||||||
NET INCREASE IN STOCKHOLDERS' EQUITY RESULTING FROM OPERATIONS | $ | 18,141,122 | $ | 9,881,890 | $ | 48,676,835 | $ | 25,988,053 | ||||||||
BASIC AND DILUTED EARNINGS PER COMMON SHARE (see Note 4) | $ | 0.39 | $ | 0.42 | $ | 1.19 | $ | 1.33 | ||||||||
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING (see Note 4) | 46,880,245 | 23,323,314 | 41,018,821 | 19,583,970 | ||||||||||||
See accompanying notes to consolidated financial statements.
S-42
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2006
|
|
|
|
Distributions in Excess of Net Investment income |
|
|
|
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Common Stock |
|
Accumulated Net Realized Gain on Sale of Investments |
|
|
|||||||||||||||||
|
Capital in Excess of Par Value |
Net Unrealized Appreciation of Investments |
Total Stockholders' Equity |
|||||||||||||||||||
|
Shares |
Amount |
||||||||||||||||||||
Balance at January 1, 2006 | 37,909,484 | $ | 37,910 | $ | 559,192,554 | $ | | $ | 5,765,225 | $ | 4,616,510 | $ | 569,612,199 | |||||||||
Issuance of common stock from add-on offering (net of offering and underwriting costs) | 10,781,250 | 10,781 | 161,991,734 | 162,002,515 | ||||||||||||||||||
Shares issued in connection with dividend reinvestment plan | 400,461 | 401 | 6,736,272 | 6,736,673 | ||||||||||||||||||
Net increase in stockholders' equity resulting from operations | | | | 38,312,425 | 26,102,809 | (15,738,399 | ) | 48,676,835 | ||||||||||||||
Dividend declared ($1.14 per share) | | | | (38,312,425 | ) | (9,446,927 | ) | | (47,759,352 | ) | ||||||||||||
Balance at September 30, 2006 | 49,091,195 | $ | 49,092 | $ | 727,920,560 | $ | | $ | 22,421,107 | $ | (11,121,889 | ) | $ | 739,268,870 | ||||||||
See accompanying notes to consolidated financial statements.
S-43
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2005 (unaudited)
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Distributions Less Than (in Excess of) Net Investment income |
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|
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Common Stock |
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Accumulated Net Realized Gain on Sale of Investments |
Net Unrealized Appreciation (Depreciation) of Investments |
|
|||||||||||||||||
|
Capital in Excess of Par Value |
Total Stockholders' Equity |
||||||||||||||||||||
|
Shares |
Amount |
||||||||||||||||||||
Balance at January 1, 2005 | 11,066,767 | $ | 11,067 | $ | 159,602,706 | $ | (136,415 | ) | $ | | $ | 230,947 | $ | 159,708,305 | ||||||||
Issuance of common stock from add-on offering (net of offering and underwriting costs) | 12,075,000 | 12,075 | 183,859,340 | 183,871,415 | ||||||||||||||||||
Reimbursement of underwriting costs paid by the Investment Adviser (see Note 9) | (2,475,000 | ) | (2,475,000 | ) | ||||||||||||||||||
Shares issued in connection with dividend reinvestment plan | 267,717 | 268 | 4,691,101 | 4,691,369 | ||||||||||||||||||
Net increase in stockholders' equity resulting from operations | 15,542,242 | 10,343,115 | 102,696 | 25,988,053 | ||||||||||||||||||
Dividend declared ($0.96 per share) | (15,405,827 | ) | (3,268,822 | ) | (18,674,649 | ) | ||||||||||||||||
Balance at September 30, 2005 | 23,409,484 | $ | 23,410 | $ | 345,678,147 | $ | | $ | 7,074,293 | $ | 333,643 | $ | 353,109,493 | |||||||||
See accompanying notes to consolidated financial statements.
S-44
ARES CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
|
For the Nine Months Ended September 30, 2006 |
For the Nine Months ended September 30, 2005 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
(unaudited) |
(unaudited) |
|||||||||
OPERATING ACTIVITIES: | |||||||||||
Net increase in stockholders' equity resulting from operations | $ | 48,676,835 | $ | 25,988,053 | |||||||
Adjustments to reconcile net increase in stockholders' equity resulting from operations: | |||||||||||
Net realized gain on investment transactions | (26,102,809 | ) | (10,343,115 | ) | |||||||
Net unrealized (gain) loss on investment transactions | 15,738,399 | (102,696 | ) | ||||||||
Net accretion of discount on securities | (395,114 | ) | (78,621 | ) | |||||||
Increase in accrued payment-in-kind dividends and interest | (4,373,346 | ) | (2,243,980 | ) | |||||||
Amortization of debt issuance costs | 1,317,329 | 216,281 | |||||||||
Depreciation | 148,896 | | |||||||||
Proceeds from sale and redemption of investments | 306,852,077 | 112,704,621 | |||||||||
Purchases of investments | (744,333,358 | ) | (333,160,023 | ) | |||||||
Changes in operating assets and liabilities: | |||||||||||
Interest receivable | (5,103,382 | ) | (2,297,712 | ) | |||||||
Other assets | (7,162,818 | ) | (563,934 | ) | |||||||
Accounts payable and accrued expenses | 1,011,618 | 138,362 | |||||||||
Management and incentive fees payable | 7,503,566 | 4,947,461 | |||||||||
Interest and facility fees payable | 3,757,369 | 214,287 | |||||||||
Interest payable to the Investment Adviser | (154,078 | ) | 115,706 | ||||||||
Net cash used in operating activities | (402,618,816 | ) | (204,465,310 | ) | |||||||
FINANCING ACTIVITIES: | |||||||||||
Net proceeds from issuance of common stock | 162,002,515 | 183,871,415 | |||||||||
Borrowings on debt | 740,200,000 | 26,500,000 | |||||||||
Repayments on debt | (392,200,000 | ) | | ||||||||
Underwriting costs paid to the Investment Adviser | (2,475,000 | ) | | ||||||||
Dividends paid in cash | (53,911,904 | ) | (17,303,310 | ) | |||||||
Net cash provided by financing activities | 453,615,611 | 193,068,105 | |||||||||
CHANGE IN CASH AND CASH EQUIVALENTS | 50,996,795 | (11,397,205 | ) | ||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 16,613,334 | 26,806,160 | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 67,610,129 | $ | 15,408,955 | |||||||
Supplemental Information: | |||||||||||
Interest paid during the period | $ | 5,933,911 | $ | 385,265 | |||||||
Taxes paid during the period | $ | 3,260,589 | $ | | |||||||
Dividends declared during the period | $ | 47,759,352 | $ | 18,674,649 |
See accompanying notes to consolidated financial statements.
S-45
ARES CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2006 (unaudited)
Ares Capital Corporation (the "Company" or "ARCC" or "we") is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the Investment Company Act of 1940 ("1940 Act"). We were incorporated on April 16, 2004 and were initially funded on June 23, 2004. On October 8, 2004, we completed our initial public offering (the "IPO"). On the same date, we commenced substantial investment operations.
The Company has qualified and has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986 (the "Code"), as amended. The Company expects to continue to qualify and to elect to be treated for tax purposes as a RIC. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments in private middle market companies.
We are externally managed by Ares Capital Management LLC (the "Investment Adviser"), an affiliate of Ares Management LLC ("Ares Management"), an independent investment management firm that manages investment funds. Ares Technical Administration LLC ("Ares Administration"), an affiliate of Ares Management, provides the administrative services necessary for us to operate.
Interim financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim period, have been included. The current period's results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2006.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States, and include the accounts of the Company and its wholly owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, liquid investments in a money market fund. Cash and cash equivalents are carried at cost which approximates fair value.
S-46
Concentration of Credit Risk
The Company places its cash and cash equivalents with financial institutions and, at times, cash held in money market accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Investments
Investment transactions are recorded on the trade date. Realized gains or losses are computed using the specific identification method. Investments for which market quotations are readily available are valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. In addition, the board of directors currently receives input from independent valuation firms that have been engaged at the direction of the board to value each portfolio security at least once during a trailing 12 month period. The valuation process is conducted at the end of each fiscal quarter, with approximately a quarter of our portfolio companies without market quotation subject to valuation by the independent valuation firm each quarter. The types of factors that the board may take into account in fair value pricing of our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our private equity valuation. Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board under a valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments, and the differences could be material.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
Interest Income Recognition
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on its investments when it is determined that interest is no longer collectible. If any cash is received after it is determined that interest is no longer collectible, we will treat the cash as payment on the principal balance until the entire principal balance has been repaid, before any interest
S-47
income is recognized. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion of discounts and amortizations of premium on bonds.
Payment in Kind Interest
The Company has loans in its portfolio that contain a payment-in-kind ("PIK") provision. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance of the loan and recorded as interest income. To maintain the Company's status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. For the three and nine months ended September 30, 2006, the Company recorded $1,817,565 and $4,373,346, respectively, in PIK income. For the three and nine months ended September 30, 2005, the Company recorded $783,249 and $2,243,980, respectively, in PIK income.
Capital Structuring Service Fees
The Company's Investment Adviser seeks to provide assistance to the portfolio companies in connection with the Company's investments and in return the Company may receive fees for capital structuring services. These fees are normally paid at the closing of the investments, are generally non-recurring and are recognized as revenue when earned upon closing of the investment. The services that the Company's Investment Adviser provides vary by investment, but generally consist of reviewing existing credit facilities, arranging bank financing, arranging equity financing, structuring financing from multiple lenders, structuring financing from equity investors, restructuring existing loans, raising equity and debt capital, and providing general financial advice, which concludes upon closing of the loan. The Company's Investment Adviser may also take a seat on the board of directors of a portfolio company, or observe the meetings of the board of directors without taking a formal seat. Any services of the above nature subsequent to the closing would generally generate a separate fee payable to the Company. In certain instances where the Company is invited to participate as a co-lender in a transaction and in the event that the Company does not provide significant services in connection with the investment, a portion of loan fees paid to the Company in such situations will be deferred and amortized over the estimated life of the loan.
Foreign Currency Translation
The Company's books and records are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis:
Although the net assets and the fair values are presented at the foreign exchange rates at the end of the day, the Company does not isolate the portion of the results of the operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair value of investments. Such fluctuations are included with the net realized and unrealized gains or losses from investments. Foreign security and currency translations may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. Government securities. These risks include but are not limited to revaluation of currencies and future adverse political and economic developments which could cause investments in their markets to be less liquid and prices more volatile than those of comparable U.S. companies.
S-48
Offering Expenses
The Company's offering costs were charged against the proceeds from the Add-on Offering (as defined in Note 10) when received. For the three and nine months ended September 30, 2006, the Company incurred approximately $687,000 of such costs. For the nine months ended September 30, 2005, the Company incurred approximately $635,000 of such costs.
Debt Issuance Costs
Debt issuance costs are being amortized over the life of the related credit facility or debt obligation using the straight line method which approximates the interest method.
Federal Income Taxes
The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from Federal income taxes. In order to qualify as a RIC, among other factors, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. For the three and nine months ended September 30, 2006, the Company recorded a benefit or provision of approximately $(253,000) and $571,000, respectively, for Federal excise tax. As of September 30, 2006, the entire $571,000 was unpaid and included in accounts payable on the accompanying consolidated balance sheet.
Our wholly owned subsidiaries ARCC Cervantes Corporation ("ACC") and ARCC Cervantes LLC ("ACLLC") are subject to Federal and state income taxes. For the three months ended September 30, 2006 we recorded no provision for these subsidiaries. For the nine months ended September 30, 2006, we recorded a tax provision of approximately $4,354,000 for these subsidiaries.
Dividends
Dividends and distributions to common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed at least annually, although we may decide to retain such capital gains for re-investment.
We have adopted a dividend reinvestment plan that provides for reinvestment of our distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our board of directors authorizes, and we declare, a cash dividend, then our stockholders who have not "opted out" of our dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of actual and contingent assets and liabilities at the date of the financial statements
S-49
and the reported amounts of income or loss and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the valuation of investments.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments approximate fair value. The carrying value of interest and open trade receivables, accounts payable and accrued expenses, as well as the credit facility payable approximate fair value due to their short maturity.
The Company has entered into an investment advisory agreement (the "Advisory Agreement") with the Investment Adviser under which the Investment Adviser, subject to the overall supervision of our board of directors, provides investment advisory services to ARCC. For providing these services, the Investment Adviser receives a fee from us, consisting of two componentsa base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.5% of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds). The base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our total assets (other than cash or cash equivalents but including assets purchased with borrowed funds) at the end of the two most recently completed calendar quarters.
The incentive fee has two parts. One part is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the administration agreement, and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature such as market discount, debt instruments with payment-in-kind interest, preferred stock with payment-in-kind dividends and zero coupon securities, accrued income that we have not yet received in cash. The Investment Adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by an entity on the obligation that resulted in the accrual of such income.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a fixed "hurdle rate" of 2.00% per quarter.
We pay the Investment Adviser an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
S-50
These calculations are adjusted for any share issuances or repurchases during the quarter.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the calendar year ending on December 31, 2004, and equals 20% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation for such year.
We defer cash payment of any incentive fee otherwise earned by the Investment Adviser if during the most recent four full calendar quarter periods ending on or prior to the date such payment is to be made the sum of (a) the aggregate distributions to the stockholders and (b) the change in net assets (defined as total assets less indebtedness) is less than 8.0% of our net assets at the beginning of such period. These calculations are appropriately pro rated during the first three calendar quarters following October 8, 2004 and are adjusted for any share issuances or repurchases.
For the three and nine months ended September 30, 2006, we incurred $3,660,997 and $9,311,853, respectively, in base management fees and $4,358,427 and $11,365,248, respectively, in incentive management fees related to pre-incentive fee net investment income. For the three and nine months ended September 30, 2006, we incurred $105,714 and $2,962,176 in incentive management fees related to realized capital gains. As of September 30, 2006, $10,981,600 was unpaid and included in management and incentive fees payable in the accompanying consolidated balance sheet.
For the three and nine months ended September 30, 2005, we incurred $1,380,863 and $3,222,709, respectively, in base management fees and $1,777,526 and $2,648,827, respectively, in incentive management fees related to pre-incentive fee net investment income. For the three and nine months ended September 30, 2005, we incurred $865,827 and $2,063,729, respectively, in incentive management fees related to realized capital gains.
We also entered into a separate administration agreement (the "Administration Agreement") with Ares Administration under which Ares Administration furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, Ares Administration also performs or oversees the performance of our required administrative services, which include, among other things, being responsible for the financial records which we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Ares Administration assists us in determining and publishing the net asset value, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Under the Administration Agreement, Ares Administration also provides on our behalf, managerial assistance to those portfolio companies to which we are required to provide such assistance. The Administration Agreement may be terminated by either party without penalty upon 60-days' written notice to the other party.
For the three and nine months ended September 30, 2006, we incurred $201,763 and $567,787, respectively, in administrative fees. As of September 30, 2006, $201,763 was unpaid and included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.
For the three and nine months ended September 30, 2005, we incurred $195,360 and $684,747, respectively, in administrative fees.
S-51
The following information sets forth the computation of basic and diluted net increase in stockholders' equity per share resulting from operations for the three and nine months ended September 30, 2006:
|
Three Months Ended September 30, 2006 |
Nine Months Ended September 30, 2006 |
||||
---|---|---|---|---|---|---|
Numerator for basic and diluted net increase in stockholders' equity resulting from operations per share: | $ | 18,141,122 | $ | 48,676,835 | ||
Denominator for basic and diluted net increase in stockholders' equity resulting from operations per share: | 46,880,245 | 41,018,821 | ||||
Basic and diluted net increase in stockholders' equity resulting from operations per share: | $ | 0.39 | $ | 1.19 |
The following information sets forth the computation of basic and diluted net increase in stockholders' equity per share resulting from operations for the three and nine months ended September 30, 2005:
|
Three Months Ended September 30, 2005 |
Nine Months Ended September 30, 2005 |
||||
---|---|---|---|---|---|---|
Numerator for basic and diluted net increase in stockholders' equity resulting from operations per share: | $ | 9,881,890 | $ | 25,988,053 | ||
Denominator for basic and diluted net increase in stockholders' equity resulting from operations per share: | 23,323,314 | 19,583,970 | ||||
Basic and diluted net increase in stockholders' equity resulting from operations per share: | $ | 0.42 | $ | 1.33 |
For the nine months ended September 30, 2006, the Company purchased (A) $495.8 million aggregate principal amount of senior term debt, (B) $179.7 million aggregate principal amount of senior subordinated debt and (C) $63.3 million of investments in equity securities.
In addition, for the nine months ended September 30, 2006, (1) $132.2 million aggregate principal amount of senior term debt, (2) $9.0 million aggregate principal amount of collateralized obligation notes and (3) $33.0 million aggregate principal amount of senior subordinated debt were redeemed. Additionally, (A) $64.0 million of investments in equity securities, (B) $25.1 million aggregate principal amount of senior term debt and (C) $17.0 million aggregate principal amount of senior subordinated debt were sold.
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As of September 30, 2006, investments and cash and cash equivalents consisted of the following:
|
Amortized Cost |
Fair Value |
|||||
---|---|---|---|---|---|---|---|
Cash and cash equivalents | $ | 67,610,129 | $ | 67,610,129 | |||
Senior term debt | 663,625,556 | 659,218,764 | |||||
Senior notes | 10,000,000 | 10,000,000 | |||||
Senior subordinated debt | 278,078,174 | 278,590,942 | |||||
Collateralized debt obligations | 7,411,433 | 7,343,166 | |||||
Equity securities | 84,994,014 | 77,834,416 | |||||
Total | $ | 1,111,719,306 | $ | 1,100,597,417 | |||
As of December 31, 2005, investments and cash and cash equivalents consisted of the following:
|
Amortized Cost |
Fair Value |
|||||
---|---|---|---|---|---|---|---|
Cash and cash equivalents | $ | 16,613,334 | $ | 16,613,334 | |||
Senior term debt | 338,993,970 | 338,467,061 | |||||
Senior notes | 10,000,000 | 10,000,000 | |||||
Senior subordinated debt | 129,816,927 | 130,042,698 | |||||
Collateralized debt obligations | 16,980,590 | 17,386,561 | |||||
Equity securities | 85,560,378 | 90,072,055 | |||||
Total | $ | 597,965,199 | $ | 602,581,709 | |||
The amortized cost represents the original cost adjusted for the accretion of discounts and amortization of premiums on debt using the effective interest method.
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The industry and geographic compositions of the portfolio at fair value at September 30, 2006 and December 31, 2005 were as follows:
Industry |
September 30, 2006 |
December 31, 2005 |
||||
---|---|---|---|---|---|---|
Health Care | 18.5 | % | 13.1 | % | ||
Printing/Publishing | 12.0 | 2.8 | ||||
Manufacturing | 10.3 | 9.5 | ||||
Other Services | 8.4 | 10.5 | ||||
Retail | 7.3 | 0.0 | ||||
Consumer Products | 7.2 | 11.2 | ||||
Containers/Packaging | 7.0 | 12.0 | ||||
Education | 5.2 | 5.6 | ||||
Business Services | 4.7 | 1.5 | ||||
Restaurants | 4.6 | 10.6 | ||||
Environmental Services | 2.6 | 11.0 | ||||
Aerospace and Defense | 2.5 | 2.7 | ||||
Broadcasting/Cable | 2.5 | 0.9 | ||||
Computers/Electronics | 2.1 | 0.0 | ||||
Cargo Transport | 1.2 | 2.1 | ||||
Beverage/Food/Tobacco | 1.2 | 0.0 | ||||
Homebuilding | 1.0 | 1.7 | ||||
Farming and Agriculture | 1.0 | 1.8 | ||||
Financial | 0.7 | 3.0 | ||||
Total | 100.0 | % | 100.0 | % | ||
Geographic Region |
September 30, 2006 |
December 31, 2005 |
||||
---|---|---|---|---|---|---|
West | 27.5 | % | 38.9 | % | ||
Mid-Atlantic | 24.3 | 24.3 | ||||
Southeast | 20.3 | 10.2 | ||||
Midwest | 18.0 | 12.3 | ||||
Northeast | 6.8 | 11.3 | ||||
International | 3.1 | 3.0 | ||||
Total | 100.0 | % | 100.0 | % | ||
6. COMMITMENTS AND CONTINGENCIES
As of September 30, 2006, the Company had committed to make a total of approximately $90.6 million of investments in various revolving senior secured loans. As of September 30, 2006, $50.2 million was unfunded. Included within the $90.6 million commitment in revolving secured loans is a commitment to issue up to $3.8 million in standby letters of credit through a financial intermediary on behalf of certain portfolio companies. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio companies were to default on their related payment obligations. As of September 30, 2006, the Company had $2.7 million in standby letters of credit issued and outstanding on behalf of the portfolio companies, of which no amounts were recorded as a liability. Of these letters of credit, $2.2 million expire on September 30, 2007 and $500,000 expire on July 31, 2007. These letters of credit may be extended under substantially similar terms for additional one-year terms at the Company's option until the revolving line of credit, under which the letters of credit were issued, matures on September 30, 2011.
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As of September 30, 2006, the Company was subject to a subscription agreement to fund up to $10.0 million of equity commitments in a private equity investment partnership. As of September 30, 2006, $202,000 was funded to this partnership.
As of December 31, 2005, the Company had committed to make a total of approximately $43.0 million of investments in various revolving senior secured loans. As of December 31, 2005, $28.8 million was unfunded. Included within the $43.0 million commitment in revolving secured loans is a commitment to issue up to $3.2 million in standby letters of credit through a financial intermediary on behalf of a portfolio company. Under these arrangements, the Company would be required to make payments to third-party beneficiaries if the portfolio company was to default on its related payment obligations. As of December 31, 2005, the Company had $2.2 million in standby letters of credit issued and outstanding on behalf of the portfolio company, of which no amounts were recorded as a liability.
In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. On October 29, 2004, we formed Ares Capital CP Funding LLC ("Ares Capital CP"), a wholly owned subsidiary of the Company, through which we established a revolving credit facility (the "CP Funding Facility"). On November 3, 2004, we entered into the CP Funding Facility that, as amended, allows Ares Capital CP to issue up to $350.0 million of variable funding certificates ("VFC"). As part of the CP Funding Facility, we are subject to limitations as to how borrowed funds may be used including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings as well as regulatory restrictions on leverage which may affect the amount of VFC that we may issue from time to time. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early amortization of the CP Funding Facility and limit further advances under the CP Funding Facility and in some cases could be an event of default. Such limitations, requirements, and associated defined terms are as provided for in the documents governing the CP Funding Facility. As of September 30, 2006, there was $15.0 million outstanding under the CP Funding Facility and the Company continues to be in compliance with all of the limitations and requirements of the CP Funding Facility. As of December 31, 2005 there was $18.0 million outstanding under the CP Funding Facility.
The CP Funding Facility was scheduled to expire on November 1, 2006 (see Note 14) and is secured by all of the assets held by Ares Capital CP, which as of September 30, 2006 consisted of eight investments. At expiration, at our election, any principal amounts then outstanding will be amortized over a 24-month period from the termination date. Under the terms of the CP Funding Facility, we are required to pay a renewal fee of 0.375% of the total amount available for borrowing on or around each November 3rd.
The interest charged on the VFC is based on the commercial paper rate plus 0.75%. The interest charged on the VFC is payable quarterly. As of September 30, 2006 the commercial paper rate was 5.3610% and as of December 31, 2005 the commercial paper rate was 4.3223%. For the three and nine months ended September 30, 2006, the average interest rate (i.e. commercial paper rate plus the spread) was 6.10% and 5.71%, respectively. For the three and nine months ended September 30, 2005, the average interest rate (i.e. commercial paper rate plus the spread) was 4.73% and 4.26%, respectively. For the three and nine months ended September 30, 2006, the average outstanding balance was $12,360,870 and $55,939,927, respectively. For the three and nine months ended September 30, 2005, the average outstanding balance was $7,894,273 and $21,550,661, respectively. For the three and nine months ended September 30, 2006 the interest expense incurred was $190,747 and $2,381,652, respectively. For the three and nine months ended September 30, 2005 the interest expense
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incurred was $252,939 and $577,673, respectively. Cash paid for interest expense during the nine months ended September 30, 2006 and September 30, 2005 was $2,412,539 and $385,265, respectively.
The Company is also required to pay a commitment fee for any unused portion of the CP Funding Facility. Initially, the commitment fee was 0.175% per annum. On April 8, 2005 the CP Funding Facility was amended pursuant to which among other things, the commitment fee was temporarily reduced to 0.11% per annum until the earlier of (a) the date the total borrowings outstanding exceed $150.0 million or (b) October 3, 2005, after which the commitment fee was 0.175% per annum. On November 14, 2005 the CP Funding Facility was further amended pursuant to which among other things, the commitment fee was reduced to 0.10% per annum prior to the first time that the borrowings outstanding under the CP Funding Facility equal or exceed $200.0 million and 0.125% per annum on and after the first time that the borrowings outstanding under the CP Funding Facility exceed $200.0 million. On July 13, 2006 the CP Funding Facility was further amended pursuant to which among other things, the commitment fee was increased to 0.125% per annum calculated based on an amount equal to $200.0 million less the borrowings outstanding under the CP Funding Facility. As soon as the borrowings outstanding under the CP Funding Facility equal or exceed $200.0 million, the fee is calculated based on an amount equal to $350.0 million less the borrowings outstanding under the CP Funding Facility. For the three and nine months ended September 30, 2006, the commitment fee incurred was $64,806 and $201,258, respectively. For the three and nine months ended September 30, 2005, the commitment fee incurred was $57,524 and $171,059, respectively.
In December 2005, we entered into a senior secured revolving credit facility (the "Revolving Credit Facility") under which the lenders have agreed to extend credit to the Company in an initial aggregate principal amount not exceeding $250 million at any one time outstanding. The Revolving Credit Facility expires on December 28, 2010 and with certain exceptions is secured by substantially all of the assets in our portfolio (other than investments held by Ares Capital CP under the CP Funding Facility and those held as a part of the Debt Securitization, discussed below) which as of September 30, 2006 consisted of 96 investments. Under the Revolving Credit Facility, we have made certain representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar revolving credit facilities, including, without limitation, covenants related to: (a) limitations on the incurrence of additional indebtedness and liens, (b) limitations on certain investments, (c) limitations on certain restricted payments, (d) maintaining a certain minimum stockholders' equity, (e) maintaining a ratio of total assets (less total liabilities) to total indebtedness, of the Company and its subsidiaries, of not less than 2.0:1.0, (f) maintaining minimum liquidity, and (g) limitations on the creation or existence of agreements that prohibit liens on certain properties of the Company and its subsidiaries.
In addition to the asset coverage ratio described above, borrowings under the Revolving Credit Facility (and the incurrence of certain other permitted debt) will be subject to compliance with a borrowing base that will apply different advance rates to different types of assets in our portfolio. The Revolving Credit Facility also includes an "accordion" feature that allows us to increase the size of the Revolving Credit Facility to a maximum of $500 million under certain circumstances. The Revolving Credit Facility also includes usual and customary events of default for senior secured revolving credit facilities of this nature. As of September 30, 2006, there was $87.0 million outstanding under the Revolving Credit Facility and the Company continues to be in compliance with all of the limitations and requirements of the Revolving Credit Facility. As of December 31, 2005, there were no amounts outstanding under the Revolving Credit Facility.
The interest charged under the Revolving Credit Facility is generally based on LIBOR (one, two, three or six month) plus 1.00%. As of September 30, 2006, the one, two, three and six month LIBOR were 5.32%, 5.35%, 5.37% and 5.37%, respectively. For the three and nine months ended September 30, 2006, the average interest rate was 6.77% and 6.30%, respectively. For the three and nine months ended September 30, 2006, the average outstanding balance was $33,923,913 and
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$75,183,150, respectively. For the three and nine months ended September 30, 2006, the interest expense incurred was $351,050 and $3,541,037, respectively. Cash paid for interest expense during the nine months ended September 30, 2006 was $3,521,372. As of December 31, 2005, the one, two, three and six month LIBOR were 4.39%, 4.48%, 4.54% and 4.70%, respectively. The Company is also required to pay a commitment fee of 0.20% for any unused portion of the Revolving Credit Facility. For the three and nine months ended September 30, 2006, the commitment fee incurred was $108,556 and $257,844, respectively.
As of September 30, 2006, the Company had $3.8 million in standby letters of credit issued through the Revolving Credit Facility.
On July 7, 2006, through our wholly owned subsidiary, ARCC CLO 2006 LLC ("ARCC CLO"), we completed a $400.0 million debt securitization (the "Debt Securitization") and issued approximately $314.0 million principal amount of asset-backed notes (including a $50.0 million revolver with no amounts drawn as of September 30, 2006) (the"CLO Notes") to third parties that were secured by a pool of middle market loans that have been purchased or originated by the Company. The CLO Notes are included in the September 30, 2006 consolidated balance sheet.
We retained approximately $86.0 million of certain BBB and non-rated securities in the Debt Securitization. The CLO Notes mature on December 20, 2019, and, as of September 30, 2006, there is $264.0 million outstanding. The blended pricing of the CLO Notes, excluding fees, is approximately 3-month LIBOR plus 34 basis points.
The classes, amounts, ratings and interest rates (expressed as a spread to LIBOR) of the CLO Notes are:
Class |
Amount (millions) |
Rating (S&P/Moody's) |
LIBOR Spread (basis points) |
||||
---|---|---|---|---|---|---|---|
A-1A | $ | 75 | AAA/Aaa | 25 | |||
A-1A VFN | 50 | (1) | AAA/Aaa | 28 | |||
A-1B | 14 | AAA/Aaa | 37 | ||||
A-2A | 75 | AAA/Aaa | 22 | ||||
A-2B | 33 | AAA/Aaa | 35 | ||||
B | 23 | AA/Aa2 | 43 | ||||
C | 44 | A/A2 | 70 | ||||
Total | $ | 314 | |||||
During the first five years from the closing date, principal collections received on the underlying collateral may be used to purchase new collateral, allowing us to maintain the initial leverage in the securitization for the entire five-year period. Under the terms of the securitization, up to 15% of the collateral may be subordinated loans that are neither first nor second lien loans.
The Class A-1A VFN Notes are a revolving class of secured notes and allow us to borrow and repay AAA/Aaa financing over the initial five-year period thereby providing more efficiency in funding costs. All of the notes are secured by the assets of ARCC Commercial Loan Trust 2006, including commercial loans totaling $308.1 million as of the closing date, currently which were sold to the trust by the Company, the originator and servicer of the assets. As of September 30, 2006, there were 46 investments securing the notes. Additional commercial loans will be purchased by the trust from the Company primarily using the proceeds from the Class A-1A VFN Notes. The pool of commercial loans in the trust must meet certain requirements, including, but not limited to, asset mix and concentration,
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collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
The interest charged under the ARCC CLO debt securitization is based on 3-month LIBOR which as of September 30, 2006 was 5.37%. For the three months ended September 30, 2006, the effective average interest rate was 5.86%. For the three months ended September 30, 2006, we incurred $3,653,371 of interest expense. The Company is also required to pay a commitment fee of 0.175% for any unused portion of the Class A-1A VFN Notes. For the three and nine months ended September 30, 2006, the commitment fee incurred was $23,611 on these notes.
In 2005, we entered into a costless collar agreement in order to manage the exposure to changing interest rates related to the Company's fixed rate investments. The costless collar agreement is for a notional amount of $20 million, has a cap of 6.5%, a floor of 2.72% and matures in 2008. The costless collar agreement allows us to receive an interest payment for any quarterly period when the 3-month LIBOR exceeds 6.5%, and requires us to pay an interest payment for any quarterly period when the 3-month LIBOR is less than 2.72%. The costless collar resets quarterly based on the 3-month LIBOR. As of September 30, 2006, the 3-month LIBOR was 5.37%. As of September 30, 2006 these derivatives had no fair value.
The underwriting costs related to the IPO were $7,425,000 or $0.675 per share. As a part of the IPO, the Investment Adviser, on our behalf, agreed to pay the underwriters $0.225 of the $0.675 per share in underwriting discount and commissions for a total of approximately $2.5 million. We were obligated to repay this amount, together with accrued interest (charged at the 3-month LIBOR plus 2% starting on October 8, 2004) (a) if during any four calendar quarter period ending on or after October 8, 2005 the sum of (i) the aggregate distributions, including return of capital, if any, to the stockholders and (ii) the change in net assets (defined as total assets less indebtedness) equals or exceeds 7.0% of the net assets at the beginning of such period (as adjusted for any share issuances or repurchases) or (b) upon the Company's liquidation. On March 8, 2005, the Company's board of directors approved entering into an amended and restated agreement with the Investment Adviser whereby the Company would be obligated to repay the Investment Adviser for the approximate $2.5 million only if the conditions for repayment referred to above were met before the third anniversary of the IPO. If one or more such events did not occur on or before October 8, 2007, we would not be obligated to repay this amount to the Investment Adviser. For the year ended December 31, 2005, the sum of our aggregate distributions to our stockholders and our change in net assets exceeded 7.0% of net assets as of December 31, 2004 (as adjusted for any share issuances). As a result, in February 2006 we repaid this amount together with accrued interest.
In accordance with the Advisory Agreement, we bear all costs and expenses of the operation of the Company and reimburse the Investment Adviser for all such costs and expenses incurred in the operation of the Company. For the three and nine months ended September 30, 2006, the Investment Adviser incurred such expenses totaling $434,298 and $665,026, respectively. There were no payable amounts relating to these expenses outstanding to the Investment Adviser as of September 30, 2006. For the three and nine months ended September 30, 2005, the Investment Adviser incurred such expenses totaling $102,739 and $144,651, respectively.
As of September 30, 2006, Ares Management LLC, of which the Investment Adviser is a wholly owned subsidiary, owned 666,667 shares of the Company's common stock representing approximately 1.4% of the total shares outstanding as of September 30, 2006.
See Note 3 for a description of other related party transactions.
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During the nine months ended September 30, 2005, we completed a public add-on offering on March 23, 2005, of 12,075,000 shares of common stock (including the underwriters' overallotment of 1,575,000 shares) at $16.00 per share, less an underwriting discount and commissions totaling $0.72 per share. Total proceeds received from this add-on offering, net of the underwriters' discount and offering costs, were $183.9 million.
During the nine months ended September 30, 2006, we completed a public add-on offering on July 18, 2006 (the "July Add-on Offering"), of 10,781,250 shares of common stock (including the underwriters' overallotment of 1,406,250 shares) at $15.67 per share, less an underwriting discount and commissions totaling $0.58 per share. Total proceeds received from the July Add-on Offering, net of the underwriters' discount and offering costs, were approximately $162.0 million.
For the three months ended September 30, 2006, the Company declared a dividend on August 9, 2006 of $0.40 per share for a total of $19,595,399. The record date was September 15, 2006 and the dividend was distributed on September 29, 2006. For the three months ended June 30, 2006, the Company declared a dividend on May 8, 2006 of $0.38 per share for a total of $14,481,380. The record date was June 15, 2006 and the dividend was distributed on June 30, 2006. For the three months ended March 31, 2006, the Company declared a dividend on February 28, 2006 of $0.36 per share for a total of $13,682,573. The record date was March 24, 2006 and the dividend was distributed on April 14, 2006.
For the three months ended September 30, 2005, the Company declared a dividend on September 6, 2005 of $0.34 per share for a total of $7,940,174. The record date was September 16, 2005 and the dividend was distributed on September 30, 2005. For the three months ended June 30, 2005, the Company declared a dividend on June 20, 2005 of $0.32 per share for a total of $7,413,951. The record date was June 30, 2005 and the dividend was distributed on July 15, 2005. For the three months ended March 31, 2005, the Company declared a dividend on February 23, 2005 of $0.30 per share for a total of $3,320,524. The record date was March 7, 2005 and the dividend was distributed on April 15, 2005.
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The following is a schedule of financial highlights for the nine months ended September 30, 2006 and for the nine months ended September 30, 2005:
Per Share Data:
|
For the Nine Months Ended September 30, 2006 |
For the Nine Months Ended September 30, 2005 |
|||||
---|---|---|---|---|---|---|---|
Net asset value, beginning of period(1) | $ | 15.03 | $ | 14.43 | |||
Issuance of common stock | 0.01 | 0.45 | |||||
Effect of dilution | (0.03 | ) | (0.04 | ) | |||
Underwriting costs paid by the Investment Adviser (see Note 9)(2) | | (0.13 | ) | ||||
Net investment income for period(2) | 0.94 | 0.80 | |||||
Net realized and unrealized gains for period(2) | 0.25 | 0.53 | |||||
Net increase in stockholders' equity | 1.17 | 1.61 | |||||
Distributions from net investment income | (0.94 | ) | (0.80 | ) | |||
Distributions from net realized capital gains on securities | (0.20 | ) | (0.16 | ) | |||
Total distributions to stockholders | (1.14 | ) | (0.96 | ) | |||
Net asset value at end of period(1) | $ | 15.06 | $ | 15.08 | |||
Per share market value at end of period | $ | 17.42 | $ | 16.28 | |||
Total return based on market value(3) | 15.49 | % | (11.27 | )% | |||
Total return based on net asset value(4) | 7.89 | % | 8.97 | % | |||
Shares outstanding at end of period | 49,091,195 | 23,409,484 | |||||
Ratio/Supplemental Data: | |||||||
Net assets at end of period | $ | 739,268,870 | $ | 353,109,493 | |||
Ratio of operating expenses to average net assets(5)(6) | 8.34 | % | 5.18 | % | |||
Ratio of net investment income to average net assets(5)(7) | 9.02 | % | 7.05 | % | |||
Portfolio turnover rate(5) | 47 | % | 46 | % |
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The Company's shares fluctuate in value. The Company's performance changes over time and currently may be different than that shown. Past performance is no guarantee of future results.
13. IMPACT OF NEW ACCOUNTING STANDARDS
In July 2006, the Financial Accounting Standards Board ("FASB") released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," ("FIN 48"). FIN 48 provides guidance on how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authorities. Tax positions not deemed to satisfy the "more-likely-than-not" threshold would be recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the effective date. At this time, the Company is evaluating the implications of FIN 48, and its impact in the consolidated financial statements has not yet been determined.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurement ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements, but does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At this time, the Company is evaluating the implications of SFAS No. 157, and its impact in the consolidated financial statements has not yet been determined.
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On November 1, 2006, we entered into an amendment to extend the maturity of the CP Funding Facility to October 31, 2007. Additionally, the interest rate charged on the CP Funding Facility was reduced to the commercial paper rate plus 0.70%.
On November 7, 2006, we declared a dividend of $0.40 per share and an additional dividend of $0.10 per share for a total of $19,636,478 and $4,909,120, respectively. The record date for both dividends is December 15, 2006 and the dividends will be distributed on December 29, 2006.
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PROSPECTUS
$250,000,000
Common Stock
Ares Capital Corporation is a specialty finance company that is a closed-end, non-diversified management investment company incorporated in Maryland that is regulated as a business development company under the Investment Company Act of 1940. We were founded in April 2004 and completed our initial public offering on October 8, 2004. Our investment objectives are to generate both current income and capital appreciation through debt and equity investments. We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases may include an equity component, and, to a lesser extent, in equity investments, in private middle market companies.
We are managed by Ares Capital Management LLC, an affiliate of Ares Management LLC, an independent Los Angeles based firm that currently manages investment funds that have approximately $10.7 billion of committed capital. Ares Technical Administration LLC provides the administrative services necessary for us to operate.
Our common stock is quoted on The NASDAQ National Market under the symbol "ARCC." On June 15, 2006, the last reported sales price of our common stock on The NASDAQ National Market was $16.77 per share.
Investing in our common stock involves risks that are described in the "Risk Factors" section beginning on page 15 of the prospectus.
We may offer, from time to time, up to $250 million aggregate initial offering price of our common stock in one or more offerings. We will offer the shares of common stock at prices and on terms to be described in one or more supplements to this prospectus. The offering price per share of our common stock less any underwriting commissions or discounts will not be less than the net value per share of our common stock at the time we make the offering. This prospectus and the accompanying prospectus supplement concisely provide important information you should know before investing in our common stock. Please read the prospectus and the accompanying prospectus supplement before you invest and keep it for future reference. Our Internet address is http://www.arescapitalcorporation.com. We make available free of charge on our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The SEC also maintains a website at www.sec.gov that contains such information.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This prospectus may not be used to consummate sales of shares of common stock unless accompanied by a prospectus supplement.
The date of this prospectus is June 23, 2006.
You should rely only on the information contained in this prospectus and the accompanying prospectus supplement. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus and the accompanying prospectus supplement is accurate only as of the date on the front cover of this prospectus and the accompanying prospectus supplement, as applicable. Our business, financial condition, results of operations and prospects may have changed since that date.
|
Page |
|
---|---|---|
Prospectus Summary | 1 | |
The Company | 1 | |
Offerings | 8 | |
Fees and Expenses | 10 | |
Selected Financial and Other Data | 13 | |
Risk Factors | 15 | |
Forward-Looking Statements | 32 | |
Use of Proceeds | 33 | |
Price Range of Common Stock and Distributions | 34 | |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 36 | |
Senior Securities | 51 | |
Business | 52 | |
Portfolio Companies | 64 | |
Management | 69 | |
Certain Relationships | 87 | |
Control Persons and Principal Stockholders | 88 | |
Determination of Net Asset Value | 90 | |
Dividend Reinvestment Plan | 91 | |
Material U.S. Federal Income Tax Considerations | 92 | |
Description of our Stock | 100 | |
Regulation | 107 | |
Custodian, Transfer and Dividend Paying Agent and Registrar | 114 | |
Brokerage Allocation and Other Practices | 114 | |
Plan of Distribution | 115 | |
Legal Matters | 116 | |
Independent Registered Public Accountants | 116 | |
Available Information | 116 | |
Financial Statements | F-1 |
i
This prospectus is part of a registration statement that we have filed with the SEC, using the "shelf" registration process. Under the shelf registration process, we may offer, from time to time, up to $250 million aggregate initial offering price of our common stock on the terms to be determined at the time of the offering. Shares of our common stock may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus provides you with a general description of the shares of our common stock that we may offer. Each time we use this prospectus to offer shares of our common stock, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and any prospectus supplement together with any exhibits and the additional information described under the headings "Available Information" and "Risk Factors" before you make an investment decision.
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This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under "Risk Factors" and the other information included in this prospectus. Except where the context suggests otherwise, the terms "we," "us," "our," "the Company" and "Ares Capital" refer to Ares Capital Corporation and its subsidiaries; "Ares Capital Management" or "investment adviser" refers to Ares Capital Management LLC; "Ares Administration" refers to Ares Technical Administration LLC; and "Ares" refers to Ares Partners Management Company LLC and its affiliated companies, including Ares Management LLC.
Ares Capital is a specialty finance company that is a closed-end, non-diversified management investment company, regulated as a business development company, or a "BDC," under the Investment Company Act of 1940, or the "1940 Act." We were founded in April 2004, completed our initial public offering on October 8, 2004 and completed two additional equity offerings in March 2005 and October 2005. Ares Capital's investment objectives are to generate both current income and capital appreciation through debt and equity investments by primarily investing in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive.
We primarily invest in first and second lien senior loans and long-term mezzanine debt. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt is subordinated to senior loans and is generally unsecured. In some cases, we may also receive warrants or options in connection with our debt instruments. Our investments have generally ranged between $10 million and $50 million each, although the investment sizes may be more or less than the targeted range and are expected to grow with our capital availability. We also, to a lesser extent, make equity investments in private middle market companies. These investments have generally been less than $10 million each but may grow with our capital availability and are usually made in conjunction with loans we make to these companies. In connection with our investing activities, we may make commitments with respect to indebtedness or securities of a potential portfolio company substantially in excess of our final investment. In this prospectus, we generally use the term "middle market" to refer to companies with annual EBITDA between $5 million and $50 million. EBITDA represents net income before net interest expense, income tax expense, depreciation and amortization.
The first and second lien senior loans generally have stated terms of three to ten years and the mezzanine debt investments generally have stated terms of up to ten years, but the expected average life of such first and second lien loans and mezzanine debt is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The debt that we invest in typically is not rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than "Baa3" by Moody's or lower than "BBB-" by Standard & Poor's). We may invest without limit in debt of any rating, including securities that have not been rated by any nationally recognized statistical rating organization.
We believe that our investment adviser, Ares Capital Management, is able to leverage Ares' current investment platform, resources and existing relationships with financial sponsors, financial institutions, hedge funds and other investment firms to provide us with attractive investments. In addition to deal flow, the Ares investment platform assists our investment adviser in analyzing, structuring and monitoring investments. Ares' senior principals have worked together for many years and have substantial experience in investing in senior loans, high yield bonds, mezzanine debt and
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private equity. The Company has access to the Ares staff of approximately 58 investment professionals and to the 38 administrative professionals employed by Ares who provide assistance in accounting, legal, compliance and investor relations.
While our primary focus is to generate current income and capital appreciation through investments in first and second lien senior loans and mezzanine debt and, to a lesser extent, equity securities of private companies, we also may invest up to 30% of the portfolio in opportunistic investments. Such investments may include investments in high-yield bonds, debt and equity securities in collateralized debt obligation vehicles and distressed debt or equity securities of public companies. We expect that these public companies generally will have debt that is non-investment grade. As part of this 30% of the portfolio, we may also invest in debt of middle market companies located outside of the United States, which investments are not anticipated to be in excess of 10% of the portfolio at the time such investments are made.
Ares is an independent firm with approximately $10.7 billion of total committed capital and 129 employees. Ares was founded in 1997 by a group of highly experienced investment professionals.
Ares specializes in originating and managing assets in both the leveraged finance and private equity markets. Ares' leveraged finance activities include the acquisition and management of senior loans, high yield bonds, mezzanine and special situation investments. Ares' private equity activities focus on providing flexible, junior capital to middle market companies. Ares has the ability to invest across a capital structure, from senior secured floating rate debt to common equity.
Ares is comprised of the following groups:
Ares' senior principals have been working together as a group for many years and have an average of over 20 years of experience in leveraged finance, private equity, distressed debt, investment banking and capital markets. They are backed by a large team of highly-disciplined professionals. Ares' rigorous investment approach is based upon an intensive, independent financial analysis, with a focus on preservation of capital, diversification and active portfolio management. These fundamentals underlie Ares' investment strategy and have resulted in large pension funds, banks, insurance companies, endowments and high net worth individuals investing in Ares funds.
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Ares Capital Management, our investment adviser, is served by a dedicated origination and transaction development team of 17 investment professionals, including our President, Michael J. Arougheti, which team is augmented by Ares' additional investment professionals, primarily its 24 member Capital Markets Group. Ares Capital Management's investment committee has 5 members, including Mr. Arougheti and 4 founding members of Ares. In addition, Ares Capital Management leverages off of Ares' entire investment platform and benefits from the Ares investment professionals' significant capital markets, trading and research expertise developed through Ares industry analysts. Ares funds have made investments in over 1,000 companies in over 30 different industries and currently hold over 400 investments in over 30 different industries.
We believe the environment for investing in middle market companies is attractive for the following reasons:
We believe that we have the following competitive advantages over other capital providers in middle market companies:
Ares currently manages approximately $10.7 billion of committed capital in the related asset classes of syndicated loans, high yield bonds, mezzanine debt and private equity. We believe Ares' current investment platform provides a competitive advantage in terms of access to origination and marketing activities and diligence for Ares Capital.
Ares senior professionals have an average of over 20 years experience in leveraged finance, including substantial experience in investing in leveraged loans, high yield bonds, mezzanine debt, distressed debt and private equity securities. As a result of Ares' extensive investment experience, Ares and its senior principals have developed a strong reputation in the capital markets. We believe that this experience affords Ares Capital a competitive advantage in identifying and investing in middle market companies with the potential to generate positive returns.
Experience and focus on middle market companies
Ares has historically focused on investments in middle market companies and we benefit from this experience. Our investment adviser uses Ares' extensive network of relationships with intermediaries focused on middle market companies, to attract well-positioned prospective portfolio
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company investments. In particular, our investment adviser works closely with the Ares investment professionals, who oversee a portfolio of investments in over 400 companies, and provide access to an extensive network of relationships and special insights into industry trends and the state of the capital markets.
Disciplined investment philosophy
In making its investment decisions, our investment adviser has adopted Ares' long-standing, consistent investment approach that was developed over 14 years ago by several of its founders. Ares Capital Management's investment philosophy and portfolio construction involves an assessment of the overall macroeconomic environment, financial markets and company-specific research and analysis. Our investment approach emphasizes capital preservation, low volatility and minimization of downside risk.
We concentrate our investing activities in industries with a history of predictable and dependable cash flows and in which the Ares investment professionals historically have had extensive investment experience. Since its inception in 1997, Ares investment professionals have invested in over 1,000 companies in over 30 different industries, and over this time have developed long-term relationships with management teams and management consultants within these industries. The experience of Ares' investment professionals in investing across these industries, throughout various stages of the economic cycle, provides our investment adviser with access to ongoing market insights and favorable investment opportunities.
Flexible transaction structuring
We are flexible in structuring investments, the types of securities in which we invest and the terms associated with such investments. The principals of Ares have extensive experience in a wide variety of securities for leveraged companies with a diverse set of terms and conditions. This approach and experience should enable our investment adviser to identify attractive investment opportunities throughout the economic cycle and across a company's capital structure so that we can make investments consistent with our stated objectives.
OPERATING AND REGULATORY STRUCTURE
Our investment activities are managed by Ares Capital Management and supervised by our board of directors, a majority of whom are independent of Ares and its affiliates. Ares Capital Management is an investment adviser that is registered under the Investment Advisers Act of 1940, or the "Advisers Act." Under our amended and restated investment advisory and management agreement, referred to herein as our investment advisory and management agreement, we have agreed to pay Ares Capital Management an annual base management fee based on our total assets, as defined under the 1940 Act (other than cash and cash equivalents but including assets purchased with borrowed funds), and an incentive fee based on our performance. See "ManagementInvestment Advisory and Management Agreement."
As a BDC, we are required to comply with certain regulatory requirements. While we are permitted to finance investments using debt, our ability to use debt is limited in certain significant respects. See "Regulation." We have elected to be treated for federal income tax purposes as a regulated investment company, or a "RIC," under Subchapter M of the Internal Revenue Code of 1986, or the "Code." See "Material U.S. Federal Income Tax Considerations."
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We are party to a Senior Secured Revolving Credit Agreement that provides for up to $250 million of borrowings, which expires on December 28, 2010. In addition, our wholly owned subsidiary, Ares Capital CP Funding LLC, is party to a separate credit facility (together with the Senior Secured Revolving Credit Agreement, the "Facilities") that provides for up to $350 million of borrowings, which expires on November 1, 2006, unless extended prior to such date with the consent of the lenders.
Investing in Ares Capital involves risks. The following is a summary of certain risks that you should carefully consider before investing in shares of our common stock. In addition, see "Risk Factors" beginning on page 15 for a more detailed discussion of the factors you should carefully consider before deciding to invest in our common stock.
Risks Relating to Our Business
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Risks Relating To Our Investments
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Risks Relating To Offerings
Our administrative offices are located at 1999 Avenue of the Stars, Suite 1900, Los Angeles, California, 90067, telephone number (310) 201-4200, and our executive offices are located at 280 Park Avenue, 22nd Floor, Building East, New York, New York 10017, telephone number (212) 750-7300.
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We may offer, from time to time, up to $250 million of our common stock, on terms to be determined at the time of the offering. We will offer our common stock at prices and on terms to be set forth in one or more supplements to this prospectus; provided that the offering price per share, less any underwriting commissions or discounts, will not be less than the net asset value per share of our common stock at the time of the offering.
We may offer our common stock directly to one or more purchasers, through agents that we designate from time to time, or to or through underwriters or dealers. The prospectus supplement relating to the offering will identify any agents or underwriters involved in the sale of our common stock, and will set forth any applicable purchase price, fee, commission or discount arrangement between us and our agents or underwriters or among our underwriters or the basis upon which such amount may be calculated. See "Plan of Distribution." We may not sell any of our common stock through agents, underwriters or dealers without delivery of a prospectus supplement describing the method and terms of the offering of our securities.
Set forth below is additional information regarding offerings of our securities:
Use of proceeds | Unless otherwise specified in a prospectus supplement, we intend to use the net proceeds from the sale of our securities for general corporate purposes, which includes investing in portfolio companies in accordance with our investment objectives and strategies and repaying indebtedness, if any, incurred under our credit facilities. The supplement to this prospectus relating to an offering will more fully identify the use of the proceeds from such offering. See "Use of Proceeds." | |
Distributions |
We intend to distribute quarterly dividends to our stockholders out of assets legally available for distribution. Our quarterly dividends, if any, will be determined by our board of directors. For more information, see "Dividends." |
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Taxation |
We have elected to be treated for federal income tax purposes as a RIC. As a RIC, we generally will not pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To maintain our RIC status, we must meet specified source-of-income and asset diversification requirements and distribute annually an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, out of assets legally available for distribution. See "Risk FactorsWe will be subject to corporate level income tax if we are unable to qualify as a RIC" and "Distributions." |
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Dividend reinvestment plan |
We have a dividend reinvestment plan for our stockholders. This is an "opt out" dividend reinvestment plan. As a result, if we declare a dividend, then stockholders' cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends. Stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. See "Dividend Reinvestment Plan." |
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NASDAQ National Market symbol |
"ARCC" |
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Anti-takeover provisions |
Our board of directors is divided into three classes of directors serving staggered three-year terms. This structure is intended to provide us with a greater likelihood of continuity of management, which may be necessary for us to realize the full value of our investments. A staggered board of directors also may serve to deter hostile takeovers or proxy contests, as may certain other measures adopted by us. See "Description of Our Stock." |
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Leverage |
We borrow funds to make additional investments. We use this practice, which is known as "leverage," to attempt to increase returns to our common stockholders, but it involves significant risks. See "Risk Factors," "Senior Securities" and "RegulationIndebtedness and Senior Securities." With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ at any particular time will depend on our investment adviser's and our board of directors' assessment of market and other factors at the time of any proposed borrowing. |
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Management arrangements |
Ares Capital Management serves as our investment adviser. Ares Administration serves as our administrator. For a description of Ares Capital Management, Ares Administration, Ares and our contractual arrangements with these companies, see "ManagementInvestment Advisory and Management Agreement," and "Administration Agreement." |
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Available information |
We are required to file periodic reports, proxy statements and other information with the SEC. This information is available free of charge on our website at www.arescapitalcorp.com. The SEC also maintains a website at www.sec.gov that contains such information. |
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The following table is intended to assist you in understanding the costs and expenses that an investor in our common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by "you," "us" or "Ares Capital," or that "we" will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in Ares Capital.
Stockholder transaction expenses (as a percentage of offering price): | |||
Sales load paid by us | | (1) | |
Offering expenses borne by us | | (2) | |
Dividend reinvestment plan expenses | None | (3) | |
Total stockholder transaction expenses paid by us | | (4) | |
Estimated annual expenses (as a percentage of consolidated net assets attributable to common stock)(5): |
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Management fees | 2.04 | %(6) | |
Incentive fees payable under investment advisory and management agreement (20% of realized capital gains and 20% of pre-incentive fee net investment income, subject to certain limitations) | 0.00 | %(7) | |
Interest payments on borrowed funds | 1.23 | %(8) | |
Other expenses | 0.78 | %(9) | |
Total annual expenses (estimated) | 4.05 | %(10) |
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consolidated financial statements as of December 31, 2005 and Note 3 to our consolidated financial statements as of March 31, 2006.
The incentive fee consists of two parts:
The
first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income (including interest that is accrued but not yet received in cash), subject to a 2.00%
quarterly (8% annualized) hurdle rate and a "catch-up" provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, our investment adviser
receives no incentive fee until our net investment income equals the hurdle rate of 2.00% but then receives, as a "catch-up," 100% of our pre-incentive fee net investment
income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.50%. The effect of this provision is that, if
pre-incentive fee net investment income exceeds 2.50% in any calendar quarter, our investment adviser will receive 20% of our pre-incentive fee net investment income as if a
hurdle rate did not apply.
The
second, payable annually in arrears for each calendar year ending on or after December 31, 2004, equals 20% of our net realized capital gains, if any, computed net of all realized capital
losses and unrealized capital depreciation.
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) 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.
See "ManagementInvestment Advisory and Management Agreement."
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expenses" percentage were calculated instead as a percentage of consolidated total assets, our "Total annual expenses" would be 2.97% of consolidated total assets.
The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we would have no additional leverage, that none of our assets are cash or cash equivalents, and that our annual operating expenses would remain at the levels set forth in the table above. Transaction expenses are not included in the following example. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.
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1 year |
3 years |
5 years |
10 years |
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You would pay the following expenses on a $1,000 investment, assuming a 5% annual return(1) | $ | 41.50 | $ | 125.56 | $ | 211.06 | $ | 431.24 |
The foregoing table is to assist you in understanding the various costs and expenses that an investor in our common stock will bear directly or indirectly. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the investment advisory and management agreement, which, assuming a 5% annual return, would either not be payable or have an insignificant impact on the expense amounts shown above, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, our expenses, and returns to our investors, would be higher. In addition, while the example assumes reinvestment of all dividends and distributions at net asset value, participants in our dividend reinvestment plan who have not otherwise elected to receive cash will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the valuation date for the dividend. See "Dividend Reinvestment Plan" for additional information regarding our dividend reinvestment plan.
This example and the expenses in the table above should not be considered a representation of our future expenses, and actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.
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SELECTED FINANCIAL AND OTHER DATA
The following selected financial and other data for the period from June 23, 2004 (inception) through December 31, 2004 and the year ended December 31, 2005, are derived from our consolidated financial statements that have been audited by KPMG LLP, an independent registered public accounting firm whose report thereon is included within this registration statement. Quarterly financial information is derived from unaudited financial data, but in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments) that are necessary to present fairly the results of such interim periods. Interim results at and for the three months ended March 31, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. The data should be read in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included elsewhere in this registration statement.
ARES CAPITAL CORPORATION AND SUBSIDIARY
SELECTED FINANCIAL DATA
Three Months Ended March 31, 2006
Year Ended December 31, 2005 and
Period June 23, 2004 (inception) Through December 31,
2004
|
Three Months Ended March 31, 2006 |
Year Ended December 31, 2005 |
For the Period June 23, 2004 (inception) Through December 31, 2004 |
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Total Investment Income | $ | 20,191,305 | $ | 41,850,477 | $ | 4,380,848 | ||||||
Net Realized and Unrealized Gain on Investments | 2,151,498 | 14,727,276 | 475,393 | |||||||||
Total Expenses | (8,499,770 | ) | (14,726,677 | ) | (1,665,753 | ) | ||||||
Net Increase in Stockholders' Equity Resulting from Operations | $ | 13,843,033 | $ | 41,851,076 | $ | 3,190,488 | ||||||
Per Share Data: | ||||||||||||
Net Increase in Stockholder's Equity Resulting from Operations: | ||||||||||||
Basic: | $ | 0.36 | $ | 1.78 | $ | 0.29 | ||||||
Diluted: | $ | 0.36 | $ | 1.78 | $ | 0.29 | ||||||
Cash Dividend Declared: | $ | 0.36 | $ | 1.30 | $ | 0.30 | ||||||
Total Assets |
$ |
778,620,556 |
$ |
613,645,144 |
$ |
220,455,614 |
||||||
Total Debt | $ | 185,200,000 | $ | 18,000,000 | $ | 55,500,000 | ||||||
Total Stockholders' Equity | $ | 571,375,338 | $ | 569,612,199 | $ | 159,708,305 | ||||||
Other Data: |
||||||||||||
Number of Portfolio Companies at Period End | 48 | 38 | 20 | |||||||||
Principal Amount of Investments Purchased(1) | $ | 195,411,000 | $ | 504,299,000 | $ | 234,102,000 | ||||||
Principal Amount of Investments Sold and Repayments(2) | $ | 36,745,000 | $ | 108,415,000 | $ | 52,272,000 | ||||||
Total Return Based on Market Value(3) | 9.15 | % | (10.60 | )% | 31.53 | % | ||||||
Total Return Based on Net Asset Value(4) | 2.42 | % | 12.04 | % | (1.80 | )% | ||||||
Weighted Average Yield of Income Producing Equity Securities and Debt(5): | 11.47 | % | 11.25 | % | 12.36 | % |
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SELECTED QUARTERLY DATA (Unaudited)
|
2006 |
2005 |
2004 |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
Q4(1) |
||||||||||||
Total Investment Income | $ | 20,191,305 | $ | 14,890,281 | $ | 11,607,989 | $ | 9,601,615 | $ | 5,750,592 | $ | 4,380,848 | ||||||
Net investment income before net realized and unrealized gain on investments and incentive compensation | $ | 14,614,419 | $ | 11,071,081 | $ | 8,887,631 | $ | 7,567,053 | $ | 3,800,113 | $ | 3,009,749 | ||||||
Incentive compensation | $ | 2,922,884 | $ | (510,478 | ) | $ | 2,643,353 | $ | 1,798,919 | $ | 270,284 | $ | 95,471 | |||||
Net investment income before net realized and unrealized gain on investments | $ | 11,691,535 | $ | 11,581,559 | $ | 6,244,278 | $ | 5,768,134 | $ | 3,529,829 | $ | 2,914,278 | ||||||
Net realized and unrealized gain on investments | $ | 2,151,498 | $ | 4,281,465 | $ | 3,637,612 | $ | 1,834,122 | $ | 4,974,077 | $ | 475,393 | ||||||
Net increase in stockholders' equity resulting from operations | $ | 13,843,033 | $ | 15,863,024 | $ | 9,881,890 | $ | 7,602,256 | $ | 8,503,906 | $ | 3,389,671 | ||||||
Basic and diluted earnings per common share | $ | 0.36 | $ | 0.45 | $ | 0.42 | $ | 0.33 | $ | 0.69 | $ | 0.34 | ||||||
Net asset value per share as of the end of the quarter | $ | 15.03 | $ | 15.03 | $ | 15.08 | $ | 14.97 | $ | 14.96 | $ | 14.43 |
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Before you invest in our shares, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, before you decide whether to make an investment in our common stock. The risks set out below are not the only risks we face. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.
RISKS RELATING TO OUR BUSINESS
A failure on our part to maintain our status as a BDC would significantly reduce our operating flexibility.
If we do not continue to qualify as a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would significantly decrease our operating flexibility.
The Company may not replicate Ares' historical success.
Our primary focus in making investments differs from those of other private funds that are or have been managed by Ares' investment professionals. Further, investors in Ares Capital are not acquiring an interest in other Ares funds. While Ares Capital may consider potential co-investment participation in portfolio investments with other Ares funds (other than ACOF), no investment opportunities are currently under consideration and any such investment activity could be subject to, among other things, regulatory and independent board member approvals, the receipt of which, if sought, cannot be assured. Accordingly, we cannot assure you that Ares Capital will replicate Ares' historical success, and we caution you that our investment returns could be substantially lower than the returns achieved by those private funds.
We are dependent upon Ares Capital Management's key personnel for our future success and upon their access to Ares investment professionals.
We depend on the diligence, skill and network of business contacts of the members of Ares Capital Management's investment committee. We also depend, to a significant extent, on Ares Capital Management's access to the investment professionals of Ares and the information and deal flow generated by Ares' investment professionals in the course of their investment and portfolio management activities. Our future success will depend on the continued service of Ares Capital Management's investment committee. The departure of any of the members of Ares Capital Management's investment committee, or of a significant number of the investment professionals or partners of Ares, could have a material adverse effect on our ability to achieve our investment objectives. In addition, we cannot assure you that Ares Capital Management will remain our investment adviser or that we will continue to have access to Ares' investment professionals or its information and deal flow.
We are a new company with a limited operating history.
We were incorporated in April 2004, completed our initial public offering in October 2004 and have a limited operating history. We are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of your investment could decline substantially.
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Our investment adviser and the members of its investment committee have limited experience managing a BDC.
The 1940 Act imposes numerous constraints on the operations of business development companies. For example, business development companies are required to invest at least 70% of their total assets primarily in securities of private or thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Our investment adviser and the majority of the members of our senior management only have limited experience managing or providing management consultant services to an operating company, such as may be required of a BDC. Our investment adviser's, and the members of its investment committee's, lack of experience in managing a portfolio of assets under such constraints may hinder their ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.
Our financial condition and results of operation will depend on our ability to manage future growth effectively.
Our ability to achieve our investment objectives depends on our ability to acquire suitable investments and monitor and administer those investments, which depends, in turn, on Ares Capital Management's ability to identify, invest in and monitor companies that meet our investment criteria.
Accomplishing this result on a cost-effective basis is largely a function of Ares Capital Management's structuring of the investment process and its ability to provide competent, attentive and efficient services to us. Our executive officers and the members of Ares Capital Management have substantial responsibilities in connection with their roles at Ares and with the other Ares funds as well as responsibilities under the investment advisory and management agreement. They may also be called upon to provide managerial assistance to our portfolio companies on behalf of our administrator. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, Ares Capital Management will need to hire, train, supervise and manage new employees. However, we cannot assure you that any such employees will be retained. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.
Our ability to grow will depend on our ability to raise capital.
We will need to periodically access the capital markets to raise cash to fund new investments. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. An inability to successfully access the capital markets could limit our ability to grow our business and fully execute our business strategy and could decrease our earnings, if any. With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. The amount of leverage that we employ will depend on our investment adviser's and our board of directors' assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to maintain our current Facilities or obtain other lines of credit at all or on terms acceptable to us.
We operate in a highly competitive market for investment opportunities.
A number of entities compete with us to make the types of investments that we make in middle market companies. We compete with other business development companies, public and private funds, commercial and investment banks, commercial financing companies, insurance companies, high yield investors, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial,
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technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we cannot assure you that we will be able to identify and make investments that meet our investment objectives.
We do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that will be comparable to or lower than the rates we offer.
We may lose investment opportunities if we do not match our competitors' pricing, terms and structure. If we match our competitors' pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on better terms to our portfolio companies than what we may have originally anticipated, which may impact our return on these investments.
We will be subject to corporate-level income tax if we are unable to qualify as a RIC.
To qualify as a RIC under the Code, we must meet certain income source, asset diversification and annual distribution requirements.
The annual distribution requirement for a RIC is satisfied if we distribute to our stockholders on a timely basis an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses for each year. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under our loan agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain cash from other sources, we may fail to qualify as a RIC and, thus, may be subject to corporate-level income tax.
To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to (i) dispose of certain investments quickly or (ii) raise additional capital to prevent the loss of RIC status. If we fail to qualify as a RIC for any reason and become or remain subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount or increases in loan balances are included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash, including, for example, non-cash income from pay-in-kind securities and deferred payment securities.
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Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to distribute an amount equal to at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses, to maintain our status as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify as a RIC and thus be subject to corporate-level income tax. See "Material U.S. Federal Income Tax ConsiderationsTaxation as a RIC."
If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. The investment adviser is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never receive as a result of a default by an entity on the obligation that resulted in the accrual of such income.
Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital.